Tools
of Estate Planning
___________________
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An
estate plan is a very personalized document,
which reflects your goals and designates the distribution
of the assets which God has entrusted to you.
There
are many tools available in the estate
planning process. Depending on your situation,
you may use one, several or all of these tools.
Here is a brief description of some that you may
use to accomplish your unique goals and objectives.
Directory:
Basic Planning Instruments
The Will
Revocable Living Trust
Durable Power of Attorney/Physician's
Directive
Life Insurance
Utilization of Trusts in Estate
Planning
Taxation
and Charitable Trust Tools
Charitable Estate Planning Tools
How
To Get Started
Basic
Planning Instruments
There
are two primary instruments used for estate planning,
a Will and a Revocable Living Trust. Both are
discussed below.
The
Will _______________________
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The
Will is the most basic part of every estate plan.
By definition, it is a legal declaration of a
person's wishes regarding the disposal and distribution
of his or her estate after death. The Will is
the legal document, drafted during your lifetime,
which addresses numerous issues:
- Final
testimony of your Christian faith
-
Property and asset distribution
-
Naming an executor
-
Naming a legal guardian for minors
-
Reducing estate tax liability
In
the absence of a Will, the state will resort
to a formula. A judge will name an executor; bond
may have to be posted; the court will name a guardian;
and a formula will determine asset and property
distribution.
Every state has different laws
and regulations when it comes to the execution
and validity of a Will and they are often strict.
Be sure to retain competent legal counsel, familiar
with the laws of your state of residence to draft
your Will.
Revocable
Living Trust __________
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The Revocable Living Trust
(RLT) contains language to distribute
assets at death just like a Will. Here, however,
you set up a trust during your lifetime and transfer
essentially all of your assets into the trust.
These assets would then be managed and controlled
by you. Just like a Will, the RLT can contain
language to set up other trusts should these be
desired. The Revocable Living Trust has many advantages
over a Will, however. The most notable would probably
be that it allows you to avoid probate.
The Revocable Living Trust also
has the advantage of being private, none of it
is subject to public record. In addition it is
much harder to contest successfully. Since the
Revocable Living Trust is probably the lesser-known
option to most people, PhilanthroCorp has included
below a brief explanation of how the trust would
work for a married couple.
Essentially, the Revocable Living
Trust works as follows:
- An
attorney prepares the trust. It contains language
to direct, exactly as you desire, the disbursement
of funds at the death of the second spouse.
- Upon
creation of the trust, ownership of all of your
assets, except qualified retirement plans, is
generally transferred to the trust.
- A
simple Will would be prepared for both spouses,
which at death merely transfers any assets to
the trust that were previously overlooked.
- For
tax planning purposes, the Revocable Living
Trust would also contain language to create
a second trust called a Bypass Trust (see trust
section). This trust would not be funded initially,
but could be funded at the death of the first
spouse to reduce future estate taxes.
Both
spouses would serve as trustees of the Revocable
Living Trust during their lifetimes, managing
the estate. At the death of the first spouse,
the surviving spouse would serve as sole trustee
of the surviving Revocable Living Trust, and could
also serve as personal representative of the estate.
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Durable
Power of Attorney/Physician's Directive
PhilanthroCorp
recommends that you grant durable power of attorney
for property management to a trusted individual.
This will enable that individual to manage the
assets in your estate should you become incapacitated
before death. Secondly, PhilanthroCorp recommends
that you grant durable power of attorney for health
care decisions also to a trusted individual. This
will enable that individual to make healthcare
decisions for you should you become unable to
do this on your own. Generally, married couples
will name their spouses for both duties and an
alternate in case the spouse is unable. In addition
to the durable power of attorney for health care,
many people wish to establish a physician's directive,
which sets forth directions for providing critical
healthcare.
Life
Insurance __________________
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Life
insurance can sometimes play a prominent role
in estate planning. We at PhilanthroCorp does
not in any way sell life insurance but they do
encourage the consideration of strategic aspects
that life insurance can have on your planning.
Basically, there are three reasons why you would
want to consider life insurance.
- Protection
of Dependants
When you build an estate plan you will want
to look at worse case scenarios. Typically you
will want to ask yourself, if I were to leave
my dependents tomorrow, is there enough financial
protection for the surviving spouse, the children's
upbringing and education and to maintain their
lifestyle?
