Presented by: MARK HOLZGANG
Estate Planning Basics for your
Practice and Life
Estate Planning and issues involved
The Basics
Understanding the tax issues and administrative issues involved.
Why?
• Estate Tax Rates are significant – Federal: 40%
– Oregon: 10 – 16%
• Certain items still have income tax – IRAs
– Annuities – Retirement Plans
• If you die “intestate” then the state make decisions for you
– Guardian of Children
– Trustee of Children’s inheritance – Disposition of your assets
At death
• First, let’s understand what happens at death – If die “testate,” the will dictates the disposition of your assets, who is guardian of your children, who is trustee of your children’s inheritance. Will also appoints your personal representative who is in charge of administering your estate.
– If die “intestate,” state law will dictate all of these matters for you.
At death
• Your Estate consists of all of your property valued at the date of your death (stepped-up basis). Your estate is reduced by any liabilities (amounts you owe).
At death
• Property includes:
• Liabilities include:
Bank Accounts
CDs
Stocks, Bonds, Mutual Funds
Partnership Investments
Closely held business
Retirement Plans (IRA, SEP, 401k)
Real estate
Vehicles
Life Insurance
Annuities
Collectibles (Coins, stamps, etc.)
Jewelry
Household items
Tax Refunds
Mortgages
Credit Card Balances
Installment Loans
Taxes Owed
IOUs
probate
• Do you have a Probate Estate?
• What is a Probate Estate?
probate
• Probate refers to the method by which your estate is administered through the legal system.
• Probate accomplishes the following: – Confirmation of the Personal Representative – Notification to creditors
– Payment of debts
– Inventory of probate assets and valuation – Final distribution to heirs
probate
• Probate Court (state court) is a public record of your probate estate. Privacy is one reason some people try to avoid probate.
• Probate also costs somewhere between 2 and 5% of the probate estate in legal fees and court costs. Another reason to avoid probate.
probate
• The probate process usually takes between 6 months and 2 years. During this time probate assets are not available for use.
• If probate property is owned in another state, you will likely have an ancillary probate in that state (different state laws).
probate
• How do we avoid probate?
• If property passes by “operation of law” at death, then that property is not a probate asset.
• We use “will substitutes” to avoid probate by using the operation of law methods.
probate
• First, the way “Title” is held for an asset can be a Will Substitute.
– Designated Beneficiaries of retirement accounts accomplishes this transfer.
– Joint Tenants with Right of Survivorship (JTWROS) is a means of holding title with transfer occurring at death. – Pay on Death (POD) or Transfer on Death(TOD) are a
means of transfer upon death.
• This method works fine with few assets and few beneficiaries, otherwise it can become too complicated
probate
• Second, more popular Will substitute is a Revocable Living Trust(RLT).
– Assets that would normally be probate assets can avoid probate by being titled in an RLT. At death, the RLT dictates where assets are to go (Operation of Law).
– Cannot put retirement accounts (IRA, SEP, 401k) into RLT name. These accounts transfer by use of designated beneficiary form. (Operation of Law)
– Additional benefit of an RLT is that it can provide for trustee to make decisions when the “Grantor” is incapacitated.
PROBATE
• What about your Dental Practice?
– Oregon’s Dental Board allows for non-dentist ownership after the death of the doctor.
– Only allowed for the transition or sale of the practice during a 12 month window (can request 12 more if needed).
– Must notify Board.
– Some attorneys like to use “TOD” identifying the RLT as the owner upon death (identify ownership on stock certificate)
probate
• Now that we have seen ways to avoid probate, let’s talk about the estate tax (aka death tax).
