|
|
|
|
       |
|
 Questions 1. What are your overall estate planning goals? 2. To whom do you want your estate or assets to pass onto upon your death? 3. If your spouse and all your children are already deceased at the time of your death, to whom would you want your assets to go? Your relatives, charity, friends? 4. If you have minor children, who will act as guardian and care for them? Generally, we need to name a primary person and an alternate. 5. If your spouse and you both die, should your assets go directly to your children or should the assets be held in a trust for them? 6. On your death, who will handle all of your affairs and act as the Personal Representative (executor) of your estate? Generally, we need to name a primary person and an alternate. 7. How is your health and the health of your family? 8. Will any of your children need special care? 9. What kind of assets do you own (property, stocks, bonds, business interests, art, pension benefits, insurance, inheritance, etc.)? 10. How is ownership or title held for those assets (separately or jointly with right of survivorship)? 11. What is the estimated net fair market value of your estate (assets less liabilities)? Include business interests, life insurance, retirement accounts, etc. 12. Do you want to make specific gifts of property during your life or after your death to family, friends, or charity? 13. Are you involved in a business? Will there be an orderly transition on your retirement or death? How much is your ownership interest in the business worth? 14. Do you have life insurance? Do you have enough life insurance? Who are the beneficiaries of the policies? 15. Other questions? Estate Planning Considerations (1) The primary purpose of estate planning is to arrange an individual's affairs to provide an orderly transfer of his or her estate and to maximize the amount distributed to the intended beneficiaries. This is generally accomplished through wills, trusts, and lifetime gifts. In the planning process, it is our job to listen to your goals and then suggest different options to accomplish those goals. Often the desire to save, reduce or eliminate taxes is the driving force behind most estate plans. However, you should always look to the best interest of the family members, and not just the tax savings. Thus, our recommendations will try to balance your goals a practical and realistic planning structure that meets as many of your goals as possible. Ultimately, you will choose what works best for you and your family. It is important to keep in mind that the current law [June 2001] is only temporary. The new law is said to "sunset" on December 31, 2010 so that it will be in compliance with the Congressional Budget Act of 1974, which requires that changes to the federal tax law not apply after December 31, 2010.(2) Therefore, the estate tax repeal will expire and not apply after December 31, 2010. Also, each state may have a different type of inheritance tax law. With the repeal of the federal estate tax state credit, it is likely that more states will enact a tax law to pick up where the federal law leaves off. Last, it is likely that there will be more changes made to the law in the future. There are two presidential elections and three congressional elections that will take place between now and 2010. Thus, we may see a shift in politics between now and then time the estate tax is repealed in 2010. In estate planning, we deal with four different types of federal(3) taxes: Income Tax is imposed on all income. This is the most familiar of all taxes. Gift Tax is imposed on transfers made during life for less than full or adequate consideration. The tax is paid by the person making the gift and is based on the fair market value of the asset on the date of the gift. The current gift tax rates range from 18% to 55%, but will decrease to 45% in 2007. Estate Tax(4) is imposed on the fair market value of all assets a person owns or controls at the time of death. It is paid by the estate of the decedent from his or her assets. The estate tax rates range from 18% to 55%, but will decrease to 45% in 2007. Generation-Skipping Tax is imposed on all transfers of assets to a second generation, e.g. a transfer to grandchildren. The tax rate is a flat 55%. Every person is entitled to an exemption of $1,030,000 against this tax. A few general estate planning terms, concepts and techniques are discussed below: The Unlimited Marital Deduction: Since 1981, everything a person gives or leaves to a surviving spouse who is a United States citizen, is both estate and gift tax free. Federal estate and gift taxes are incurred only when there is a transfer to a person other than a spouse, e.g., to children. If a person's existing will was made before 1981, it may need to be revised to take advantage of the unlimited marital deduction. If you or your spouse are not U.S. citizens, different rules apply. The Federal Estate Tax: Until 2010, all assets that are owned or controlled by a person on his or her death are subject to federal estate tax; the estate tax returns in 2011. Assets subject to tax include jointly owned property, life insurance, retirement accounts, etc. If assets pass to a surviving spouse (U.S. citizen), they are not subject to tax; if assets pass to a non-spouse, they are subject to estate tax. The current maximum estate tax rate is 55%, but the rate will decrease to 45% in 2007. In addition to the Unlimited Marital Deduction, each person is allowed to exclude a specific dollar amount from his or her taxable estate. This is referred to either as an exclusion or a credit. The amount will increase until the year 2010 when the estate tax is repealed for one year; in 2011 the exemption amount returns to $1,000,000. The following table shows the increasing amounts:
