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Legal Terms Used in Estate Planning
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The death benefit won't be subject to estate taxes.
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The value of the policy won't bump your estate up to a taxable level if your estate isn't there without the policy.
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You can decrease your taxable estate by gifting money to the ILIT.
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Because the ILIT won't pass through probate, its provisions are confidential.
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Give annual gifts. Each year, make a gift to the trust that equals your life insurance policy's annual premium (so the trust can then pay the premium). You can apply your gift tax exemption to this amount.
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Don't be late. Make this gift at least 30 days before the annual premium is due so the trust can make the payment on time and the policy doesn't lapse.
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Your beneficiaries won't budge. If you change your mind about who you want to receive your death benefit, you're out of luck. The most you can do is stop making premium gifts to the trust so the policy lapses.
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The money is out of your hands. Since you have no control over the trust, you won't be able to borrow money from your policy or cash it out.
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You'll need to give it time. If you die within three years of putting a life insurance policy into an ILIT, the death benefit will be considered part of your taxable estate.
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Transfers are taxable. The transfer of an existing life insurance policy to an ILIT is considered a taxable gift (although you could apply your gift tax credit if you haven't already used it up). If the policy is term, the gift value is the current year's premium. With a permanent policy, the gift value is the policy's cash value when you transfer it.
Advance Directive for Health
Care is
the document that determines who you want to be your agent for health
care. This document also contains your wishes concerning whether
you want Life Support and Tube Feeding. It only goes into effect
if you become incompetent.
Advanced Planning is available from OLC for single
or married
individuals who have assets in excess of $1,000,000. i
Advanced Planning is also available for individuals and
married couples who have greater-than-average needs in Estate
Planning. Some examples include second marriages with planning to
ensure that children from the first marriage are adequately provided
for, provision for children or spouses who are under a
disability, and transfer of businesses to the next generation.
Pricing varies based on the complexity of the situation.
Certificate of Trust is the document used to identify who made the Living Trust, who the Trustees are, what powers the Trustees have, what kind of Trust it is and when it came into existence. Sometimes banks, insurance companies, and title companies require you to prove to them that you have a Living Trust and what its terms are. Using the Certificate of Trust you can comply with these requests without disclosing the entire Living Trust Agreement. This protects your privacy.
Funding of Living Trusts is the
process of transferring assets into your Living Trust. Unless an asset
is owned by your Living Trust probate of that asset may be
necessary. How an asset is transferred into the Living Trust
depends on how the asset is titled. Some asset transfer will
require the help of an attorney, i.e., deeds to real estate,
assignment of partnership interests. However, you can change title
to many other assets yourself. These assets include bank and
brokerage accounts, life insurance, and automobiles. OLC will prepare
deeds to transfer real estate for $150 per deed. OLC will also
provide you with written instructions on how you can transfer assets.
Irrevocable Live
Insurance Trust (ILIT) is a
trust that owns your life insurance policy. You establish an ILIT if you don't
want to own the policy yourself. The trust pays the policy premiums and passes
along the death benefit to your designated beneficiaries when you die. Why
would you want a trust own your life insurance policy? Because if you keep the
policy in your own name, the death benefit (that's the amount the policy pays to
your beneficiaries when you die) will be counted as an asset of your taxable
estate — and may be subject to federal estate taxes. "What?"
you might ask. "Aren't life insurance benefits always tax-free?"
Actually, a death benefit is only income free. When you die, your beneficiaries
won't have to pay any income tax on your death benefit. But your death
benefit could still be eaten away by estate taxes (unless the death
benefit goes solely to your spouse — assets always pass between spouses
estate-tax-free).
On the other hand, if your life insurance policy is owned by an ILIT:
If your estate (including your life insurance policy) is at a taxable level, an ILIT might be for you. Not only could you decrease your taxable estate by making gifts to the ILIT, but your heirs could use the money from the death benefit to pay off estate taxes.
For 2006-2008 if your estate (including your life insurance) is worth more than $2 million, it's subject to federal estate taxes. This limit will increase in 2009 to $3.5 million. In 2010, the estate tax will be repealed, but pending new legislation could be reinstated with a $1 million exemption in 2011.)
Because the legal and tax regulations surrounding ILITs are so strict, you should have a knowledgeable estate-planning lawyer set up an ILIT. A financial consultant can also give you information on irrevocable trusts and help you figure out a smart, complete estate strategy — one that's tailor-made for you and your family.