-
Liquidity in the Estate
Often it is very important that before the estate
is distributed there is significant liquidity
in the estate for your wishes to be carried
out. This is important should there be some
taxes due from the estate. Without sufficient
liquidity, assets that you intended to remain
intact might need to be sold to meet the tax
requirements.
- Irrevocable
Life Insurance Trust (ILIT)
This is explained in more detail in the next
section, but basically, an ILIT permits individuals
to pull their life insurance out of their estate
so the proceeds to heirs will not be taxable
in their estate.
Utilization
of Trusts in Estate Planning
Children's
Trust ___________________
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It
is critically important that the estate planning
process addresses the needs of minor children,
both in terms of their upbringing (guardianship)
and in terms of financial requirements. Ensuring
that all children are protected financially is
usually accomplished through a Children's Trust.
To provide for a Children's Trust, married couples
will typically incorporate language into their
will or RLT that states that, at the death of
the second spouse, should their youngest child
not have attained a certain age, assets be held
in trust for the protection of the children. By
holding the funds collectively in trust in this
manner, you can ensure that funds remain available
to meet the needs of all of your children. Often,
these trusts are structured so that the ultimate
disbursement to your children is made in increments,
as your children reach certain ages. In this manner,
the trust can also have an added benefit of preventing
children who have just reached the legal age of
maturity (18), from receiving a significant inheritance
all at once, as most young adults would not be
able to manage these funds in a responsible manner.
Bypass
Trust ___________________
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Individuals
can pass to heirs free of federal estate taxes
$1.5 million this year ( and legislation was enacted
to increase this amount over the next six years).
Married couples who plan their estates can double
the amount that would pass to heirs, tax-free,
by utilizing what is called a Bypass Trust.
To
illustrate the benefit of the Bypass Trust,
let's assume an estate large enough to fully utilize
the Bypass Trust at the death of the first spouse.
Property is simply transferred to the trust equal
to the amount offset by the federal estate tax
credit ($1.5 million in 2004). The surviving spouse
would be permitted to receive all or any portion
of the income produced by the trust. In addition,
an independent trustee would have the power to
invade the corpus of the trust (withdraw principal),
should this be required to maintain the standard
of living of the surviving spouse. At the death
of the second spouse, all trust assets would pass
to beneficiaries free from estate tax, as they
are not a part of the surviving spouse's estate.
Further, the estate of the surviving spouse would
be entitled to its own estate tax credit, enabling
$1.5 million (in the year 2004) to be distributed
to heirs free of estate tax. Hence, by utilizing
a bypass trust, both marriage partners can take
advantage of the federal estate tax exemption
of $1.5 million. By doing so, couples can protect
$3 million from estate taxes in the year 2004.
Irrevocable
Life Insurance Trust ___
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The
Irrevocable Life Insurance trust (ILIT)
can represent a dramatic means of transferring
large sums of wealth to heirs. Generally, if life
insurance is owned by the insured, the proceeds
are included in his or her estate and are subject
to estate tax. This is not a concern unless your
estate is subject to estate taxes, but for larger
estates, the ILIT presents an effective means
of avoiding this problem.
In
general, an ILIT would work as follows for a married
couple:
- The
Irrevocable Life Insurance Trust is first created
and then funded by either transferring ownership
of existing policies or by purchasing new policies.
For new policies, the trustee applies for and
becomes the owner of the new policies. In either
case, both spouses could transfer assets to
the trust to meet insurance premium requirements
(which are treated as gifts to the trust beneficiaries).
If cash is transferred to the trust and the
trust buys insurance policies, the insurance
proceeds are immediately sheltered form estate
taxation. If, on the other hand, the settlor
already owns existing insurance policies and
transfers them to the ILIT, the settlor must
survive for 3 years after putting the policies
into the trust before the insurance proceeds
escape estate taxation. For this reason, it
is best to have the ILIT buy new policies whenever
possible.
- The
trustee notifies the beneficiaries that the
gifts have been made and they have a right,
called a Crummey Power, for a limited period
of time to request that these new gifts be distributed
immediately.
-
If they do not exercise their right, the trustee
uses the money to pay the life insurance premium(s).
By
giving the beneficiaries the Crummey Power, the
annual gifts of the premiums qualify as gifts
of a present interest, thereby generally qualifying
for the $11,000 annual gift tax exclusions. Under
these circumstances the insurance proceeds, when
paid to the trust and subsequently distributed
to the heirs, will be sheltered from estate taxes.
