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Estate Planning

March 28, 2010


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Table of Contents Introduction to Estate Planning ......................................................................................................................... 10 What is estate planning? ..........................................................................................................................10 Who needs estate planning? ....................................................................................................................10 How to do it .............................................................................................................................................. 11 How do you begin? .................................................................................................................................. 12 What other factors need to be considered? ............................................................................................. 12 What are your goals and objectives? ....................................................................................................... 14 What are estate planning strategies? .......................................................................................................15 Implications of the Economic Growth and Tax Relief Reconciliation Act of 2001 ............................................. 16 Introduction .............................................................................................................................................. 16 The sunset provision ................................................................................................................................ 16 The impact on existing estate planning documents ................................................................................. 17 Estate planning in today's post-act environment ......................................................................................17 Generation-skipping transfers offer expanded opportunities for wealthy taxpayers ................................ 18 Planning for a modified carryover basis regime ....................................................................................... 19 Accelerated gifting may be indicated for some taxpayers ........................................................................20 Treatment of certain transfers made to a trust ......................................................................................... 21 The repeal of the state death tax credit ....................................................................................................21 Repeal of the qualified family-owned business (QFOB) deduction ..........................................................21 Expanded availability of installment payment rules ..................................................................................22 Navigating Estate Plans Through Uncharted Waters ........................................................................................23 Uncertainty caused by the temporary federal estate tax repeal ...............................................................23 Estate tax planning vs. capital gains tax planning ....................................................................................23 Review plans for formula clauses ............................................................................................................ 24 Gifting opportunities and issues caused by the repeal of the GST tax .................................................... 24 Addressing the impact of state death taxes ............................................................................................. 25 Wills .................................................................................................................................................................. 26

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What is a will? .......................................................................................................................................... 26 What are the requirements? .....................................................................................................................26 What does your will do? ........................................................................................................................... 27 Are there any tradeoffs? ...........................................................................................................................28 How do you make a will? ......................................................................................................................... 29 Can you change or revoke your will? ....................................................................................................... 31 What types of wills are there? .................................................................................................................. 31 Selecting an Executor ....................................................................................................................................... 33 What is an executor? ............................................................................................................................... 33 What are the duties of an executor? ........................................................................................................ 33 How do you select an executor? .............................................................................................................. 33 What if you don't leave a will? ..................................................................................................................34 Life Insurance: Estate Planning ........................................................................................................................ 35 What is life insurance? ............................................................................................................................. 35 Is it life insurance? ................................................................................................................................... 35 Why buy life insurance? ........................................................................................................................... 36 What are the advantages? ....................................................................................................................... 36 What are the tradeoffs? ............................................................................................................................37 Maximizing the Estate Planning Value of Life Insurance .................................................................................. 38 What is maximizing the estate planning value of life insurance? ............................................................. 38 How is it done? .........................................................................................................................................38 Irrevocable Life Insurance Trust ........................................................................................................................40 What is it? ................................................................................................................................................ 40 How does it work? ....................................................................................................................................40 Why use an ILIT? ..................................................................................................................................... 40 Creating the ILIT ...................................................................................................................................... 41 Funding the ILIT ....................................................................................................................................... 42 Tax considerations ................................................................................................................................... 44 Gift Tax .................................................................................................................................................... 44

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Estate Tax ................................................................................................................................................ 45 Generation-Skipping Transfer Tax ........................................................................................................... 45 How do you implement an ILIT? .............................................................................................................. 45 Minimizing Estate Taxes ................................................................................................................................... 47 What is minimizing estate taxes? .............................................................................................................47 What are estate taxes? ............................................................................................................................ 47 How do you minimize estate taxes? .........................................................................................................48 Trusts ................................................................................................................................................................ 50 What is a trust? ........................................................................................................................................ 50 Types of trusts ..........................................................................................................................................51 Why use a trust? ...................................................................................................................................... 52 Charitable Gifting .............................................................................................................................................. 54 What constitutes a gift to charity? ............................................................................................................ 54 How do you decide whether to donate to charity? ................................................................................... 54 What are the tax benefits of donating to charity? .....................................................................................54 What options do you have for donating to charity? .................................................................................. 54 Charitable Trusts ...............................................................................................................................................57 What is a charitable trust? ........................................................................................................................57 What are the different types of charitable trusts? .....................................................................................57 Conducting a Periodic Review of Your Estate Plan .......................................................................................... 59 What is conducting a periodic review of your estate plan? ...................................................................... 59 When should you conduct a review of your estate plan? .........................................................................59 Planning for Succession of a Business Interest ................................................................................................ 61 Business succession planning--what is it? ...............................................................................................61 Transferring your business interest with a buy-sell agreement ................................................................61 Sell your business interest ....................................................................................................................... 61 Transfer your business interest through lifetime gifts ...............................................................................62 Transfer your business interest at death through your will or trust .......................................................... 63 Choosing the right type of succession plan ..............................................................................................63

