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Legacy Planning: Planning an Estate to Make Gifts ...
Legacy Planning: Planning an Estate to Make Gifts ...
Legacy Planning: Planning an Estate to Make Gifts That Keep on Giving
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Good day, and thank you for joining us. I'm Ron Paprocki, CEO of Medicus Asset Advisors, and it's my pleasure to walk you through legacy planning, planning an estate to make gifts that keep on giving. During the course of the lecture, you may have a question. If so, you'll find a button at the top of your screen. Just click on the button, type in your question, and we'll address those at the conclusion of the session. Let's look at our agenda. We will start by discussing why you should plan your estate, then help you understand the process of estate planning, then move into the stage of life considerations and wrap up with how charity can play a role. Why plan your estate? Well, there could be several reasons to do so, but the most common reasons we identify are, you may feel it's an important task to provide income necessary to maintain a standard of living to surviving family or friends. You may want to make certain that the assets you've accumulated during your life are distributed to the people or organizations that are important to you. You may want to minimize the potential impact of estate taxation. Federal estate taxes have recently become much less burdensome for most individuals. However, these favorable laws are expected to sunset or change in a few years. In addition, states also have tax structures that should be considered. Finally, you may want to provide specific bequests or gifts to various charitable organizations that are important to you, regardless of the reason why the process can feel overwhelming. However, with appropriate steps, the process becomes pretty straightforward. Let's take a look at the process. To begin, understand that as you accumulate assets during your life, they typically fall into one of four basic categories. Personal property, such as cars or boats, bank accounts or investment accounts. Next, real estate, your residence, a summer home or winter home, perhaps a commercial building, office building or apartment complex. Next, a practice or business interest. These are unique assets that can be valued and distributed in various manners and could require special attention. Finally, taxed advantaged assets. These are assets with unique income tax treatment during life or at the time of death. Most notable examples are retirement accounts, such as your IRA, 401k, pension or profit sharing plan, as well as life insurance policies. At the time of death, the bulk of these assets can be pulled into probate. I'll have more to explain about probate in a moment. Before assets can be removed from probate, any taxes or expenses have to be paid and paid in cash before whatever is left is available to the people that you care about, your family or friends. A question many ask is how might these assets be protected so your estate planning objectives can be accomplished? Well, the appropriate distribution of assets will do much to help accomplish your estate planning goals. There are various types of distribution methods. Let's take a closer look. Distribution can depend on several variables such as title of ownership, beneficiary designation or legal documents. Ownership can be in the form of solely owned, jointly owned, as community property or as tenants in common. Beneficiary designations are important to control the distribution of assets such as life insurance policies, retirement plan accounts or some bank or brokerage accounts that have a transfer or payable on death arrangement. These arrangements allow you to name a beneficiary for those types of accounts. Legal documents, a quick word about legal documents. They only control distribution if the form of ownership is appropriate and if there are not any beneficiary designations. This is a common area of misconception. Many individuals prepare elaborate estate documents that don't control distribution simply because the type of ownership or beneficiary designation will supersede the control assumed to be provided by legal documents. For example, a will typically controls distribution only if the assets are owned solely in one name and if there is no beneficiary designation such as payable or transfer on death arrangements. A trust will typically control distribution of assets that have been titled to the trust prior to death or that are to be paid to the trust at the time of death. Let's take a closer look at how ownership impacts distribution at the time of death. If sole ownership, the asset will be controlled by your will. Jointly titled property transfers to the surviving tenant regardless of what your will might state. Community property is somewhat similar. Typically, one half of the property is directed by your will and the other half is retained by the other community property owner. Finally, property held as tenants in common will result in the percentage of property owned by the decedent being distributed by their will. The surviving tenant or tenants in common will retain their percentage. Now let's take a deeper dive into the administration and the probate process. Well, first a little history. Probate is the judicial process by which a decedent's estate is valued, beneficiaries are determined, an executor in charge of estate distribution is declared, and the estate is legally transferred to the determined beneficiaries. It's also a process to allow creditors a chance to make claim against the estate. For example, if I owe you money and I passed away, I couldn't pay you back, I'm deceased. In that case, you could petition the probate judge to receive what is due. Many estate planning attorneys tend to view probate as a process of red tape, which they often, but not always, try to avoid. Probate takes time, which usually delays the distribution of assets to estate beneficiaries. Finally, there are costs involved in a probate process. This is another reason many estate planning attorneys plan to avoid probate in order to save their clients time and cost. Now please note, assets with a beneficiary designation, such as life insurance, retirement plans, or payable on death accounts, usually avoid probate because the distribution plan is clear. How assets move through the probate process that do not have a