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Estate Conservation & Trust Planning

You worked hard accumulating wealth and protecting that wealth is your right.  However, planning ahead is necessary in order to protect that wealth.  Proactive measures taken during your lifetime will help protect your assets and family and avoid unwanted expenses and surprises.  At Danna & Associates, our years of conservation and planning experience will help you identify available courses of action and select the best designed to protect your family and wealth.  We utilize traditional Planning Tools and customize them with your involvement to achieve your particular goals and objectives. 
When you think about your estate, do you have more questions than answers?

When should you consider Estate Planning?  If you think your assets are too small to require an estate plan, you may want to reconsider.  Having an estate plan makes good sense from a variety of perspectives.  An estate plan can:

• ensure that assets are distributed according to your wishes;
• help minimize estate taxes and court costs and improve the distribution to beneficiaries;
• protect your young children or grandchildren from receiving a large sum of money without any planning or direction.  You can also decide whether to nominate a guardian for your child, in the event that neither you nor the child’s other parent is able to care for them due to an untimely death;
• allow you to choose an executor whom you trust, who knows your wishes, knows your family, and has knowledge of the contents of your estate, rather than a court-appointed executor;
• allow your business to continue after your death with a successor of your choosing, thereby reducing the chance of a forced sale.

When A Will Isn’t Enough.  Many individuals are under the impression that a will is a sufficient means of estate planning.  Having a will is a great first step, but alone, it may be legally insufficient to facilitate the attainment of all your estate planning goals and objectives.  An estate plan should include:

• a valid up-to-date will;
• a durable power of attorney;
• a living will or health care proxy
• instructions to your executor regarding the disposition of your assets, as well as other requests
• an inventory of your estate
• life insurance to provide cash to your survivors to help fund the payment of debts and estate taxes.

Additionally, you may want to consider a trust, depending on the size of the estate and your particular goals.

If you have a basic estate plan, then you’re in better shape than the majority of Americans.  Here are some additional estate planning considerations you may wish to review with your planning team.

Employer-Provide Benefits,  Your income and retirement benefits from your employer can significantly impact your estate plan and, if improperly planned for, cost your heirs more than necessary.  It is important that you review your employer-provided benefits, particularly any executive benefits, with your estate planning team, so you can take the necessary steps to mitigate the tax burden on your heirs.  Some issues to examine include:

• Qualified Retirement Plan Benefits.  If there is money in a qualified retirement plan when you and your spouse die, the tax implications can be serious.  When the money in your Qualified retirement plan is finally distributed to your heirs, the government could take a substantial percentage in taxes.  This includes payment of federal and state income taxes and estate tax.
• Executive Benefits.  If your employer offers special benefit plans, such as deferred compensation – split-dollar life insurance, there are other issues that should be considered.  Under a deferred compensation plan, benefits payable to your beneficiaries are subject to federal estate and income taxation.  Even if the money is paid to your spouse, and it escapes federal estate taxes at your death, it could inflate the value of your spouse’s estate.  Also, if you receive deferred compensation income in retirement, the payments can, in effect, increase your estate at a time when you may otherwise be trying to decrease its size.

If you are involved in a split-dollar life insurance agreement with your employer, it is essential to review ownership and beneficiary provisions to make sure your split-dollar arrangement does not create an estate tax problem.

Tax Considerations for You and Your Family.  The Economic Growth and Tax Relief Reconciliation Act of 2001 (Tax Relief Act) began what many hope to be the gradual phase-out of estate taxes.  Estate taxes are scheduled to phase out by the year 2010, but then the legislation “sunsets,” meaning lawmakers will have to vote to continue the estate tax repeal.  In the meanwhile, the estate tax rate is on the decrease, while exemptions are on the increase.

Each individual may exclude assets up to the current lifetime exemption amount from federal estate taxes.  The lifetime exemption amount, under the provisions of the Tax Relief Act of 2001, will gradually increase to $3.5 million in 2009, and then repealed in 2010, according to the following schedule:

While many individuals might think that the value of their estate will certainly fall below the exemption amount, remember that all property and assets will likely be included, unless otherwise provided for by a will or a trust.

Beneficiary Options,  One option is to consider leaving the majority of your estate  to your spouse and children.  At the time of your death, your spouse, in fact, is entitled to receive the entire proceeds of your estate, free of tax,  You’ll need to plan appropriately if this is your strategy, because when your spouse dies, his or her estate (the combination of both partners’ assets) will be fully subject to federal estate taxes, unless he or she happens to die in the year 2010 – the year the estate tax is repealed.

If your entire estate, or a portion of it, is left to your children, the lifetime exemption amount can apply, and that amount can be passed at death free of federal estate taxes, as long as you have not used this exemption during your lifetime.  Once the value of your estate exceeds this exemption amount, the federal estate tax applies.  Gifts to your grandchildren may be subject to the generation-skipping transfer tax (GST), so you may want to consult a tax professional for additional guidance.

Charitable Gifting – Have Your Cake and Eat It, Too,  One simple way to avoid paying federal estate taxes is to leave your assets, or at least some portion of your assets, to a charity.  If all wealth beyond the exemption amount is left to charity, there will be no federal estate tax due.

But there is another option you might want to consider.  Estate planning is one of the few situations in life in which you can actually give something away, and keep it too.  This can be accomplished by using and advanced estate planning technique involving charitable giving and a wealth replacement life insurance trust. Here’s an example:

• John and Susan – in addition to having other assets worth exactly the exemption amount – have accumulated a significant stock portfolio over their many years of marriage that is currently valued at about $2 million.  Their basis, or the amount they have put into the purchase of the stocks, is only $200,000.  If they were to sell these stocks at their $2 million value, they would realize a gain of $1.8 million.  The capital gains tax of 20% on the $1.8 million.  The capital gains tax of 20% on the $1.8 million would be $360,000, reducing their estate to about $1.64 million.  This amount would then be available to generate income for John and Susan.

They could, instead, use the $2 million to establish a charitable remainder trust that would provide John and Susan with a lifetime income.  At their death, the remainder interest would pass to the charity.  They would save money by getting a charitable deduction and removing the value of the stock from both of their estates.

To complete the cycle of giving something away and keeping it, John and Susan could establish a wealth replacement life insurance trust for the benefit of their children in order to replace the $2 million given to charity.  The charitable income tax deduction could provide John and Susan with sufficient cash to help pay the premiums necessary to sustain the life insurance.

Review Your Estate Plan Regularly,  Because of its complex nature, estate planning often requires consultation with trusted professionals.  Additionally, regular review of your estate plan is essential, particularly in view of continually changing tax laws, as well as your own assets and life circumstances.
It may be time for a review of your estate plan when:

• tax laws have changed;
• change in marital status occurs;
• you’ve had children or grandchildren added to your family;
• you’ve moved to another state or country (tax laws differ by state as well as outside the U.S.); and/or
• you have any circumstances requiring special consideration, such as a disabled spouse or child, or perhaps a parent who requires custodial care.

Seek Professional Advice,  Questions abound in estate planning, especially for business owners and those with substantial wealth.  Estate planning is an involved process, requiring the knowledge of experienced professionals – often, the work of a team consisting of your financial adviser, attorney, accountant, insurance professional, and trust officer.  And, the earlier you start to plan, the more likely you are to have a comprehensive plan that will care for your heirs for many years to come.