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Table of Federal Estate Tax Brackets and Exemption Limits ........................................................................... 64 Common Incapacity Documents ....................................................................................................................... 65 The Best Property to Give to Charity ................................................................................................................ 66 Estate Planning Pyramid ...................................................................................................................................67 Steps to Estate Planning Success .................................................................................................................... 68 The World of Estate Planning ........................................................................................................................... 69 Advantages of Trusts ........................................................................................................................................ 70 A/B Trust Diagram: $7 Million Estate ................................................................................................................ 71 Estate Shrinkage ...............................................................................................................................................72 How a Charitable Remainder Trust Works ........................................................................................................73 How a Charitable Lead Trust Works ................................................................................................................. 74 How a Grantor Retained Income Trust (GRIT) Works ...................................................................................... 75 Estate Planning: An Introduction .......................................................................................................................76 Over 18 .................................................................................................................................................... 76 Young and single ..................................................................................................................................... 76 Unmarried couples ................................................................................................................................... 76 Married couples ........................................................................................................................................76 Married with children ................................................................................................................................ 77 Comfortable and looking forward to retirement ........................................................................................ 77 Wealthy and worried ................................................................................................................................ 77 Elderly or ill ...............................................................................................................................................77 Gift and Estate Taxes ....................................................................................................................................... 78 Federal gift tax and federal estate tax--background .................................................................................78 Federal gift tax ......................................................................................................................................... 78 Federal estate tax .................................................................................................................................... 78 Federal generation-skipping transfer tax ..................................................................................................79 State death taxes ..................................................................................................................................... 79 Wills: The Cornerstone of Your Estate Plan ......................................................................................................80 Wills avoid intestacy .................................................................................................................................80

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Wills distribute property according to your wishes ................................................................................... 80 Wills allow you to nominate a guardian for your minor children ............................................................... 80 Wills allow you to nominate an executor .................................................................................................. 80 Wills specify how to pay estate taxes and other expenses ...................................................................... 80 Wills can create a testamentary trust ....................................................................................................... 81 Wills can fund a living trust .......................................................................................................................81 Wills can help minimize taxes .................................................................................................................. 81 Assets disposed of through a will are subject to probate ......................................................................... 81 Will provisions can be challenged in court ............................................................................................... 81 Understanding Probate ..................................................................................................................................... 82 How does probate start? .......................................................................................................................... 82 What's an executor? ................................................................................................................................ 82 What if you don't name an executor? .......................................................................................................82 Is all of your property subject to probate? ................................................................................................ 83 Trust Basics ...................................................................................................................................................... 84 What is a trust? ........................................................................................................................................ 84 Why create a trust? .................................................................................................................................. 84 The duties of the trustee .......................................................................................................................... 85 Living (revocable) trust .............................................................................................................................85 Irrevocable trusts ......................................................................................................................................85 Testamentary trusts ................................................................................................................................. 86 Life Insurance and Estate Planning .................................................................................................................. 87 Life insurance can protect your survivors financially by replacing your lost income ................................ 87 Life insurance can replace wealth that is lost due to expenses and taxes ...............................................87 Life insurance lets you give to charity, while your estate enjoys an estate tax deduction ........................87 Life insurance won't increase estate taxes--if you plan ahead .................................................................87 Be like Frank, not like Dave ..................................................................................................................... 88 Facing the Possibility of Incapacity ................................................................................................................... 89 Incapacity can strike anyone at anytime .................................................................................................. 89

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Planning ahead can ensure that your wishes are carried out .................................................................. 89 Managing medical decisions with a living will, durable power of attorney for health care, or Do Not Resuscitate order ..................................................................................................................................... 89 Managing your property with a living trust, durable power of attorney, or joint ownership .......................89 Charitable Giving .............................................................................................................................................. 91 A few words about estate taxes ............................................................................................................... 91 Make an outright bequest in your will .......................................................................................................91 Make a charity the beneficiary of an IRA or retirement plan .................................................................... 91 Use a charitable trust ............................................................................................................................... 91 Why use a charitable lead trust? ..............................................................................................................91 Why use a charitable remainder trust? .................................................................................................... 92 Bypassing Probate ............................................................................................................................................ 93 Transfer your assets to a revocable living trust ........................................................................................93 Own property as joint tenancy with rights of survivorship ........................................................................ 93 Designate beneficiaries ............................................................................................................................93 Make lifetime gifts .................................................................................................................................... 93 Other ways to bypass or minimize probate .............................................................................................. 94 Asset Protection in Estate Planning .................................................................................................................. 95 Liability insurance is your first and best line of defense ........................................................................... 95 A Declaration of Homestead protects the family residence ..................................................................... 95 Dividing assets between spouses can limit exposure to potential liability ................................................95 Business entities can provide two types of protection--shielding your personal assets from your business creditors and shielding business assets from your personal creditors ......................................95 Certain trusts can preserve trust assets from claims ............................................................................... 96 A word about fraudulent transfers ............................................................................................................ 96 Transferring Your Family Business ................................................................................................................... 97 You and your estate may get some relief under the Internal Revenue Code .......................................... 97 Selling your business interest outright ..................................................................................................... 97 Transferring your business interest with a buy-sell agreement ................................................................97 Grantor retained annuity trusts or grantor retained unitrusts ................................................................... 98

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Private annuities .......................................................................................................................................98 Self-canceling installment notes ...............................................................................................................98 Family limited partnerships ...................................................................................................................... 98 Life Insurance Basics ........................................................................................................................................ 99 The many uses of life insurance .............................................................................................................. 99 How much life insurance do you need? ................................................................................................... 99 How much life insurance can you afford? ................................................................................................ 99 What's in a life insurance contract? ......................................................................................................... 99 Types of life insurance policies ................................................................................................................ 100 Your beneficiaries .................................................................................................................................... 100 Where can you buy life insurance? .......................................................................................................... 101 Types of Life Insurance Policies ....................................................................................................................... 102 Term life insurance ...................................................................................................................................102 Traditional whole life insurance--guaranteed premiums .......................................................................... 102 Universal life--openness and flexibility ..................................................................................................... 102 Variable life--you make the investment decisions .................................................................................... 103 Variable universal life--the ultimate in flexibility ........................................................................................103 Joint or survivorship life for you and your spouse .................................................................................... 103 Can I transfer my business through my will? .................................................................................................... 104 What is a buy-sell agreement? ..........................................................................................................................105 How can I determine what my business is worth for estate and gift tax purposes? ..........................................106 How can I keep my business in the family? ...................................................................................................... 107 What is the difference between a living will and a living trust? ......................................................................... 108 What is probate and why do I want to avoid it? .................................................................................................109 What will happen if I die without a will? .............................................................................................................110 Does property owned jointly avoid probate? ..................................................................................................... 111 Isn't estate planning only for the rich? ...............................................................................................................112 How can I minimize taxes on my estate? ..........................................................................................................113 I want my son to have my collection of baseball cards when I die. How do I make sure he gets it? ................ 114

