Transcript Title set in Georgia 50pt

2011 Estate Planning Ideas
Nerre Shuriah
Vice President and Senior Financial Planner,
Wells Fargo Wealth, Brokerage and Retirement Group
January 16, 2011
© 2011 Wells Fargo Bank, N.A. All rights reserved.
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Estate Planning Ideas Agenda
I. 2010 Tax Relief Act
• What transfer tax changes did the law make,
and how do the changes affect your estate plan?
II. Retirement Planning
• A look at the Defined Benefit Plan strategy
III. Business Succession
• The Combination Buy-Sell Arrangement –
a strategy tailor-made for private medical practices
1
Trust and Estate Planning Is Important
There are many reasons to create an estate plan
• Provide for your heirs
• Prepare a life insurance plan
• Protect your wealth
• Create contingency plans for unforeseen circumstances
• Philanthropy
• Choose a guardian for minor children
• Convey your burial/cremation plans
• Avoid lengthy & expensive court proceedings (Probate Court)
• Give clear direction regarding your asset distribution
• Minimize taxes
2
Impact of No Estate Plan
Creating a comprehensive estate plan is critical to preserving and
distributing your wealth, as well as protecting it from taxes and fees
When Elvis Presley died, he left a $6.2 million estate.
However, he did not have an estate plan. As a result,
nearly 85% of his estate was consumed by taxes and
fees, leaving less than $1 million for his heirs.
Do you have an
estate plan?
Reasons commonly given for not
completing an estate plan include:
$986,247
to Heirs
• I am busy with other priorities
• I am not old enough
• I do not need a plan
• It is too complicated
• Creating a plan is expensive
and time-consuming
$3,339,520
Estate Taxes
• I do not know how or
where to start
3
Common Estate Planning Tools
A will is typically just one element of a complete estate plan:
your plan may include a combination of estate planning tools
Wills:
Designate how
your assets and
property are
distributed
Trusts:
Help you protect
and transfer your
assets
Life Insurance:
Financially protect
your estate and
assist your family
Ancillary
Documents:
Includes legal
documents and
agreements
4
A Will Communicates Your Wishes
A will designates how your assets and property are
distributed at your death and identifies the parties involved
in settling your estate
Wills
• Executor
You name an executor to carry out your requests.
The executor is responsible for taking care of the
estate, paying your debts and estate taxes and
distributing money and other property by following
the instructions in the will.
• Guardians
A guardian is given custody of both the property and
the person of one who is unable to manage their own
affairs, such as a child or mentally-disabled person.
You may name two different guardians: one to care
for property and one to care for the person.
• Beneficiaries
You choose beneficiaries to receive funds or property.
A beneficiary can be any person(s) or entity capable
of taking and holding property.
What is not covered
by a will?
Items not covered include:
• Assets held in joint
tenancy with right of
survivorship
• Assets for which you
completed a beneficiary
designation form, such
as your IRA or retirement
benefits
• Life insurance
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A Trust Transfers Ownership
Trusts
A trust is a legal arrangement whereby you transfer ownership
of assets to a trust: it is administered by a trustee and proceeds
go to beneficiaries you designate
• Revocable
- Can simplify management of your wealth during your lifetime
- May provide ongoing management of your assets should you become incapacitated
- Allows you to control the distribution of your estate
• Irrevocable
- Minimizes estate and gift taxes
- Allows you to control the distribution of your estate
- Avoids probate for assets in trust
• Testamentary
- Creates a trust by your will at the time of your death
- Directs property into trust by your will
- Does not exempt assets from probate
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Ancillary Living Documents Prepare for Contingencies
Ancillary
Documents
Ancillary living documents are legal documents and agreements
that outline a plan in the case of any unexpected events
regarding your property, health care or other personal issues
• Power of Attorney
- Appoints a designee to make decisions on your behalf regarding issues such as
health care and your financial affairs in the case that you are unable to do so
• Health Care Directive (Living Will)
- Provides instructions on the medical care you do or don’t want in the event you
are incapacitated
• Separate Property Agreement
- Most commonly used in community property states to define the ownership of
property acquired during marriage
• Prenuptial Agreement
- Establishes terms for a broad range of financial issues (money management,
property rights, responsibility for debts, estate planning, etc.) between two people
planning to wed
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Tax Relief Act of 2010 – Key Estate Tax Elements
1. After a one-year hiatus, the estate tax will be reinstated for 2011 and 2012, with a top rate
of 35%. The exemption amount will be $5 million per individual in 2011 and will be
indexed to inflation in following years.