Estates
• Estates of $0 to $1M – NO estate tax issues
• Estates of $1M to $5.43M (10.86M Joint) – Oregon estate tax issues
– NO Federal estate tax issues
• Estates over $5.43M (10.86M Joint) – Both Federal and Oregon estate tax issues
estates
• $1M to $5.43M ($10.86 Joint)
– Federal law allows “portability” of each spouse’s
$5.43M exemption. Therefore no Federal estate tax if Joint estate is less than $10.86M
– Oregon does not have portability of the $1M exemption per spouse. That means that if one spouse dies and leaves all to the surviving spouse, no tax on first death but only $1M exempt on second death.
estates
H
$1M
W
$1M
Husband Dies Transfers $1M
Wife has $2M Estate = $2M
Wife dies
$1M Exemption < $1M >
Taxable Estate for Wife $1M
Oregon Tax $101,250
estates
• Solution to preserve each spouse’s $1M exemption in Oregon.
– Have your Will or RLT dictate that a “Bypass” Trust (BT) or “Credit Shelter” Trust (CST) be created on death of first spouse.
– Surviving Spouse is “Income” Beneficiary and children are “Remainder” beneficiaries.
estates
H
$1M
W
$1M
INCOME
Husband Dies Transfers BT or CST $1M
REMAINDER
Wife Dies $1M Estate
No Tax
Children
$1M
estates
• Another solution to preserving $1M Oregon exemption for each spouse…GIFTING
– Oregon allows unlimited gifting without including in estate tax calculation.
H
$1M
W
$1M
Husband Dies Transfers $1M
Gifts Children
$1M
Wife Dies $1M Estate
No Tax
estates
• Beware of the income tax consequence to the children. They step into the shoes of the giftor and may have capital gains in the property.
• Federal Form 709 is required for gifts over the
$14,000 annual exclusion. These gifts reduce the $5.43M Federal exemption.
estates
• Estates over $5.43M ($10.86M Joint)
– Estate Planning becomes much more complex and scrutinized by the IRS.
– Planning typically involves:
• Gifting of Appreciating Property
• Gifting of Property using “discounts”
• Funding various trusts to accomplish liquidity at death or charitable endeavors
estates
• Gifting of Appreciating Assets
– If you know that an asset is going to increase in value rapidly over time, then gifting ASAP is advisable.
– Gifts over $14,000 annually to any one individual requires Form 709 and reduces the $5.43M exemption.
estates
• Gifting using discounts
– Family Limited Partnerships (FLP)
– 30 – 35% discounts on value of the gifts are common.
• Lack of marketability
• Minority interest
• IRS Scrutiny requires good documentation and qualified appraisal for the valuation and discount.
estates
• Example:
– Real property in FLP – value: $3M – Parents own 50/50
– Parents gift 5% interest in FLP to child
Value of FLP $ 3,000,000
Value of 5% $ 150,000 (before discounts)
Less: Discounts $ (45,000) (minority interest & lack of marketability)
Discounted Value $ 105,000
Tax Savings on "Discount" $ 22,500 (50% of 45K)
Funding trusts to help with estate tax
• Irrevocable Life Insurance Trust (ILIT)
– Insurance on Life of parent (or second to die policy) – Policy owned by the Trust not the parent
– Trustee of the Trust is not the parent
– Proceeds on death not included in Estate (3 year rule) – Premiums paid by parents but considered “gifts” to
children
– Children are beneficiaries of the trust – Benefits:
• Provides liquidity at death
• Proceeds not included in the estate
• Can avoid “forced sales” of assets to pay estate tax.
Funding trusts to help with estate tax
• Charitable Remainder Trusts (CRUT & CRAT)
– Fund a charity with appreciated property by creating trust – Trust pays income stream for life or certain period to donor – At death, property in trust goes to charity
– Income tax deduction for value of gift up front less value of future income to be received
– Benefits:
• Satisfies charitable goals
• Income tax deduction for charitable gift
• Annuity income during trust operation
• Asset removed from estate without capital gains
Final thoughts
• Review your wills annually
• Periodically review your overall estate plan
• Review your goals in your estate plan and make changes as needed.
• It’s not all about tax issues
MARK HOLZGANG – [email protected] 503.245.0766
COMMENTS OR QUESTIONS