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Can I disinherit relatives I don't like? .................................................................................................................115 Do I need an attorney to prepare my will? ........................................................................................................ 116 Who should I name as guardian of my children in case my spouse and I should die at the same time? ......... 117 Who should I name as trustee? ........................................................................................................................ 118 What is a living trust? ........................................................................................................................................ 119 What is the difference between a power of attorney and a durable power of attorney? ................................... 120 What is an advanced directive for health care? ................................................................................................ 121 What is a life insurance trust and why should I consider establishing one? ..................................................... 122 I just made a gift. Do I have to file a gift tax return? ..........................................................................................123 Do I have to accept a bequest I don't want? ..................................................................................................... 124 What makes up my taxable estate? .................................................................................................................. 125 What is a family limited partnership, and will it help reduce estate taxes? ....................................................... 126 My life insurance’s death benefit will be paid to an ILIT. What if it’s needed to pay estate taxes? ................... 127 What is the applicable exclusion amount? ........................................................................................................ 128 How will estate taxes be paid if I leave no provision in my will? ....................................................................... 129 What is a Crummey power? ..............................................................................................................................130 How often do I need to review my estate plan? ................................................................................................ 131 Can I be buried in a national cemetery even though I got out of the Army years ago? .................................... 132 Is it possible to name a charity as the beneficiary of my life insurance policy? ................................................ 133 What is funeral insurance, and do I need it? .....................................................................................................134 When I die, is my beneficiary required to take a lump-sum payment of my life insurance benefit? ..................135 I own a business. Are there any creative ways I can use life insurance in my business? ................................ 136

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Introduction to Estate Planning What is estate planning? Simply stated, estate planning is a method for determining how to distribute your property during your life and at your death. It is the process of developing and implementing a master plan that facilitates the distribution of your property after your death and according to your goals and objectives. At your death, you leave behind the people that you love and all your worldly goods. Without advance planning, you have no say about who gets what, and more of your property may go to others, like the federal government, instead of your loved ones. If you care about (1) how and to whom your property is distributed, and (2) ensuring that your property is preserved for your loved ones, you need to know more about estate planning. As a process, estate planning requires a little effort on your part. First, you'll want to come to terms with dying, at least to a degree that you can deal with the necessary planning. Understandably, your death can be a very uncomfortable subject, but unfortunately, the discussions in this area are full of references to your death, so it really can't be avoided. Some statements may seem too businesslike and unfeeling, but tiptoeing around the subject of dying will only make the planning process more difficult. You will understand the process more easily and implement a more successful master plan if you approach it in a straightforward manner.

Who needs estate planning? Not just for the wealthy Estate planning may be important to individuals with a wide range of financial situations. In fact, it may be more important if you have a smaller estate because the final expenses will have a much greater impact on your estate. Wasting even a single asset may cause your loved ones to suffer from a lack of financial resources. Your master plan can consist of strategies that are simple and inexpensive to implement (e.g., a will or life insurance). If your estate is larger, the estate planning process can be more complex and expensive. Implementing most strategies will probably require you to hire professional help of some kind, an attorney, an accountant, a trust officer, or an insurance agent, for example. If your estate is large or complex, you should consult with an estate planning expert such as a tax attorney or financial planner for advice before the implementation stage. In deciding on your course of action, you should always consider whether the benefit of the strategy outweighs the cost of its implementation. May be especially needed under certain circumstances You may need to plan your estate especially if: • Your estate is valued at more than the federal estate tax applicable exclusion amount (formerly known as the unified credit) (see tip below) or your state's death death exclusion amount • Your income tax bracket is in excess of 10 percent • You have children who are minors or who have special needs • Your spouse is uncomfortable with or incapable of handling financial matters • You're a business owner

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• You have property in more than one state • You intend to contribute to charity • You have special property, such as artwork or collectibles • You have strong feelings about health-care decisions You have privacy concerns or want to avoid probate Tip: The federal estate tax is repealed for 2010, unless Congress acts to reinstate the tax retroactively. In 2011 the tax will return with an applicable exclusion amount of $1 million. So, estates over $1 million may actually want to make appropriate plans to be on the safe side.

How to do it Designing a plan is a process that is unique to each estate owner. Don't be intimidated or overwhelmed at the prospect. Even the most complex plan can be achieved if you proceed step by step. Remember, the peace of mind that comes with developing a successful estate plan is worth the time, trouble, and expense. Understand your particular circumstances Begin the estate planning process by understanding your particular circumstances, such as your age, health, wealth, etc. Understand the factors that will affect your estate You will also need to have some understanding of the factors that may affect the distribution of your estate, such as taxes, probate, liquidity, and incapacity. Clarify your goals and objectives When your particular circumstances and the factors that may affect your estate are clear, your goals and objectives should come into focus. Understand the strategies that are available With these goals and objectives now clear, you can begin to consider the different estate planning strategies that are available to you. Seek professional help Seeking professional help (an attorney or financial advisor) will help you understand the strategies that are available and formulate and implement your master plan. Formulate and implement a plan Finally, after following these steps, you can formulate and implement a plan that works for you. Here are a few basic tips: (1) make sure you understand your plan, (2) rely on people you trust, and (3) keep your documents and information organized and within easy reach. Perform periodic reviews When you have implemented your master plan, be sure to perform a periodic review and, if necessary, make revisions that reflect any changing circumstances and tax laws.