Consider: The lower rate and higher exemption amount is only for 2 years. Estate
planning is usually a long-term consideration. Sunset rules ($1M exemption and 55% top
rate) reinstate in 2013. Uncertainty requires flexibility in planning and more frequent
oversight.
2. The estate tax exemption amount is portable – if not used by the first spouse to die,
it can be used by the second spouse. Married couples can shelter $10 million from
transfer taxes.
Consider: Utilizing the estate tax exemption amount at the first death is still a good
idea due to appreciation during time period between deaths, and the ability to
leverage that tax-free amount with life insurance.
2. Estates of people who died in 2010 can choose to follow either 2010’s or 2011's rules.
Consider: Without the estate tax, some estates of people who died in 2010 will be subject to
higher capital gains taxes due to lack of stepped-up basis.
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Tax Relief Act of 2010 – Key Gift Tax Elements
1. Gifts made after 12/31/2010: reunified with the estate tax. $5 million shelter amount
for gifts too (up from $1 million). Top gift rate is 35%.
Consider: You are allowed to make yearly gifts up to $13,000 ($26,000 if married)
per donee. Gifts made directly to creditors for educational or medical expenses are
not included in this threshold. A program of annual gifting will capture these benefits.
Also, §529 plans allow you to frontload 5 years worth of annual gifts
($65,000/$130,000) for educational purposes. All §529 distributions are income tax
free if used for educational needs (tuition, books, equipment, room & board).
Consider making gifts in excess of the annual limit in order to take advantage of the
$5 million exemption. This higher limit may go away after 2012. (In past years the
gifting limit never exceeded $1M, and it is set to return to that amount in 2013.)
•
•
•
Sophisticated strategies allow you to leverage the gift amount using:
Life Insurance
Estate Freeze Techniques – GRATs, QPRTs, IDGTs
Valuation Discounts – LLC or FLP interest
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Tax Relief Act of 2010 – Key GST Tax Elements
1. GST Tax (generation-skipping transfer tax) – for gifts made to skip persons more than one
generation below. Top rate is 35%, exemption amount if $5 million (No GST tax on gifts
made in 2010, although may be subject to gift tax if exceeds $1 million.)
Consider: A skip person is more than one generation below you, such as grandchildren, or
greater than 37½ years younger. This latter category is a pitfall when leaving devises to
friends, employees, or extended family (cousins, nieces and nephews, etc.)
If you feel your children are already taken care of, or alternatively, you fear they will spend
their entire inheritance, consider GST planning for your grandchildren. This can be
accomplished by outright gifts or setting up trusts that benefit grandchildren and allocating
your $5 million exemption to the gift.
You may also be able to create §529 plans for grandchildren and utilize the higher gift and
GST exemption amounts available for the next two years.
10
Retirement Planning Ideas:
The Defined Benefit Plan
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Why Implement a Defined Benefit Pension Plan?
Increased tax-deductible contributions (up to $200K/year)
Income taxes are due only when distributions made
Increased savings can be as high as $2M at time of retirement
At death, your pension plan can be left to your spouse/heirs
You can roll over your DB plan to an IRA at retirement
You can carve out the plan so select employees benefit most
The DB plan can be partially funded with life insurance
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Defined Benefit Plans – Sample Contributions
Annual contribution examples using different funding methods
Current
Age
Retirement
Age*
Profit
Sharing
Defined Benefit
Level Funding
Defined Benefit
Maximum
Funding**
Defined Benefit
Minimum
Funding
30
55
$49,000
$34,451
$47,219
$9,253
35
55
$49,000
$49,299
$65,549
$12,845
40
55
$49,000
$74,434
$92,153
$18,059
45
55
$49,000
$123,950
$127,389
$24,963
50
60
$49,000
$157,909
$163,109
$32,622
55
62
$49,000
$207,144
$223,029
$36,864
60
65
$49,000
$202,871
$234,114
$43,830
*Retirement Age less than 62 is assumed to be Early Retirement Age.