Once you set up an ILIT and put a life insurance policy into it (either by transferring an existing policy into it or having the ILIT trustee open one), you'll need to fund the ILIT. Here are some tips:
When you die, the trust will receive your life insurance death benefit and then pay it to your designated beneficiaries.
An irrevocable trust is exactly as it sounds — irrevocable. You determine the terms of the trust when you set it up (picking which beneficiaries will receive your death benefit and so on), but you can't change it after that.
Before you dash out to set one up, be aware that these things happen with an ILIT:
Of course, "irrevocable" also has a plus side. If any of your beneficiaries are unhappy with their inheritance, they won't be able to challenge the ILIT or have it revoked.
Now that you understand the issues, do you think an ILIT is right for you? Be sure to consult your tax adviser before making any final decisions. A financial consultant can also help you understand ILITs — and help you create a smart, complete strategy for your unique estate.
Living Trust (Joint Trust) for an Married Couple is a contract that allows you to control your property while you are alive and to set out who will inherit your property when you die. In that sense it is like a will in that it says who gets what. However, a Living Trust also sets out who will take care of you and your assets if you were to become incompetent before you die. In that sense it is different than a will because a will only comes into play when you die. When properly funded the Living trust does not require Probate, with all of Probate's inconvenience, publicity, and expense. As the person setting up the Living Trust you are the Trustor. You are also the initial Trustee, that is the person who runs the trust. You are also the Beneficiary, the person for whose benefit the trust is established.
Living Trusts (2 Individual Trusts) for a Married Couple is a contract that allows you to control your property while you are alive and to set out who will inherit your property when you die. It that sense it is like a will in that it says who gets what. However, a Living Trust also sets out who will take care of you and your assets if you were to become incompetent before you die. It that sense it is different than a will because a will only comes into play when you die. When properly funded the Living trust does not require Probate, with all of Probate's inconvenience, publicity, and expense. As the person setting up the Living Trust you are the Trustor. You are also the initial Trustee, that is the person who runs the trust. You are also the Beneficiary, the person for whose benefit the trust is established.
Living Trust (Individual Trust) for an Unmarried Person is a contract you make with yourself that allows you to control your property while you are alive and to set out who will inherit your property when you die. It that sense it is like a will in that it says who gets what. However, a Living Trust also sets out who will take care of you and your assets if you were to become incompetent before you die. It that sense it is different than a will because a will only comes into play when you die. When properly funded the Living trust does not require Probate, with all of Probate's inconvenience, publicity, and expense. As the person setting up the Living Trust you are the Trustor. You are also the initial Trustee, that is the person who runs the trust. You are also the Beneficiary, the person for whose benefit the trust is established. You name Successor Trustees to take over the management of the Living Trust if you become incompetent or at your death.
Living Trust or Will - Which Works Best For You
This chart may help you decide...
Living Trust Plan
Will Plan
Probate Avoidance
No Probate
Usually Probate is necessary.
Cost at Death
Less Cost at Death since there is usually no Attorney Fee and no Personal Representative Fee.
More Cost at Death since. The Attorney Fee is based on time spent and starts at about $5,000 and can be much more depending on the complexity of the estate. The Personal Representative charges a percentage of the estate as the fee.
Time to Distribute Property at Death
Usually quickly distributed to your heirs. Takes longer if you owe federal Estate Tax .
Minimum delay is 4 months often more because of Probate
Privacy
Completely private.
Your affairs are open to public inspection since the Probate process is a public court proceeding
Provide for Incapacity
Living Trust has a built-in Conservatorship feature which allows your Co-Trustee or Successor Trustee to take care of your business affairs if you become incapacitated.. You also have a Power of Attorney.
Using a Power of Attorney you give someone else the power to handle your business affairs if you become incapacitated. Somewhat more limited ability than with a Living Trust.
Cost to Set Up
$1935 Simple Living Trust.
$2735 for Complex Living Trust with Estate Tax Savings$495
Tax Saving
If you have federal Estate Tax liability and are married it is beneficial to have separate Living Trusts for each spouse. Otherwise, using a Living Trust or a Will doesn't affect tax liability.
Personal Representative
is
the person you name in your Will to wind up your affairs. In some
states this person is called the Executor. Just naming
someone in your Will as your Personal Representative does not
make them the Personal Representative. The person you
name has to get a piece of paper from the Probate Court called Letters
Testamentary before he becomes the official Personal
Representative. He or she has to see an attorney to draw up
papers to be filed in Court. This process starts Probate.