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How do you begin? There are many estate planning strategies, including some that are implemented inter vivos (during life), such as making gifts, and others post-mortem (after death), such as disclaimers. Before you choose which strategies are right for you, you need to understand your particular circumstances. Gather and analyze the facts Understanding your particular circumstances results from gathering and analyzing the facts. The following questions may help you to accomplish this. If they are not easy to answer, you may have to make some estimates based on reasonable assumptions and expectations. Information regarding your financial condition • What is your current income? • What is your income likely to be in the future? • How much do you spend each year? • What are your expenses likely to be in the future? • What are your current assets and debts? • Are your assets currently owned solely or jointly? • What estate planning strategies have you already implemented? Family information • Who are the family members you intend to benefit? • What are the needs of each family member?

What other factors need to be considered? Decide what your goals and objectives are in light of your particular circumstances and in light of the factors that may affect your estate. The primary factors that may affect your estate are your beneficiaries, taxes, probate, liquidity, and incapacity. Taxes One of the largest potential expenses your estate may have to pay is taxes, which may include federal transfer taxes, state death taxes, and federal income taxes. Federal transfer taxes--The federal transfer taxes include (1) the federal gift tax and federal estate tax and (2) the federal generation-skipping transfer tax (GSTT). • Federal gift tax--Gift tax is imposed on property you transfer to others while you are living. You need a basic understanding of how the gift tax system works to minimize gift tax liability. Under the gift tax system, you are allowed a $1 million lifetime gift tax applicable exclusion amount that reduces your gift tax liability (any gift tax applicable exclusion amount you use during life effectively reduces the applicable exclusion amount that will be available at your death). Also, you are currently allowed to give $13,000 per donee gift tax free under the annual gift tax exclusion. Further, certain other types of transfers can be made gift tax free. You need to understand what these types of transfer are and how they work to take full advantage of them.

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• Federal estate tax--Generally speaking, estate tax is imposed on property you transfer to others at the time of your death. You need a basic understanding of how the estate tax system works for several reasons:Saving your property for your beneficiaries--Estate tax rates could reach as high as 55 percent in 2011, which means that an enormous chunk of your estate may go to the federal government instead of your beneficiaries. If you want to preserve your estate for your beneficiaries, you'll need to know how to minimize estate tax with respect to your property. • Reducing estate tax liability--Under the estate tax system, you are allowed an applicable exclusion amount (formerly referred to as the unified credit) that reduces your estate tax liability. Also, there are exclusions, deductions, and other credits available that allow you to pass a certain amount of your estate tax free. You need to understand what these exclusions, deductions, and credits are and how they work to take full advantage of them. • Providing for the payment of estate tax--Generally, estate tax must be paid within nine months after your death. To avoid depriving your beneficiaries of what you intend for them to receive, you should provide that specific and sufficient assets be set aside and used for this purpose. In addition, these assets should be sufficiently liquid to pay these expenses when they are due. • Planning for estate tax expense--Although calculating estate tax can be complex, you should estimate what the amount of your estate tax may be (if any), so that you can arrange to replace that wealth. • GSTT--Another federal transfer you need to understand is the federal generation-skipping transfer tax (GSTT). The GSTT is imposed on property you transfer to an individual who is two or more generations below you (e.g., a grandchild or great-nephew). Not surprisingly, the IRS wants to levy a tax on property as it is passed from generation to generation at each and every level. The purpose of the GSTT is to keep individuals from avoiding estate tax by skipping an intermediate generation. A flat tax rate equal to the highest estate tax then in effect is imposed on every generation-skipping transfer you make over a certain amount. Currently, some states also impose their own GSTT. Check with an attorney or your state to find out what may be subject to your state's GSTT, and how and when to file a state GSTT return. State death taxes--States also impose their own death taxes. You should be aware of what the death tax laws are in your state and how they may affect your estate. There are three types of state death taxes: (1) estate tax, (2) inheritance tax, and (3) credit estate tax (also called a sponge tax or pickup tax). Some states also impose their own gift tax and/or generation skipping transfer tax. • Estate tax--State estate tax is imposed on property you transfer to others at your death, much like federal estate tax. The state estate tax calculation for most states is similar to the federal calculation. • Inheritance tax--Unlike estate tax, the inheritance tax is imposed on your beneficiary's right to receive your property. Tax is due on each beneficiary's share of your estate. Beneficiaries are grouped into classes (generally based upon their familial relationship to you) and are taxed accordingly. Although inheritance tax is due on each heir's share of your estate, it's your personal representative who writes the check from your estate to pay it. • Credit estate tax--Some states impose a credit estate tax (also referred to as a sponge tax or pickup tax). Tip: Most states that imposed a credit estate tax have "decoupled" from the federal system (i.e., they're imposing some form of stand-alone estate tax.) Tip: The federal system allows a deduction for state death taxes for the estates of persons dying in 2005 through 2009. Prior to 2005, a credit was available, which will be reinstated in 2011. Federal income taxes--In the estate planning context, you should be aware of three federal income tax considerations: 1. Income taxation of trusts --If your estate plan includes the use of a trust, you need to know that a trust may be an income tax-paying entity. The trustee may be required to file an annual return and