**Assumes that 3 years’ compensation history is available.
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Hypothetical Example: Surgical Practice
• Doctor – $700k salary
• Spouse – $100k salary
• 10 Employees – $627k total salary
• Existing Profit Sharing Plan:
- Doctor – $36,700 contribution
- Wife – $25,000 contribution
- 10 Employees – $151,000 contribution
• Problem: the employee cost is twice that of the owner
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Surgical Practice Example: Solution
• Solution:
- Layer “split-funded” defined benefit plan on top of profit
sharing plan
• New contributions:
- Doctor: $237,393 (includes $40,813 for first 6 years to
fund life insurance, dropping to $196,580)
- Wife: $92,000
- 10 Employees: $151,000 – NO CHANGE
• $125k of contribution used to purchase Life Insurance
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Defined Benefit Pension Plan Summary for Example Doctor
Age
DB Plan
Contribution
Profit
Sharing
Total
52
$201,455
$36,700
$238,155
53
$237,393
$36,700
$274,093
54
$237,393
$36,700
$274,093
55
$237,393
$36,700
$274,093
56
$237,393
$36,700
$274,093
57
$237,393
$36,700
$274,093
58
$196,580
$36,700
$233,280
59
$196,580
$36,700
$233,280
60
$196,580
$36,700
$233,280
61
$196,580
$36,700
$233,280
Totals
$2,174,740
$367,000
$2,541,740
What did he give up?
Total Contributions
$2,541,740
IRS Tax Savings (40% Rate) $1,016,695
Net Contributions
$1,525,043
What did he get?
At Retirement (age 62):
$3,040,876 (assuming 5% return), plus
$1,619,005 of life insurance death benefit
What can he do with it? (age 90)
A. Retirement Assets provide:
$254,783 annually (age 62–90)
(assuming 8% gross return)
B. Life Insurance (VUL – 8% yield) provides:
$34,863 tax-free annual income (age 62–90),
or
$3,451,229 death benefit (age 90) to family
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Example: Surgical Practice
• How?
• Comparability Testing
- Performed by TPA actuaries
- 25% of salary for 10 employees was already
being contributed
• Percentage of salary required for contributions on
behalf of rank and file employees can be different
within limits
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Business Succession Ideas:
The Combination Buy-Sell Agreement
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Key Elements of Succession Planning
• Common practice continuation problems:
- Death of the professional
- Disability
- Retirement
- Loss of a key employee
- Need certified/licensed successor
• Adverse effects/consequences of practice termination:
- Loss of income from practice for the owner/family
- Disruption of careers for remaining owners/employees
- Loss of value due to a forced sale of assets
• Management succession and client retention
- Increase loyalty of the client base
- Recruit, retain, and incentivize key employees
- Identify and groom potential successors or partners
- Stabilize value
• Structure to facilitate and fund buyouts
- Handle future, multiple, and continuing buyouts that will
arise from retirement, death, or disability
- Determine insurance ownership
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Combination Buy-Sell Arrangement
The combination buy-sell is a nontraditional arrangement in which a general partnership (or
limited liability company) is used to structure and fund a buy-sell agreement. This arrangement
combines the benefits of both a cross-purchase and stock redemption, while avoiding their
negative aspects. With this arrangement, the owners of the business establish a separate
general partnership, which owns and names itself beneficiary of life insurance policies insuring
the lives of the owners. Premiums are contributed by the owners (either from their own funds
or bonused from the company.)
Owner A
Contribution
Owner B
Owner C
Partnership
Contribution
Premiums
Life Insurance
Policies on
A, B, C
Contribution
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Combination Buy-Sell Arrangement (cont.)
At death (or other triggering event) of one of the owners, and according to the terms
of the buy-sell agreement, the death benefits can be:
• Distributed to the surviving owners to fund a cross-purchase buyout
• Lent to the business to fund a stock redemption, or
• Used by the partnership to buy the deceased owner’s interest
Owner A
Ownership interest in
Partnership
Owner B
Owner C
50% Death Benefit
Partnership
Death
Benefit for A
Life Insurance
Policies on
B, C
50% Death Benefit
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Combination Buy-Sell Arrangement (cont.)
A properly structured combination buy-sell arrangement provides benefits
of both stock-redemption and cross-purchase agreements by:
• Requiring only one insurance policy per owner
• Dividing premium burden equitably among all owners
• Providing full cost basis for purchased shares of business to all surviving
business owners
• Enabling business to deduct bonuses paid to owners, who then
contribute same amounts to partnership for insurance purchase
• Avoiding possible levy of AMT on business from receipt of life insurance
death benefit when an owner dies
• Facilitating ease of including or removing changing owners from the
arrangement
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Questions and Answers
Closing Remarks
Cheryl McDonald
Thank You