Power of Attorney is
the document that empowers an individual other than yourself to act as
your agent to handle all financial assets not held in a trust. A Power
of Attorney is considered "Durable" when it continues to
be valid even if you become incompetent.
Pour-Over Will is the same as a Will, except it is used with a Living Trust rather than as a stand-alone document. It will only be used if you fail to fully fund your Living Trust. The Pour-Over will provides that if you die owning anything that is outside you Living Trust you leave it to your Living Trust. Property outside your Living Trust is subject to Probate so it's important to fully fund your Living Trust.
Probate is a Court process used
to transfer your assets after you die. It is a fully public process and
performs five functions: 1) gathers the assets; 2) identifies the
creditors; 3) pays the creditors including the attorney and the IRS; 4)
determines heirs; and 5) finally pays the heirs. In Oregon it is not
uncommon for attorney's fees to run about $5,000 and up. The
Personal Representative is also allowed to charge a fee which is a
percentage of the Estate. Probate takes a minimum of four months
and usually takes much longer to complete depending on the complexity of
the Estate. What triggers Probate is often the requirement by a bank or
a title company that the Personal Representative named in the Will get
proof from the Court (Letters Testamentary) that the Personal
Representative really has the authority to act instead of the
deceased person. For instance, your Personal Representative is
trying to sell your home. The title company requires him to get an
official paper from the Court. That means your Personal
Representative has to contact an attorney. That starts the meter
running and it doesn't stop running until months later when the Probate
Court finally discharges your Personal Representative from any further
responsibility.
Estate and Gift Tax-Rules 2002 and later...
Gift and Estate Tax. The federal government imposes a percentage tax when you give away your assets while you are alive (Gift Tax) and when you give away your assets when you die (Estate Tax). Oregon also imposes a tax which is different from the federal tax.
$11,000 Annual Gifts. Each year you can give $11,000 to as many people as you like and the government does not tax those transfers.
$1,000,000 Federal Gift Tax Exemption. If you make a gift in any given year that is more than $11,000 to a single person you have to file a Gift Tax return and you may owe gift tax. If the total amount of gifts you have made in your lifetime (not counting the $11,000 gifts) is less than $1,000,000 you do not owe a gift tax even though you have to file a gift tax return. If when you file the Gift Tax return you have given more than $1,000,000 during your lifetime you owe Gift Tax.
All Assets Counted for the Estate Tax. When you die you have to add up everything you own to see if your estate is large enough that you owe Estate Tax. This includes life insurance proceeds even if they are paid to someone other than your Estate.
Amount You Can Own Before Paying Estate Tax. This amount is going up according to the following schedule:
Year of
DeathAmount that Can Be Transferred
Free of Federal Estate Tax2002
$1,000,000
2003
$1,000,000
2004
$1,500,000
2005
$1,500,000
2006
$2,000,000
2007
$2,000,000
2008
$2,000,000
2009
$3,500,000
2010
Tax Repealed for 1 Year
Basis Not Fully "Stepped Up"2011
$1,000,000
Oregon imposes an Inheritance Tax on estates over $850,000. Previously the amount that Oregon allowed to pass free of inheritance tax was the same as the federal Estate Tax. Now the Oregon amount is "disconnected" from the federal amount, i.e., in 2004 federal law allows $1.5 million to be passed free of Estate Tax, while Oregon allows only $850,000 to pass free of Oregon Inheritance Tax.
"Repeal" of the Estate Tax. In 2010 the 2001 Tax Law will "sunset" and the federal Estate Tax law existing prior to the passage of the 2001 law will go back into effect. This sunset provision will probably not go into effect because new legislation will be passed. However, no one knows what that will be passed so it is really hard to plan.
Gift Tax Not Repealed. The Gift Tax exemption remains at $1,000,000.
Stepped Up Basis. When you calculate your profit when you sell something your basis is what you subtract from the sales price to determine your profit. Here is an example. You bought a rental house for $75,000 in 1980 and over the years have taken a total of $25,000 in depreciation. Your basis is $50,000. When you sell it in 2001 for $130,000 you have a $100,000 gain (sales price of $150,000 less basis of $50,000. You have to pay capital gains tax on the profit. If you give the rental to your son during your life he takes the rental with your basis. However, under current law (until 2010) if he inherits the rental from you, his basis is "stepped up" , i.e., up from your basis to the fair market value at the date of your death. This is a great deal for him. Say that it's worth $150,000 at your death. If he sells it right away he doesn't have any profit (and no tax) because his basis is $150,000. This is going to change in 2010 and under some rather complex rules the amount of basis that can be stepped up will be limited.