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pay income taxes on trust income. 2. Decedent's final income tax return --Your personal representative or surviving spouse has the duty of filing your last income tax return that covers the tax year ending on the date of your death. 3. Income taxation of your estate --Your estate is considered a separate income taxpaying entity. Your personal representative must file and pay income taxes on any income your estate receives (e.g., interest from bonds, or dividends from stock). Probate Probate is the court-supervised process of proving, allowing, and administering your will. The probate process can be time-consuming, expensive, and open to public scrutiny. Avoiding probate may be one of your most important goals. To develop a successful avoidance strategy, you'll need to understand how the probate process works, how to estimate probate costs, and what is subject to probate. Liquidity Estate liquidity refers to the ability of your estate to pay taxes and other costs that arise after your death from cash and cash alternatives. If your property is mostly nonliquid (e.g., real estate, business interests), your estate may be forced to sell assets to meet its obligations as they become due. This could result in an economic loss, or your family selling assets that you intended for them to keep. Therefore, planning for estate liquidity should be one of your most important estate planning objectives. Incapacity Planning for incapacity is a vital yet often overlooked aspect of estate planning. Who will manage your property and make health-care decisions for you when you can no longer handle these responsibilities? You need to ask and answer this question because the consequences of being unprepared may have a devastating effect on your estate and loved ones. You should include plans for incapacity as a part of your overall estate plan.

What are your goals and objectives? Your goals and objectives are personal, but you can't formulate a successful plan without a clear and precise understanding of what they are. They can be based on your particular circumstances and the factors that may affect your estate, as discussed earlier, but your feelings and desires are just as important. The following are some goals and objectives you might consider: • Provide financial security for your family • Ensure that your property is preserved and passed on to your beneficiaries • Avoid disputes among family members, business owners, or with third parties (such as the IRS) • Provide for your children's or grandchildren's education • Provide for your favorite charity • Maintain control over or ensure the competent management of your property in case of incapacity • Minimize estate taxes and other costs • Avoid probate • Provide adequate liquidity for the settlement of your estate • Transfer ownership of your business to your beneficiaries

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What are estate planning strategies? An estate planning strategy is any method that facilitates the distribution of your assets and the settlement of your estate according to your wishes. There are several estate planning strategies available to you. Intestate succession Intestate succession is a strategy by default and is a means of transferring your property to your heirs if you have failed to make other plans such as a will or trust. State law controls how and to whom your property is distributed, who administers your estate, and who takes care of your minor children. Without directions, your opinions and feelings are not considered. Indeed, one of your primary goals in planning your estate may be to avoid intestate succession. Last will and testament A will is a legal document that lets you state how you want your property distributed after you die, who shall administer your estate, and who will care for your minor children. This is probably the most important tool available to you. Anyone with property or minor children should have a will. Will substitutes A will substitute, for example, Totten Trust and payable on death bank accounts, allows you to designate a beneficiary of certain property that will automatically pass to that beneficiary after you die and avoids passing through probate. Trusts A trust is a separate legal entity that holds your assets that are then used for the benefit of one or more people (e.g., you, your spouse, or your children). There are different types of trusts, each serving a different purpose, and include marital trusts and charitable trusts. You will need an attorney to create a trust. Joint ownership Joint ownership is holding property in concert with one or more persons or entities. There are different types of joint ownership, such as tenancy in common and community property, each with different legal definitions, requirements, and consequences. Life insurance Life insurance is a contract under which proceeds are paid to a designated beneficiary at your death. Life insurance plays a part in most estate plans. Gifts A gift is a transfer of property, not a bona fide sale, that you make during your life to family, friends, or charity. Making gifts can be personally gratifying as well as an effective estate planning tool. Tax exclusions, deductions, and credits There are several important estate planning tools you can use that are offered by the federal government. These include the annual gift tax exclusion, the applicable exclusion amount, the unlimited marital deduction, split gifts, and the charitable deduction.

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Implications of the Economic Growth and Tax Relief Reconciliation Act of 2001 Introduction Signed into law on June 7, 2001, the Economic Growth and Tax Relief Reconciliation Act of 2001 has created financial planning opportunities in many areas. For instance: • The act increased contributions to qualified retirement plans and created a "catch-up" contribution for individuals over age 50 • It is now easier to transfer money from a qualified plan to another qualified plan or to an IRA • Section 457(b) plans have been greatly enhanced • A variety of education incentives make it easier to save for a college education • Itemized deduction and personal exemption limitations are being eliminated • Lower marginal income tax rates and marriage penalty relief may have implications in personal planning (however, due to the alternative minimum tax, taxpayers may see little benefit from these lower rates) This discussion considers some of the federal estate, gift, and generation-skipping transfer (GST) tax planning implications of the act.

The sunset provision One of the most challenging provisions of the Tax Relief Act of 2001 is the so-called sunset provision. It reads, in relevant part, as follows: "All provisions of, and amendments made by, this Act shall not apply. to estates of decedents dying, gifts made, or generation-skipping transfers, after December 31, 2010. [The current laws]. shall be applied. to years, estates, gifts, and transfers [after December 31, 2010]. as if the provisions and amendments described [herein]. had never been enacted." Because of the uncertainty about the permanency of the estate tax repeal created by this sunset provision, individuals can be characterized in one of three ways: (1) those who believe that estate tax repeal is here to stay, (2) those who believe that repeal is illusory, and (3) those who don't know what to believe. For those who believe that repeal is here to stay Income tax planning becomes more critical than transfer tax planning. Consequently, these individuals should take maximum advantage of income tax deduction and deferral opportunities. First on the list should be contributions to qualified retirement plans, the opportunities for which have been greatly enhanced by the new tax law. Absent a concern about estate tax inclusion of proceeds, the purchase of life insurance within a retirement plan becomes an even more attractive option--the premiums are paid with tax-deductible contributions, and the proceeds are received free from all federal taxes. The new required minimum distribution rules should be coordinated with the expanded use of qualified retirement plans to maintain the deferral of income taxes for as long as possible. Both lifetime and testamentary charitable gifting strategies remain attractive under the estate tax repeal.