beneficiary designation depends again on ownership. For example, property with sole ownership will go through probate before distributed according to the terms of the will. Property owned as tenants in common experience a similar process. The percentage of ownership owned by the decedent will pass through the probate process before being distributed according to the terms of your will. Community property has a slight difference. The survivor of a community property arrangement will retain ownership while the amount of community property owned by the decedent is subject to the same probate process before being distributed by your will. Joint ownership property is handled very differently. The assets avoid the probate process and ownership is shifted fully to the surviving joint owner regardless of what your will may state. Be careful, many assume jointly owned property solves distribution and administration concerns and avoids probate. However, once an owner of jointly held property dies, the survivor now owns property as a sole owner and is thus subject to all the concerns previously mentioned for solely owned property. Finally, let's look at taxation. Recent tax law changes have resulted in federal taxes becoming less onerous. However, there are substantial changes that are expected no later than the end of year 2025. States may also have an estate or inheritance tax. It's important to be aware of the laws of your state to determine what type of tax liability your estate may be facing. Please note, no federal taxes are assessed on transfers of property between spouses. Most states apply the same treatment. Estate or inheritance taxes are generally assessed on property transferred to individuals other than your spouse. All taxes are due and payable in cash within nine months after death. Here's a simplified federal tax table for 2019. As you can see, there's a substantial amount of property that can be distributed to individuals other than your spouse without paying federal estate tax. Currently, the amount is 11.4 million. Once you exceed that amount, taxes begin at 40%. Remember, this estate tax structure will sunset after 2025. In the meantime, keep in mind that Congress can change the estate tax law. How should you go about planning your estate now that you're armed with this understanding of the process? We've seen clients effectively approach this process by beginning with an understanding of the distribution of their assets. Take inventory of your assets. Identify your heirs and charities that you would like to see benefit by the assets you've accumulated. Next, understand how the administration of your estate can be impacted by the probate process. Understand how titling or beneficiary designations or the existence of various trusts can all play a part to avoid these issues. Next, consider the need for ongoing management of the assets that you leave. Important issues here would be to understand who may need management, what kind of management is required, and how long should management be provided. Next, consider the income needed for individual beneficiaries. Understanding, again, who may need income, how much income should be provided, and for what period. Consider also taxes, both federal and state taxes. The key can be very critical to maximizing the value of your assets. It also makes sense to understand the players involved in your estate plan. The first job is that of executor. That's usually a temporary role. The executor's job is simply to make certain the provisions of your will are followed. A trustee typically has a longer-term role in that a trustee is responsible in that a trustee's job is to make certain the terms of the trust are followed. Remember, a trust can exist for many years depending upon the income need, management need, or age of your heirs. Guardians might be considered. These are the individuals to care for either minors or for elderly family members for whom you are responsible. Power holders should also be considered. Power of attorney for property and power of attorney for healthcare are typical documents that will be included in any estate planning portfolio that is created, and these individuals could play an important role for your benefit. Successors should be considered. In each of the roles identified above, it's important to identify individuals that can fill the role in the event your primary choice is unavailable or declines to serve. Finally, selecting an attorney is key to make certain your estate plan is assembled appropriately. Our standard for recommending attorneys is to find those who are expert in the area, are prompt in their delivery of service, and are reasonable in their fees. At this point, I'd like to remind you about your ability to ask questions. Feel free to type in your question. We'll address those at the conclusion. Now that you have this basic information as it relates to an estate plan, it's important to apply this knowledge based on your stage of life. For example, if you're in an early career phase, we typically see the following key issues for estate planning. The identification of guardians, executors, and trustees is an important first step. These individuals typically play their role for a more extended period, especially if children or other heirs are young and require management or income for an extended period. Identifying any income need is also critical. In this case, evaluating standard of living requirements, potential education costs, and to what extent you may wish to provide income for retirement years will all be important variables. Next, identify available assets, especially those that can be used for income-producing purposes. Make certain to verify all beneficiary designations. For example, all retirement plan accounts and all life insurance beneficiaries should be coordinated with your overall estate plan. Next, identify possible life insurance requirements. If you calculate the assets you've accumulated are insufficient to accomplish your goals. Most clients use life insurance as a tool to replace capital they hope to accumulate before they passed away. Finally, management. Especially for early career physicians, the identification of people that can help manage assets and coordinate the distribution of income to beneficiaries is an important task. What if you're mid-career? Well, once again, identifying the appropriate individuals to serve as guardians, executors, or trustees, that's