Therefore, at death, a person can transfer free of tax an unlimited amount to a surviving spouse, or assets having a value between $675,000 and $3,500,000, depending on the applicable year. If a person's individual (or combined) net taxable estate (assets minus liabilities) is close to or exceeds the Applicable Estate Tax Credit Equivalent Amount, some estate tax planning needs to be done to maximize the use of the credit amount and minimize the payment of estate taxes. The Federal Gift Tax: Under the old law, the gift and estate tax rates were unified, as were the credits and exclusion amounts, the thought being that you paid a transfer tax either during life or at death. Under the new law, the federal gift tax is not repealed and the unified credit exclusion amount used in the past for gift tax purposes will no longer be the same as for estate tax purposes — the two exclusions will no longer be "unified" in one amount. In 2002, the gift tax exclusion amount will increase to $1,000,000 and remain there through December 31, 2010. The top gift tax rates will be the same as the top estate tax rates until 2010, when the top gift tax rate will be equal to the top individual income tax rate (i.e., 35%). Starting in 2010, the gift tax rate will really be a flat tax, not a progressive tax, with all gifts in excess of $1,000,000 taxed at the "top" rate of 35%. The Generation Skipping Transfer (GST) Tax: As stated above, the GST tax is imposed on transfers to persons who are two or more generations (37.5 years) away from the transferor. Thus, if a grandparent gives assets to a grandchild, a GST tax will be imposed unless an exception or exemption applies. The current (2001) exemption amount is $1,030,000, and which can only be used if properly claimed on a gift tax return (Form 706). The GST tax exemption will be indexed for inflation until 2004. After 2003, it will increase in the same amount as the estate tax exclusion. The GST tax rate will decrease along with the top estate tax rate. The GST tax is repealed starting in 2010. Depending on life expectancies, and further changes in the law, transfers of the GST is a good tax planning tool. Many older parents are finding that there children are financially successful in their own right, and transfer their wealth directly to grandchildren either in trust or outright. Annual Gifts: Annual gifts are used primarily to reduce estate taxes by currently transferring property to those who would ultimately receive the assets on a person's death, for example an individual's children. By making the transfer now, the asset is excluded from a person's taxable estate, and is not subject to estate taxes on death. Gifting of assets is a very beneficial planning tool because any appreciation of an asset after it is gifted away will not be part of your estate. Generally, the gift must be of a present interest, the value of the gift cannot exceed $10,000 per donee,(5) per year to avoid any federal gift tax. This $10,000 is called the "annual exclusion." There are a number of exceptions to this general rule. First: A person may elect to allow his or her spouse to use both annual exclusions. This is called a "split gift." By splitting the gift, one spouse can transfer up to $20,000 per donee, per year without gift tax consequences. Second: An individual can give a future interest in property if the donee is given the present right to receive the property. Typically, parents want to make a gift to a trust for their children or grandchildren, with distributions from the trust at age 30. When the transfer is made into the trust, if the donee is given the unrestricted right to withdraw the asset from the trust for 35 days, the gift is a present interest and thus qualifies for the $10,000 annual exclusion. Most parents who do this strongly encourage their children or grandchildren to not withdraw the assets from the trust although there can be no prearranged agreement or conditions. Third: Generally, any gift made in excess of the $10,000 annual gift tax exclusion amount is subject to federal gift taxes. However, for gifts less than the gift exclusion amount (discussed above), the gift tax is eliminated. Fourth: Payments made directly to a college or medical facility are exempt from the gift tax and generation skipping tax. Therefore, a grandparent can pay for the entire college education of a grandchild free of gift and generation skipping tax provided that payments are made directly to the educational institution. Community Property: Alaska now has an elective community property statute. The Alaska "Community Property Act" (AS34.77) provides that Alaska retains the traditional common law presumption of how assets are held between spouses, but spouses can now enter into a written agreement designating all or specific assets as community property. Specifically, AS 34.77.030 provides that "property of spouses is community property under this chapter only to the extent provided in a community property agreement or community property trust." This statute is unique in that most states with community property make "community property" mandatory and not elective. The Community Property Act has significant estate planning benefits for two reasons. First, a spouse can now elect to treat property as community property and fund their credit shelter trust more easily without having to hold completely separate interests in the assets. Second, although each spouse is deemed to own a 50% interest in the designated