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For those who believe that repeal is illusory While the above strategies are viable even in the face of the estate tax, most people of means should continue to use the planning techniques that were used prior to the passage of the act, such as gifting and other estate reduction techniques, irrevocable life insurance trusts, and generation-skipping transfers. For those who don't know what to believe Flexibility becomes the driving force behind all planning decisions--plan for the worst, but be prepared to change direction on short notice. In the financial planning world, the call will be for those products and concepts that most effectively keep an individual's options open. Strategies that have both transfer tax and income tax advantages will be preferred.

The impact on existing estate planning documents Many wills and trusts contain "formula" marital deduction clauses to take maximum advantage of the applicable exclusion amount (formerly known as the unified credit) and other credits that have been in the Internal Revenue Code for decades. One approach divides the estate into two portions--an amount equal to the applicable exclusion amount is allocated to a trust (the credit shelter trust) for the benefit of spouse and children, with the balance of the estate going to the spouse outright or to a trust (the marital trust). Another approach directs to the spouse or the marital trust the smallest amount that will qualify for the unlimited marital deduction and, after taking into account the applicable exclusion amount (and other credits and deductions), will result in the smallest federal estate tax being paid. Consider the results in the following cases: Husband died in 2001 with a $2 million estate and a will that was drafted in 2000 with a formula marital deduction clause similar to the first approach described above. Because the applicable exclusion amount was then $675,000, his spouse received $1.325 million as a marital bequest, and the balance went to the credit shelter trust. Same facts, only Husband dies in 2006. Because the applicable exclusion amount is now $2 million, nothing goes to the marital trust. While Husband and Wife may not object to the above disposition, it is probably not what they contemplated when their wills were drafted in 2000. What this means is that all wills drafted with formula marital deduction provisions before the Tax Relief Act of 2001 need to be reviewed by competent counsel to determine whether they still accomplish their intended objectives.

Estate planning in today's post-act environment As individuals contemplate planning their estates, it goes without saying that a variety of strategies should be considered. The trick is identifying and building a flexible and tax-efficient strategy that works in a constantly changing environment. Qualified disclaimers Taxpayers may wish to use qualified disclaimers during this period of exemption increases and estate tax phaseout. For instance, assets can be left outright to a surviving spouse who has the power to disclaim that amount that he or she, after the decedent's death, determines appropriate to fund the nonmarital share. While disclaimer planning may be an effective technique in response to the Tax Relief Act of 2001, there are some inherent issues. First, it may be impractical in a second-marriage situation where the children of the decedent who are the beneficiaries of the nonmarital share (to which the disclaimed marital share would be added) are not on friendly terms with the disclaiming spouse. Second, the surviving spouse may be reluctant to give up assets. This may be particularly true among older surviving spouses who have a deep-rooted fear that

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they will outlive their existing assets. Finally, a qualified disclaimer has several very technical elements--it must be made in writing, within nine months after the decedent's death, before the surviving spouse has accepted any of the benefits of the disclaimed assets, and without any direction on the part of the disclaiming spouse. A surviving spouse might accept benefits from the assets (e.g., cashing a dividend check from a stock portfolio) before meeting with an estate planner to discuss whether to disclaim. This would render the disclaimer ineffective. Qualified terminable interest property (QTIP) trust Increased planning flexibility can be achieved by leaving an estate entirely to a trust that can constitute a qualified terminable interest property (QTIP) trust. The trustee is given the authority to divide the trust after the decedent's death to take the best advantage of the estate tax applicable exclusion amount, the GST tax exemption, the unlimited marital deduction, and the aggregate spousal basis increase. Technical Note: In a private letter ruling, the IRS has ruled that, upon the severance of a QTIP trust into an exempt QTIP and two nonexempt QTIPs pursuant to court order, a surviving spouse may renounce his or her interest in one of the nonexempt QTIPs without being deemed to have made a gift of the property in the other two QTIPs. A variation of the single, divisible QTIP is the Clayton QTIP (so called after the first case sustaining this type of arrangement). Under this strategy, assets pass to a QTIP trust only to the extent that the personal representative elects for it to so qualify. The portion of the estate that the personal representative declines to deduct is held in a different trust on terms that do not qualify for the unlimited marital deduction. Installment sale of an asset to an intentionally defective irrevocable trust The installment sale of an asset to an intentionally defective irrevocable trust remains beneficial as a freeze technique of the value of the transferred assets with the only gift being the initial contribution to fund the trust. With estate tax repeal, it may be possible to forgive any balance remaining due on the promissory note at death with no transfer tax consequences. Dynasty trust Once there is repeal, a decedent might establish a dynasty trust with a spray provision for the benefit of the spouse and children. This provides a vehicle that would, in perpetuity (depending on the trust's situs--the state in which the trust legally exists), likely be exempt from any estate tax that may subsequently be enacted. Irrevocable life insurance trust In preparing an irrevocable life insurance trust, the provision allowing distributions of the policy during the grantor's life (either to the grantor in those states allowing self-settling discretionary trusts, such as Delaware and Alaska, or to the grantor's spouse) should be drafted with care. Such a provision should not be so broad as to constitute a reversion, but should be broad enough to allow the trustee to distribute out the policy as the trustee determines, taking into account eliminating any liability of the trustee for so doing. Tip: Properly structured and administered, family limited partnerships and family limited liability companies can be flexible alternatives to irrevocable life insurance trusts.