an important first step. Income needs for survivors is important, even though income needs may be different from those that are in their early stage. The same process applies, identifying standard of living requirements, education costs, and retirement needs. However, because the beneficiaries may be a bit older than those in early career, the requirements may not be as substantial. Identifying available assets. Typically, more assets are available simply because you've had more time to gather those assets. Verify beneficiaries as well. Verify the distribution of assets, especially when income may not be the primary concern. For example, children may have reached adulthood and are not requiring income to support their standard of living. In these cases, distribution of assets rather than production of income becomes a primary concern. Finally, management is key, even if management is not required for as long a period as in the early stage career. For those of you that are late career or already retired, the considerations are similar. Identifying appropriate executors and trustees, verifying distribution to survivors, and understanding beneficiary designations is key to make certain your assets are distributed in the manner you wish. Understanding the administration of your estate and taking steps to avoid probate can be important as well. Taxation may be more critical factor simply because the total value of assets may exceed the non-taxed amounts. You may find that a current review of the total estate process is critical, especially for those in late career or already retired status. This can be a simple process, but it's one that's important to verify that your plans will be appropriately executed. Now, how does all this information coordinate into possible charitable contributions? Charity can play a role. Let's wrap up by exploring some alternatives. Contributions to charity can be viewed from two different perspectives. First, during life, and second, as a part of an estate plan. During life, there are different ways you can make contributions, so let's explore each. A common form of contribution to charity are cash contributions, such as when you write a check. Cash contributions to qualified charities may be deductible expenses if they do not exceed 60% of your adjusted gross income. While common, contributions of cash are not the most tax-efficient manner to give. Let's explore some different alternatives. Appreciated securities, they also can be used for charitable contributions and may be deductible in an amount up to 30% of your adjusted gross income. If your contributions exceed these limits, excess amounts can be carry forward for up to five years. Let's get a better understanding of the concept of carry forward. If a charitable contribution exceeds the limits that we've discussed, the excess amount can be applied as a contribution for up to five years or until used completely. As an example, let's assume your adjusted gross income is $200,000 and you contributed 100,000 of appreciated securities. The 30% limit of an adjusted gross income of 200,000 is only $60,000. Therefore, only 60,000 of the $100,000 is allowable as a charitable deduction in the first year, but the remaining $40,000 can be applied to next year's return. Therefore, substantial charitable contributions can still be made with some income tax deductibility, but may have to be spread over a few years. In addition, the contributions of cash or appreciated securities, it's possible to create vehicles that can assist in your charitable giving. A very common form is the donor advised fund. Donor advised funds are easy to arrange and can become very effective tax planning and charitable giving tools. Let's see how a donor advised fund works. Let's assume you own some Apple stock that has appreciated a lot. If you wanted to give the value of that Apple stock, you could sell the stock, pay capital gains tax, and the remaining cash is available for contribution. However, you could also donate this Apple stock to the donor advised fund. The contribution of the stock can create the charitable deduction equal to the fair market value the stock donated. Once received, the stock can be sold, but no capital gains are due. Why? Because the donor advised fund is considered a charitable tax exempt entity. The proceeds of the sale can be reinvested and you can direct grants from the donor advised funds to the qualified charitable organizations of your choice. For example, the AASM Foundation. Of course, other qualified charities can also benefit by such grants. Be aware, administrative fees and investment fees may apply and it's important to consult with your tax advisor regarding your own situation. Well, how might you prioritize your contribution strategy for tax impact? Well, we suggest first consider creating entities for contribution purposes, such as the donor advised fund. This can be especially effective if you have appreciated securities and many charitable interests. For those of you that are age 70 and a half or better, you may use qualified charitable distributions from your IRA account. Based on current law, it's possible for individuals who attain that age to make contributions of up to $100,000 from their IRA account each year. Such contributions also help to satisfy required minimum distributions. Consider contributing appreciated securities, which can allow you to contribute assets and avoid paying capital gains tax. And finally, use cash contributions. Writing a check is an easy way to provide yourself with a record of the contribution and contributions of cash in the form of currency are not generally recommended. But remember, even writing a check does not provide many of the benefits of the other techniques. Charitable contributions can also be part of an estate plan. Most typically, a bequest to a worthy organization, stated in your will or trust. It's also possible to establish donor advised funds at the time of death so that your charitable giving can be continued. Some will also consider more advanced techniques, such as a charitable remainder trust or a charitable lead trust. Keep in mind, contributions to a qualified charity as part of your estate plan are not subject to estate taxation. If a bequest is preferred, you can consider some examples which should be reviewed with your lawyer before drafting your will or trust. Each of the following examples can be used depending upon the