Marital Deduction. No matter how big your estate is, if you leave everything to your spouse, you will not owe Estate Tax. Your estate gets a deduction in computing the Estate Tax which is unlimited in amount. If Bill Gates leaves $45,000,000,000 to his wife Linda, he gets a $45,000,000,000 deduction and 40% of $45,000,000,000 is zero.
Credit Shelter Trusts.
Oregon Legal Center's Plan which creates a separate Living Trust for the husband and a separate Living Trust for the wife is designed to take advantage of the amount each spouse can pass free of federal Estate Tax (the unified credit). The separate trusts contain a special provision (QTIP) which allows State of Oregon Estate Tax which might be owed upon the death of the first spouse to be deferred until the death of the second to die spouse.
Here is how it works. Most married couples' estate plan provides that the surviving spouse owns everything. The assets are titled so that the survivor becomes the sole owner and the will or living trust provides that the surviving spouse inherits from the deceased spouse. For example, John and Mary own their house jointly with right of survivorship. Their wills provide that if the spouse survives the deceased spouse leaves their entire estate to the surviving spouse. Let's say they own together $4,000,000. John dies first. Mary becomes the sole owner of $4,000,000. Mary dies in 2008. The first $2,000,000 is excluded from the federal Estate Tax. She is taxed on the additional $2,000,000.
Here is how the OLC plan works to reduce tax. John sets up a Living Trust and Mary sets up a Living Trust. They divide their property and transfer one-half to John's Living Trust and one-half to Mary's Living Trust. At death their is no probate since Living Trusts are utilized. Each Living Trust provides that upon death of the first spouse that a credit shelter trust is funded up to the maximum amount allowed by federal estate tax law. The surviving spouse is the trustee of the Credit Shelter Trust. Although the Credit Shelter spouse is controlled by and for the benefit of the surviving spouse, it is excluded from the surviving spouse's estate. The Credit Shelter trust terminates when the surviving spouse dies. The trustee makes a QTIP election and the amount over the State of Oregon maximum is put into a QTIP trust which qualifies for the marital deduction. Oregon Estate Tax is deferred until the death of the second-to-die spouse.
To illustrate this consider the following example. Let's use John and Mary only this time we divide up the estate so that John's Living Trust owns $2,000,000 and Mary's Living Trust owns $2,000,000. When John dies $2,000,000 is transferred into the Credit Shelter Trust. The transfer from John to his Credit Shelter trust is free of federal Estate Tax since the amount transferred does not exceed $2,000,000. The trustee makes a QTIP election as to $1,000,000 of the $2,000,000. which is the difference between the $2,000,000 allowed to pass under Federal Estate Tax Law and the $1,000,000 allowed to pass under the State of Oregon Estate Tax Law. Mary is the trustee of the both the Credit Shelter Trust and the QTIP trust. . She has access to income and principal. She also, of course, has her own $2,000,000. Let's assume that for the sake of the example that she dies six months later and she still has her own $2,000,000 and the Credit Shelter Trust still has $1,000,000 and the QTIP Trust still has $1,000,000. When Mary dies her Living Trust states that since John has already died, Mary leaves him nothing and instead leaves her estate to their children. So her $2,000,000 passes to her children free of Federal Estate Tax since it is less than $2,000,000. However, the portion over $1,000,000 ($1,000,000) will be subject to the State of Oregon Estate Tax. John's Living Trust states that when Mary dies that the Credit Shelter trust terminates and its assets are transferred to their children. Thus, the children get $1,000,000 from the Credit Shelter trust free of Federal and State of Oregon Estate Tax. The $1,000,000 in the QTIP passes to the children free of any Federal Estate Tax. However, the $1,000,000 in the QTIP trust is subject to State of Oregon Estate Tax.
Will is a document in which you set out who will inherit your property when you die. You name a person to wind up your affairs after you die. That person is called the Personal Representative. Depending on the type of property you own when you die, your estate may have to go through Probate.
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Legal Center at
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