Generation-skipping transfers offer expanded opportunities for wealthy taxpayers As the estate tax and GST tax exemptions increase over the next decade, so do the opportunities for wealth transfer. For those who die in 2009, up to $3.5 million may be left to a dynasty trust, where it may benefit descendants in perpetuity (depending on the situs of the trust) without being exposed to transfer taxes--regardless of whether repeal is made permanent. Those who die in 2010 may leave unlimited amounts to such a trust, with the only potential problem being the carryover basis (see below).

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Further, wealthy clients can take advantage of expanded opportunities during their lifetimes. Transfers in excess of $1.1 million (in 2002) are subject to both gift and GST taxes. Under the new law, generation-skipping transfers of up to $1.5 million in 2004, up to $2 million in 2006, and up to $3.5 million in 2009 can be made with only a gift tax imposed. In 2010, unlimited generation-skipping transfers can be made subject only to gift tax. What this means is that even when the repeal sunsets in 2011, all such prior transfers will forever escape further estate, gift, and generation-skipping taxes.

Planning for a modified carryover basis regime After repeal of the estate and generation-skipping transfer taxes, the present-law rules providing for a fair market value (i.e., stepped-up) basis for property acquired from a decedent are repealed. A modified carryover basis regime generally takes effect, which provides that recipients of property transferred at the decedent's death will receive a basis equal to the lesser of the adjusted basis of the decedent or the fair market value of the property on the date of the decedent's death. The decedent can pass on an aggregate $1.3 million of basis increase to any beneficiary, plus another $3 million to a surviving spouse. These amounts are indexed for inflation beginning in 2011, with the base year being 2009. Caution: There is only $60,000 of basis increase allowed where the decedent was a nonresident alien. Caution: Items of income in respect of a decedent (IRD) are not subject to the basis increase allowance--which is also the case under current law. Families of decedents with most of their wealth in IRD items, such as IRAs and pensions, will be worse off than families who receive appreciated assets that can get the step-up allocations. In a carryover basis regime, there is no tax--capital gains or otherwise--triggered on appreciated assets at the death of the estate owner. Rather, the tax is imposed on the subsequent sale or liquidation of the asset by the beneficiary. Keep in mind that there is no guarantee that the income taxes imposed on these items will be at capital gains rates, or that those rates will be the same as, or lower than, they are today. Built-in losses A helpful provision in the Tax Relief Act of 2001 increases the $1.3 million number by the value of any built-in loss that existed on the date of death. Example(s): An individual's basis in stock is $400,000, and the date of death value is $100,000. The personal representative is permitted to pass on a total of $1.6 million of basis increase. This is more favorable than under pre-act law, where the beneficiary of the stock would take the decedent's basis of $100,000 and the tax loss would be wasted. Life insurance For estates large enough to be subject to estate taxes, policies owned outside the insured's estate will continue to provide liquidity to pay taxes or to offset the estate shrinkage resulting from taxes of any kind. In 2010 (and thereafter, if repeal is extended), there will be limitations (described above) on the value of assets that can be passed with increased basis. In that case, even personally owned life insurance will avoid all federal taxes, because the death benefit is received income tax free with no basis step-up needed. Life insurance will also still play a role in estate planning after full estate tax repeal in as much as a client may wish to insure against the potential capital gains tax resulting from carryover basis. Buy-sell agreements In anticipation of this modified carryover basis regime, all business continuation (buy-sell) arrangements need to be reviewed in light of the capital gains triggered by mandatory at-death sales.

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Tracking basis One of the more difficult practical concerns with the carryover basis regime is the tracking of basis in various assets. For some wealthy individuals, it may be a major undertaking to reconstruct cost basis today, let alone sometime many years in the future. At some point, the Treasury will issue regulations detailing the level of evidence that may be required and the consequences of failure to provide that evidence. It might turn out to be like getting on a toll road and then losing your ticket--even if you've traveled only one exit, you'll be charged as if you had driven the entire length of the toll road to your current exit point.