community property, both halves get a full (100%) step-up (or step-down) in basis to fair market value on the death of the first spouse under IRC §1014(b)(6). This is compared to owning the asset under the common law rule as tenants by the entirety and receiving only a 50% step-up in basis on those assets. It is anticipated that spouses will want to sign Community Property Agreements (AS 34.77.090) or Community Property Trusts (AS 34.77.100) designating specific assets as community property just to obtain the favorable step-up in basis for highly appreciated assets. This planning technique is best suited for business interests, real estate, brokerage accounts, and other assets with low basis and high appreciation. It is not recommended for an asset that has a fair market value that is less than its adjusted basis. Trusts: There are many different types of trusts used for many different reasons. Trusts are either revocable or irrevocable. Revocable Trusts: A revocable trust (also known as a "living trust") is created during life and can be changed or revoked at anytime by the settlor (the person who created it) up to the time of death or incapacity. The revocable trust is most frequently promoted as a method of avoiding probate.(6) A revocable trust does not eliminate the need to have a separate will. With a revocable trust, the settlor retains complete control over the assets held by the trust, and on the death of the settlor, the assets are distributed in much the same manner as they would through a will. Like a will, a revocable trust can be structured to reduce applicable estate taxes; however, it does not eliminate or minimize income taxes. Irrevocable Trusts: Irrevocable trusts are created either during life, or through a will at the time of death. They are used for many different reasons, but primarily to minimize the payment of federal estate taxes. As the name suggests, once created, the trust cannot be altered, amended, or revoked. There are number of different types of irrevocable trusts: Bypass or Credit Shelter trusts, Qualified Terminable Interest Property Trusts ("QTIP Trusts"), Generation-Skipping Trusts, Life Insurance Trusts (ILITs), and Education trusts, to name a few. In addition, the qualified "Alaska Trust" is a unique method of protecting assets from creditors and in some cases may be used to reduce your taxable estate with proper planning. Powers of Attorney: A power of attorney is used to grant authority to another to act on behalf of a person. Powers of Attorney can either be very broad, or limited to a specific purpose. However, most Powers of Attorney terminate when the grantor becomes incompetent and when a person becomes incompetent is when the Power of Attorney is needed the most. A properly drawn "Durable Power of Attorney" will continue to be valid even during the incompetency of the person. Some people do not want to grant a power of attorney when they are competent, but rather only when they are incompetent. In this case, a "Springing Durable Power of Attorney" is recommended. This Power of Attorney becomes effective only when the grantor becomes incapacitated, and remains in effect only during the time that the grantor remains incapacitated. Living Will: A Living Will is a document that is authorized by Alaska Statute in which a person gives permission to his or her doctors and family to withhold basic life support when that person is terminally ill. There is no charge for this document. Who is the Client? If there are two of you coming to our Firm for assistance in formulating your estate plan, it is our ethical obligation to advise you of certain rights you have regarding our Firm’s representation of each of you. An attorney has an obligation to maintain certain confidences regarding information that is obtained from or about his clients. In most cases this is not a problem between two related individuals such as husband and wife; however, in some cases, the conflicts can be significant. Thus, there are three different methods we can represent you. Please read each option very carefully. Separate Representation: The first alternative is that each of you obtain your own separate attorneys to represent your own specific interests in preparing your wills and overall estate plan. If either of you feel it is necessary to do your planning in confidence from one another, we advise you to obtain separate attorneys to represent your different interests. Although this option may be more expensive, it is the best way to protect your specific individual confidences and goals. Naturally we can be the attorney for one of you, but not both. If requested, we can provide you the names of other qualified attorneys who practice in the estate planning area. Represent Each of You -- Total Confidentiality of Information: The second alternative is for each of you to consent to our Firm representing each of you individually and separately -- which means that you are both separate and distinct clients of the firm, and any information you share with us regarding your particular estate planning goals will be held in complete confidence from the other. To accomplish this, we will schedule separate appointments so we can meet with you at different times. Consequently, we will not discuss with either one of you what the other said, or what his or her particular estate planning goals or specific plan might be, even if your two plans are not compatible or are in direct conflict with each other. Represent Each of You -- No Confidentiality of Information: The third alternative is for our Firm to represent both of you jointly, as one single client. We will meet together, and