type of contribution you'd like to make. For example, you can make a contribution of cash of a specific dollar amount. You may prefer to contribute a percentage of your estate. You may prefer to give a residual amount after you've made specific bequests to family or friends. Finally, you may decide to name a specific tangible asset, such as shares of stock, a piece of real estate or other tangible property to a charitable organization. Just as the donor advised fund can play a part in contributions during life, it can also play a role as part of your estate plan. Rather than funding the donor advised fund during life, the funding occurs at the time of death by making a bequest to the donor advised fund. The same operation and tax benefits will apply. Grants can be made by individuals you appoint to manage the fund after your death. This can be an excellent way to include family members in an ongoing charitable giving strategy after you've passed away. In more advanced situations, you may consider the use of a charitable remainder trust. While a bit more rare, they may have benefit for you. The process begins by creating a trust that will provide income for a certain period of time, then distributing remainder of assets to a charity. The contribution to the trust results in a partial income tax deduction. The trust pays income to you or to other individuals during their life with the remainder passing to charities at the time of death. Another technique also somewhat rare is the charitable lead trust. These are structured to allow a contribution to the trust, which makes yearly payments to charities and the remainder paid to family members after the certain period. These are more complicated arrangements and they do require careful legal assistance to make certain all arrangements are prepared correctly. To wrap up, let's recap some of the items we've discussed. These are appropriate for all stage of life estate plans. Distribution of assets. Make certain your assets are inventoried and you identify your beneficiaries and charities. Administration. Probate can typically be avoided with appropriate titling and legal arrangements. Management. To make certain you've identified who needs such management, what kind of management is required, and for what period. Income should also be identified. Critical for early and mid-career physicians, especially when young children are part of the family. In these cases, it's important to identify who would be in need, how much income is required, and for what period. Finally, taxes, especially as it relates to both the federal and state taxation. It also makes sense to consider the documents that will be used in your estate plan. Let's start with your will. Your will is a simple document that basically controls the distribution of any assets not controlled by title or beneficiary designation. Usually, a will leaves personal property to the surviving spouse or family members and will distribute any assets into a trust if one exists. A living will may also be created. This document expresses your preferences for life support. A trust, whether living, which is one created during your life, or testamentary, which is one that's created as part of your will, can also play an important role. Remember, a trust can be in existence for many years, providing management and is the vehicle for the distribution of income or assets to family, friends, or charities. Power of attorney and power of attorney documents are important to maintain as well. These can provide temporary authority to individuals to control property or healthcare decisions on your behalf. Finally, the letter. I suggest a document that has no legal significance but can have tremendous impact. Gather some nice letterhead, a good writing instrument, and lock yourself away for an afternoon because you should write a letter, but a letter unlike any you've written before. This is a letter to be read by family and friends after you've died, a letter, perhaps, that explains why you lived your life the way you did, why you chose your profession, perhaps why certain organizations were important to you, a letter to tell them how much you love them, what you hope they will achieve, and what happiness you hope they'll find. Perhaps the letter is the last chance to say those things you've never had the opportunity to say. If you've ever been given a letter like this, you'll understand the impact it can have on a life. Finally, thanks to our legal people, I provide you with this disclaimer, but most importantly, I thank you for your attention during this webinar. We hope it was informative, instructive, and it will help you move towards accomplishing your estate planning goals. Again, thank you. Now, we'll stay online for a bit to find out if there are questions that we need to respond to, and with the help of our tech professionals here, we'll see how we'll be able to respond to these items. So, let's see. Here is a first question. I'm not sure I understand what the probate process involves. Can you clarify? Well, again, the thinking of a probate process is a means to identify and verify who appropriate beneficiaries would be, or who named beneficiaries would be, either through the way assets are titled, or the way beneficiary designations are indicated. Also, allowing creditors that chance to make claim to property. A probate process in most states can be avoided if the value of the estate is below a certain level. For example, many states have a cap of $100,000. If total assets are less than 100,000, then probate is not a concern. But the process is there just to make certain that any type of will or trust that was created is reviewed by the process, and make certain that distribution is handled in the way that the decedent would have preferred. Let's see. So, another question. Let's see, what would we recommend? Adding children to all property titles to avoid taxes when the property passes to them? That's a very common question. Very good question as well. Thanks. The idea here, folks often wonder if that's an appropriate step. We do not recommend that. And the reason why most estate planning attorneys also do not recommend is that adding a child to a title may inhibit the ability to change your mind at some point in the future. And more importantly, we find that adding children to the title of property may subject that property to liabilities or lawsuits in the event something bad happens to one