To be sure that the above works as intended, you
would, of course, want to review the requirements
and restrictions of the ILIT with your attorney
before proceeding.
Taxation
and Charitable Trust Tools _
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Generally,
we are concerned about two types of taxes
in doing estate planning. The first is the federal
estate tax and the second is income in respect
of decedent (IRD) tax.
As
was indicated previously, the exemption for federal
estate tax is presently $1.5 million. This increases
incrementally to a level of $3.5 million in the
year 2009. After that, in the year 2010, the estate
tax is repealed. However, the following year it
is reinserted at the $1 million level, as the
new legislature that increased these exemptions
is subject to what is called a sunset provision.
In other words, at the end of the ten years, unless
Congress reinstates it, the old exemption would
go into place. Therefore, for any long term planning,
we suggest that all individuals plan conservatively
and base planning assumptions on a $1 million
exemption. Amounts beyond this exemption are subject
to estate tax, at rates historically starting
at 41% and increasing to a maximum of 55%.
Many
items in your estate might be subject to IRD tax
upon death. The most prominent of these types
of assets would be tax deferred retirement assets.
At death, these assets are taxed as ordinary income.
There are various estate planning tools, particularly
the charitable tools itemized below that will
avoid this tax and bring considerable benefits
to your heirs as well as charitable beneficiaries.
To illustrate how heavily these assets can be
taxed without planning, it should be noted that
for somebody who has these assets and also has
an estate that is taxable the combined impact
of both the estate tax and the IRD tax can erode
as much as 70% of the asset's value through taxation.
Charitable
Estate Planning Tools ___
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There
are several charitable tools available for individuals
who have a heart for charity. These tools also
can yield some dramatic tax advantages. They are
described briefly below. Because of your interest
in Gospel for Asia, we hope you will consider
providing a gift to this ministry. That decision,
of course, should be based on a belief that it
is God's plan of stewardship for you and your
estate.
"...
but lay up for yourselves treasures in heaven,
where neither moth nor rust destroys and where
thieves do not break in and steal.” Matthew
6:20
Income
Taxes __________________
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Certain
estate assets carry with them adverse income tax
implications to personal beneficiaries, which
are in addition to any estate tax obligation.
For estate planning purposes it is very important
to identify these tax-encumbered items. These
are summarized below:
- Tax
deferred retirement funds, such as traditional
IRAs (not Roth IRAs), 401(k)s and 403(b)s.
-
Series EE and HH Savings Bonds (to the extent
that income has not been reported annually).
-
Stock options (those which have not expired
at the time of death).
-
Deferred income and other accrued but not realized
income such as partnership income, royalties,
etc.
-
Accounts Receivable from a trade or business.
In
the list above, the first item, tax deferred retirement
accounts, deserves special consideration. This
is because the ramifications of income tax on
these accounts can be so significant. As you are
probably aware, any withdrawals made during your
lifetime from these accounts are taxed as ordinary
income. Moreover, should death occur prior to
the withdrawal of these accounts, any distribution
to personal beneficiaries would be subject to
an income in respect of decedent (IRD) tax. Basically,
the funds would be taxed as ordinary income before
distribution to your beneficiaries, with a deduction
given for any estate taxes paid.
To
avoid this IRD tax, the retirement assets,
at the time of death, could be given outright
to charity, distributed to charity in exchange
for charitable gift annuities, or through a charitable
remainder trust agreement. These three options
are detailed below:
Outright
Gift of Retirement Assets __
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If
retirement assets are given to a charity at the
time of death of the surviving spouse, the IRD
tax is eliminated, since the charitable organization
is tax exempt. Further, because the retirement
assets are gifted directly to charity a full estate
tax deduction for the amount of the assets is
obtained. In this arrangement, assets are distributed
directly to charity instead of personal beneficiaries.
To accomplish this a married couple just needs
to designate each other as primary beneficiaries
on the accounts, and your charitable organizations
as secondary beneficiaries.
Charitable
Gift Annuities __________
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Charitable
Gift Annuities eliminate the IRD tax
on the retirement assets and at the same time
provide a benefit to heirs during their lifetimes.