we will explain each of your rights in the other’s estate and how the decisions will affect your goals and plans. This means that we are obligated to share all confidences, secrets and other information we learn from you and about you, with the other spouse -- there will be no confidentiality of information even if one of you gives us information when the other is not present. If either of you contacts us during the term of our representation about a change to your documents which would appear to us to have an effect on the other’s plan, we will have to withdraw from representing either of you. Naturally, we are depending on each of you to provide us with the full and complete disclosure of information related to the estate planning process. At our meeting, we will also ask each of you to indicate your choice of representation by initialing a copy of this letter acknowledging that you have read it. If for some reason you do not initial a choice, and unless you advise me otherwise, we assume we will be representing you under Option 3, that is, representing you both jointly and not individually, with no confidentiality of information. As stated above, this means that I am obligated to share any "secret" information you share with me with the other spouse -- thus, any information acquired from either of you that we determine to be relevant to the other, will be shared by me with the other spouse. Should you feel that there is a conflict, or the potential for a conflict, or the need to keep certain information confidential, it maybe advisable for us to meet separately with each of you. Your candidness on this matter is greatly appreciated. Our obligation to disclose confidences applies only to the two of you while you are married, and terminates on either your divorce, legal separation or death of one of you. In addition, we are obligated only to disclose that information which we determine to be materially relevant to the services for which you have engaged us. Fees: A frequently asked question is "How much will this all cost?" That is a very difficult question to answer without having had the opportunity to talk with you first. The primary factor in the cost of estate planning depends on your goals and needs, and the work involved in accomplishing your goals. If you decide to engage our firm to prepare your estate planning documents, we will need you to sign an engagement agreement and provide us a retainer before we can begin representing you and drafting the documents you request. This retainer will be deposited in our trust account and will be applied against the fee charged for the preparation of your documents and any costs advanced on your behalf. You can anticipate giving us a retainer of approximately 50% to 75% of the fee estimated at the time we meet. Unless other arrangements are made, payment is due within 30 days of billing, or upon execution of the documents, whichever first occurs. If after our first meeting, you decide not to engage our firm to perform estate planning work for you, we request that you pay for the attorney's conference time at that time. Should you decide within a reasonable amount of time to engage our firm to prepare your estate planning documents, we will credit you for one hour of conference time. Please remember that it is very important that you consult an attorney who emphasizes estate planning in his or her practice. Too frequently, the attorney is consulted after a transfer has been made, a life insurance policy has been applied for and purchased, or a spouse has already passed away. This often results in additional taxes and/or fees incurred to correct the problems created. Top of this Page  1 Estate planning is a technical area. This memorandum is to acquaint you with some of the fundamentals of estate planning. It is not comprehensive and should not be relied upon without the advice of an attorney who is qualified to do estate and tax planning. BACK 2 As originally drafted, the bill would have made the tax cuts permanent. However, the original bill would have been subject to a budgetary procedure known as the "Byrd Rule," which requires 60 votes in the Senate to alter revenue beyond a 10-year period. To avoid the procedure, Republican tax writers adjusted the tax cut agreement for H.R. 1836 by allowing the provisions to sunset by December 31, 2010. BACK 3 Currently the State of Alaska does not have an individual income tax. The State does have an estate tax, but it is integrated with the federal estate tax. The federal government gives an estate tax credit equal to the payment of the state estate tax. BACK 4 In June 2001, the estate and generation skipping tax are repealed effective for one year from 2010 and are reinstated in 2011. Prior to 2010, the estate tax rates decrease to 45%. It is very likely that this law will be either repealed or changed substantially prior to 2010. BACK 5 "Donee" is the person receiving the gift. The "Donor" is the person making the gift. BACK 6 Probate is not something that needs to be avoided in Alaska because Alaska has adopted the Uniform Probate Code. In most cases, probate of an estate in Alaska is very simple. Often the expense of drafting and transferring all of one's property into a living trust exceeds the expense of a normal probate. If you own property in any state that has not adopted the Uniform Probate Code (e.g. Oregon and California), you may want to consider a living trust as a possible method of avoiding probate in those jurisdictions. |
|
||||||||||||||||||||||
 Copyright © Hartig Rhodes Hoge & Lekisch, PC ~ Attorneys At Law Website by Sundog Media & Alaska Internet Services |