of the children. We think the appropriate drafting of estate planning documents would be a much more efficient way to accomplish the distribution goal. Ah, let's see, another question. What is a trust and what are the pros and cons? Well, probably the most simple way to think of a trust is, well, at least a trust is a vehicle that has three unique players. One is the grantor or the creator of the trust. That typically would be the person that's creating the estate plan. Next would be the trustee. The trustee is the person that has the job to manage the trust, to make certain that the terms of the trust that you've created as grantor are complied with. The third player is the fund job, that's the beneficiary. It's the person that the trust has been created to benefit. A trust is a separate entity that can own assets and distribute income. It's a very effective way to avoid a probate process, as well as provide some management of assets for beneficiaries. It also can be an effective way to protect assets from the lawsuits that beneficiaries may face. Pros and cons of a trust, well, we think most of the pros are to provide that management, either during your life or at the time of death. The cons of a trust, well, there's a cost. As you can imagine, creating a trust, it is a legal endeavor. There are attorney's fees that you will pay, and there may be some added paperwork for you to do to title assets into the trust. For the most part, whether or not a trust is appropriate depends on your unique situation, but we typically find that they do provide substantial benefits. Let's see, can we get a recording of this webinar? I'm asking our IT professionals, and they're nodding to the affirmative. We'll make certain that that makes it out to you. Now let's see, well, here's a good question as well. I have a living trust, but my investment account is set up with a TOD, that's transfer on death. Is it necessary to remove the TOD and instead make the trust be the beneficiary? Well, I'll be glad to answer the question, but I think it's important that the answer be framed with an understanding of your entire estate plan. If you have a trust, your trust can arrange for distribution, and it can postpone distributions for either the attainment of a certain age of a beneficiary or for the passing of a certain amount of time. Your TOD account or your TOD setting cannot provide either one of those. At the time of death with the TOD, the assets transferred to the beneficiary will be transferred to them directly in their name. If they're subject to a lawsuit or any other legal action that may put those assets at risk, the TOD doesn't afford any protection that way. A trust properly drafted could definitely do so. We tend to find that most estate plans will use a trust document to coordinate the distribution and the management and the income production for all beneficiaries. So we tend to see that the trust is going to be a more viable vehicle to accomplish those types of goals. I hope that answered your question. Let's see another question. Do you have to pay for a trust? If so, is it worth the extra cost? I haven't met an attorney who works for free yet, but there may be one out there. I know there are some online resources that some folks use. I prefer to see that because the estate planning could be dealing with assets or individuals that are critically important to you that exceed, well exceed the cost of some attorney's fees to have the trust created. So I typically recommend folks make use of an attorney. And I'll let you decide if that's worth the extra cost. But do keep in mind our standards. They have to be good at what they do. They have to be proficient in the field. They have to work quickly and their fees should be reasonable. I hope that answered your question. Let's see, I think that wrapped up all of the excellent questions. We're glad for that. Again, if there are others, I'm sure that if you communicate to the Academy Foundation, they'll be glad to forward those questions to me and I would be happy to respond back to you. I again, thank you for your time, your attention and the questions. I hope you found this session to be enjoyable and informative. Thank you very much.
Video Summary
In this video, Ron Paprocki, CEO of Medicus Asset Advisors, discusses legacy planning and estate planning. He begins by explaining the importance of planning an estate, which includes providing income for surviving family or friends, ensuring assets are distributed as desired, and minimizing estate taxation. Paprocki then outlines the process of estate planning, which involves categorizing assets into personal property, real estate, business interests, and tax-advantaged assets. He emphasizes the need to understand how ownership impacts distribution of assets at the time of death. <br /><br />Next, Paprocki discusses the probate process, which is the legal transfer of a decedent's estate to beneficiaries and provides an opportunity for creditors to make a claim against the estate. He highlights how assets without beneficiary designations go through probate and how different types of ownership impact distribution. <br /><br />Paprocki also explains the importance of taxes and recommends considering charitable contributions as part of the estate plan. He discusses various methods of making contributions, including cash contributions, appreciated securities, and creating donor-advised funds. He also mentions other advanced techniques such as charitable remainder trusts and charitable lead trusts.<br /><br />Finally, Paprocki provides tips and considerations for different stages of life when planning an estate, including early career, mid-career, and late career or retirement. He mentions the importance of identifying appropriate executors, trustees, and guardians, as well as considering ongoing management of assets and income needs for individual beneficiaries.<br /><br />The video concludes with a Q&A session where Paprocki answers questions related to probate process, adding children to property titles, pros and cons of trusts, and the cost of creating a trust. The webinar ends with a reminder that a recording of the webinar will be made available and encourages viewers to reach out with additional questions.
Keywords
estate planning
asset distribution
probate process
charitable contributions
ownership impact
advanced techniques
asset management
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