Here, instead of gifting the retirement assets
directly to charity, the assets are transferred
to the charitable organizations in exchange for
Gift Annuities. These annuities then provide a
source of income to personal beneficiaries for
their lifetimes. The income paid is based on the
size of the retirement assets, the number of personal
beneficiaries, the age of each beneficiary, and
current interest rates. It is important to note
that while these Gift Annuities eliminate the
IRD tax exposure associated with tax deferred
retirement plans, it only removes a portion (not
all) of the assets from the estate for federal
estate tax purposes. Also, most charities that
administer Gift Annuities set minimum gift thresholds
of at least $10,000 per beneficiary.
Charitable
Remainder Unitrust _____
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A
Charitable Remainder Unitrust (CRUT)
eliminates the IRD tax on retirement assets, removes
a portion of the assets from the estate for federal
estate tax purposes, and at the same time provides
income for heirs. When retirement assets are used
to fund a CRUT, the assets benefit personal beneficiaries
for a term of one or two lives, or a specific
term of years, and then the remainder of the assets
passes to charity.
With
a CRUT, the donor selects the payout percentage
(5% or more) and a period of time for the unitrust
to make distributions to personal beneficiaries.
Actual payments would be determined by this payout
percentage and the value of the assets in the
trust. Many donors choose to pay the unitrust
amount to family members for a period of time
that would pay out an amount equal to the initial
value of the property. For example, a trust, which
pays 7% for fifteen years, will pay to family
members income, which equals approximately the
initial fair market value of the property. By
this method the donor is able to double the total
benefits from the property once to the family
through income payments and once to the charities
through distribution of the principal after all
income payments are completed.
One
advantage of the Charitable Remainder Unitrust
is that the amount remaining in the trust grows
tax-free. For example, if a person selected a
6% payout trust and the trust investments earned
8%, there would be 2% growth tax-free each year.
This tax-free growth could substantially increase
the value of the trust over time and since the
selected 6% payout is based on this value, distributions
to personal beneficiaries would increase proportionally.
The ability of the unitrust to increase both in
principal and in income payments over a period
of years is frequently referred to as an inflation
hedge. However, please understand that this benefit
does not come without risk. In the above example,
if the growth in the trust falls short of the
payout (6% in this instance), then income payments
to beneficiaries would actually decline with time.
In
accessing the utilization of CRUTs, PhilanthroCorp
generally recommend that this option only be considered
if at least $50,000 is available to fund this
trust, as otherwise administrative expenses will
likely negate much of the benefit.
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Testamentary
Charitable Remainder Trust (TCRT)
To
utilize a Testamentary Charitable Remainder Trust,
assets at death, are transferred to a trust. The
trust will pay out a set percent of the assets
value to heirs for a period of years. The percent
and duration would be determined in the estate
documents with certain guidelines. At the conclusion
of the time set to pay heirs, a designated charity
would receive the remainder of the interest in
the trust. The trust assets grow tax-free. The
Testamentary Charitable Remainder Trust gives
the estate an estate tax deduction on a portion
of the assets that go into the trust. It also
eliminates any IRD tax exposure from these assets.
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Testamentary
Charitable Lead Trust (TCLT)
This
works in much the same manner as the TCRT,
and features the same tax advantages. Here, however,
the charity would be paid a certain percentage
of the assets for a number of years, and the remainder
interest would go to the heirs. This is used more
often on large estates where heirs do not have
significant need for near term funds.
How
To Get Started ______________
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To
get started and implement your estate plan,
you could either use this guide we have furnished
and work toward this on your own or utilize the
services of PhilanthroCorp. If you decide you
want to work this alone, you will probably want
to reflect upon the tools illustrated in this
guide, make a list of all of your property and
then seek the counsel of a competent attorney.
On the other hand, you could utilize the services
of PhilanthroCorp. Their service is provided at
no cost to you in most cases, courtesy of Gospel
for Asia in appreciation of the support you have
given us.
Be
assured that all information you provide PhilanthroCorp
will be held in strictest confidence
and there is no obligation to you. You have complete
control over the distribution of your finances.
Our only function is to provide you with sound
Christian financial counsel.
PhilanthroCorp
would appreciate the opportunity to serve you
on behalf of Gospel for Asia. Please contact them
at 800-876-7958 ext 2127 and ask for
a telephone appointment to be scheduled with one
of their Estate Specialists or email (click
here)
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