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Everyone should have an estate plan. With an estate plan, you will be secure in knowing that you and your affairs are taken care of in a manner you wish should you become disabled or upon death. An estate plan will ensure that the assets you have accumulated will go to the people you choose. Without a plan, state laws will determine how your assets will be distributed. Under current law, you can transfer $3.5 million in 2009 free of the Federal Estate Tax; the estate tax is totally eliminated in 2010 and is reinstated in 2011 at an exemption level of $1,000,000. We anticipate that Congress will pass legislation in 2009 to modify the current law. For married clients the unlimited marital deduction is available to you but only if you prepare a will containing specific provisions. If you have a marital deduction provision in your will, all estate taxes can be deferred upon the death of the first spouse to die. An estate plan can take advantage of certain tax avoidance techniques for those who have accumulated significant wealth; this gives more of your property to your intended beneficiaries, instead of giving it to the federal government. Some of these techniques include:
In general, if you are married, your spouse is entitled to a portion of your pension if you die first. However, this would typically reduce the monthly retirement payments you would have received if, instead, the benefits were to be paid just during your lifetime. If you and your spouse agree, you can waive this survivor benefit protection, and/or sometimes name some other person(s) (such as a child) or trust as your beneficiary. Consult with your plan administrator and review the plan summary carefully to find out your rights and responsibilities in this area. A will is a declaration by which a person provides for the disposition of assets after death. Wills have no legal authority until the person dies and the original will is delivered to the Court. Every person with minor children should have a will so that tutors and trustees can be named. It is the only way for you to have a say with who will be named as your child’s guardian. Special testamentary trust provisions in a will can provide for the management and distribution of assets for your heirs. Additionally, assets can be arranged and coordinated with provisions of the testamentary trusts to avoid or delay death taxes. Wills do not avoid probate. Sometimes called an Advance Medical Directive or Declaration, a living will allows you to state your wishes in advance regarding what types of medical life support measures you prefer to have, or have withheld/withdrawn if you are in a terminal condition (without reasonable hope of recovery) and cannot express your wishes yourself. Oftentimes a living will is executed along with a Durable Power of Attorney for Health care, which gives someone legal authority to make your health care decisions when you are unable to do so yourself. If you die without a Will (intestate), the legislature of your state has already determined who will inherit your assets and when they will inherit them. You may not agree with the state plan, but roughly seventy percent of Americans do not have a will.
Several assets, including life insurance, retirement accounts (IRA’s, 401(k), Roth, etc.) and annuities will transfer pursuant to beneficiary designations rather than by direction in your will. Laws regarding what assets may be transferred without probate (non-probate transfer laws) vary from state to state. It is important for you to coordinate these non-probate assets by obtaining and completing Change of Beneficiary forms. These documents allow you to appoint someone you know and trust to make your personal health care and financial decisions even when you cannot. If you are incapacitated without these legal documents, besides it being difficult for your loved ones to assist with your care, you and your family could be involved in a proceeding known as a Curatorship. This is the court proceeding where a judge determines who should make these decisions for you under the ongoing supervision of the court. This is an arrangement by which one or more persons (referred to as the "trustors", "settlors", "grantors", or "donors") transfer legal ownership of property to someone who manages the assets (a “Trustee”) for the benefit of one or more persons (the beneficiaries). In a revocable trust the settlor reserves the right to revoke or terminate the trust, and in an irrevocable trust the settlor relinquishes those rights; a living trust is a trust created during the lifetime of the settlor, as opposed to a trust created under a will, which is referred to as a testamentary trust. A testamentary trust can be amended at any time as long as the testator is alive and competent; assets transferred to a trust while the settlor is alive will not be subject to probate at the settlor’s death. This is an agreement with three parties: the Settlors who establish the trust, the Trustees who manage the trust, and the trust Beneficiaries. For example, a husband and wife may name themselves all three parties to create their trust, manage all the assets transferred to the trust, and have full use and enjoyment of all the trust assets as beneficiaries. Further, successor Trustees can step in under the terms of the trust to manage the assets should the couple become incapacitated or die. Special provisions in the trust also control the management and distribution of assets to heirs in the event of the Settlor’s death. In Louisiana, Living Trusts are often not as important or valuable as they are for people domiciled in other states. An ILIT is a trust designed to own and possess all “incidents of ownership” of one or more policies of insurance, typically on the life or lives of senior generation family members, in order to avoid having the death benefits subjected to federal estate tax; premiums are paid by the trustee, usually with funds contributed to the trust by the insured(s) which many qualify for the gift tax annual exclusion through the use of “Crummey” powers. A trust that is not amendable or revocable by the grantor without court approval. It can be created during a grantor’s lifetime, often called an “inter vivos” trust, or upon a grantor’s death, often called a “testamentary” trust. Some common types of irrevocable inter vivos trusts include Irrevocable Life Insurance Trusts, gift trusts, generation skipping trusts, qualified personal residence trusts (“QPRT”), grantor retained annuity trusts (“GRAT”), intentionally defective grantor trusts (“IDGT”), charitable remainder annuity trusts and charitable remainder unitrusts (“CRAT” and “CRUT”), charitable lead annuity trusts and charitable lead unitrust trusts (“CLAT” AND “CLUT”). This is an irrevocable trust in which the grantor retains the right to receive a fixed dollar amount from the trust, payable at least annually for a period of years. At the end of the trust term if the trust property has grown more than the 7520 rate established by the IRS, then the excess can pass to the grantor’s children free of gift tax; a GRAT can be an extremely effective device for transferring wealth to children at a greatly reduced gift tax cost. A CRT is an irrevocable trust with charitable and non-charitable beneficiaries in which one or more individuals receive either a fixed dollar amount each year (charitable remainder annuity trust) or a fixed percentage of the annual value of the trust each year (charitable remainder unitrust); the term of the trust may be for a life or lives or for a period of years not exceeding twenty years. At the end of the trust term, the trust property belongs to one or more charitable organizations. The use of CRT’s can help a client avoid capital gain taxes, yield significant income tax deductions and remove the assets from estate taxation. This is an advanced planning structure in which a family can create an entity to hold business assets and investments. Parents will typically retain the voting interests of the company while gifting non-controlling interests to their children or trusts for their benefit. By transferring non-voting interests that are difficult to sell, significant decreases in value will occur thereby limiting transfer taxation. Any type of entity can be used, whether you own a corporation, partnership or LLC. An FLP can also provide a heightened degree of asset protection. A Limited Liability Company (LLC) is the most common form of new business structures. LLCs are popular because, similar to a corporation, owners have limited personal liability for the debts and actions of the LLC. LLCs are typically taxed as a partnership, providing management flexibility and the benefit of pass-through taxation. Owners of an LLC are called members. Louisiana generally does not restrict who may own an LLC and, unlike with S corporations, members may include individuals, corporations, other LLCs and foreign entities. Louisiana also permits "single member" LLCs so that a client can have the liability protection for their business without the need for more than one owner. Small business owners with $500,000 or more of annual operating profit should consider the use of CIC’s. A business owner can establish a privately held insurance company to insure the risks of the business. The CIC can either replace existing property and casualty coverage or can simply fill the gaps in the existing coverage for the business. The business can write off the insurance as an ordinary and necessary business expense and thus not pay taxes on those amounts. The CIC can, under IRS rules, take in $1,200,000 of premium income tax free every year. If the CIC is owned by the business owner’s children, significant wealth transfer planning can also be achieved. |
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