Accelerated gifting may be indicated for some taxpayers The only positive changes that have been made in the gift tax are (1) a gradual reduction in the maximum rates from 55 percent to 35 percent (with no reductions in the lower brackets), and (2) an increase in the gift tax applicable exclusion amount to $1 million in 2002 rather than in 2006. In other words, estate and GST taxes may go away, but the gift tax is forever. Elimination of the gift tax--or significant expansion in the gift tax applicable exclusion amount--would have permitted taxpayers to give away significant amounts of wealth during their lifetimes, thus avoiding estate and GST taxes at death. Instead, Congress has substantially limited gifting opportunities, thus ensuring that when the repeal sunsets on December 31, 2010, there will be plenty of assets remaining subject to the revived estate and GST taxes. Gift tax applicable exclusion amount For those who are willing to part with control over some assets, full utilization of the $1 million gift tax applicable exclusion amount is available. This will ensure that the amount of the gift plus all the appreciation on that amount will be removed from the estate. The earlier the gift is made, the more appreciation may be removed from the estate. All other things being equal, the preference would be to gift cash, cash alternatives, or other high-basis property. Otherwise, the gift will include a built-in taxable gain, and will thus fail to maximize the efficiency of the exclusion. If death occurs prior to repeal or after the sunset takes effect, low-basis assets remaining in the estate will receive a stepped-up basis. If repeal is in effect at the time of the taxpayer's death, the estate will be able to allocate $1.3 million of basis (plus $3 million of basis in the case of a surviving spouse) to the low-basis assets remaining in the estate. The exclusion amount is per person. Thus, a qualified married couple may collectively exclude $2 million of gifts through individual gifts or through gift splitting. Example(s): Assume a $1 million investment portfolio has an aggregate cost basis of $400,000 and thus $600,000 of untaxed gain. If the entire portfolio is gifted to the children in 2002 and they sell the stock thereafter, then, under current tax law, they will owe $120,000 in federal capital gains tax (there may also be state tax due). The entire $1 million exclusion amount has been used to transfer, in effect, $880,000 of assets. More complete advantage of the available exclusion is taken when cash or high-basis assets are gifted. Moreover, if death occurs before 2010, the estate will receive a stepped-up basis in that $1 million investment portfolio; if death occurs while repeal is in effect, the personal representative can allocate part of the $1.3 million basis allowance to the $600,000 gain. Tip: To avoid making gifts that exceed the applicable exclusion amount, long-term loans may be appropriate. The IRS has determined that loans made to an irrevocable trust by its grantor to pay life insurance premiums on the policy on his or her life are not considered incidents of ownership. Once there is no longer an estate tax, it may be possible to forgive the loans at death without any transfer tax consequences. Valuation discounts Valuation discounts still apply to transfers of interests in a family limited partnership or a family limited liability company. Because the gift tax continues, transferring these discounted interests continues to be a useful wealth-shifting technique.

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Treatment of certain transfers made to a trust For gifts made after December 31, 2009, a transfer to a trust will be treated as a taxable gift unless the trust is treated as wholly owned by the donor or the donor's spouse under the grantor trust rules. This provision raises a number of issues. If read literally, this provision can be construed to mean that as long as the trust remains a grantor trust, there would be no gift and thus there could not be a completed gift until the trust is no longer a grantor trust. This is likely not the intended result. It may be that a distribution from a grantor trust to anyone other than the grantor, where the transfer to the trust at the outset was not a completed gift, would constitute a gift because, as to the property distributed, the trust ceases to be a grantor trust. Such a trust would also cease to be a grantor trust upon the grantor's death. According to one of the drafters of this provision, its purpose is not to treat transfers to trusts that are subject to Crummey withdrawal powers as taxable transfers. Instead, the provision seeks to prevent income tax avoidance that might occur if a donor of property were able to shift the burden of income taxation on property transferred to a nongrantor trust in situations where the transfer is treated as "incomplete" under the gift tax rules. Thus, all transfers to trusts that are not treated as grantor trusts will be treated as taxable gifts. If the transfer is eligible for the annual gift tax exclusion, however, that exclusion will continue to be available.

The repeal of the state death tax credit A majority of states impose a credit estate tax, also called a "sponge tax" or "pickup tax," on the estates of decedents who were residents of, or owned property in, those states. This means that the tax imposed is simply equal to the credit for state death taxes that the federal government allows against the federal estate tax. For estates subject to taxes in a credit estate tax state, repeal of this credit may be a nonevent--it simply means that instead of sending two checks (one to the IRS and one to the state), all the money will be sent to the IRS. There is one advantage for the estates of individuals who die before 2011 with significant items of IRD. Recipients of these amounts may be allowed to take an income tax deduction equal to the federal estate taxes paid that were attributable to those items of IRD. To the extent that a larger percentage of the entire estate tax bill will be paid to the federal (rather than the state) government beginning in 2002, there will be an increased income tax deduction available for the beneficiaries. However, the prediction is that repeal of the state death tax credit will have serious financial repercussions for the states themselves. Many states derive significant revenues from the credit estate tax, and the pressure will be on as early as 2002 to develop alternative sources of revenue. To the extent that states uncouple their estate taxes from the federal scheme and enact freestanding death taxes, individual estates may experience a net increase in the total amount of taxes due, because a deduction is less valuable than a credit of the same dollar amount. A deduction is used to reduce the taxable estate, whereas a credit is a direct offset to estate taxes that are due.

Repeal of the qualified family-owned business (QFOB) deduction The special deduction for qualified family-owned business (QFOB) interests is repealed after 2003, when the estate tax applicable exclusion amount reaches $1.5 million. Before its repeal, qualifying estates may still take advantage of this deduction. However, the benefit of the deduction for qualified family-owned business interests is subject to a recapture tax. Recapture is triggered if, within 10 years of the decedent's death and before the qualified heir's death, the qualified heir ceases to materially participate in the business, disposes of the business interest, moves the business outside the United States, or loses his or her U.S. citizenship. Despite the repeal of the federal estate tax mandated in the Tax Relief Act of 2001, with respect to the estates of those individuals claiming the QFOB deduction prior its repeal, the applicable recapture tax provisions may continue to apply beyond the effective date of the repeal of the federal estate tax.

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Expanded availability of installment payment rules Effective for estates of individuals who die after December 31, 2001, the number of equity owners of a corporation or partnership, the value of which is eligible for installment payments of estate tax under Section 6166, is increased from 15 to 45. In addition, certain actively operated qualified lending or finance businesses will be considered active trades or businesses for purposes of qualifying for installment payment treatment. Stock of certain non-actively traded holding companies also will be eligible. If an estate meets the requirements of Section 6166, the estate taxes attributable to the business interest may be deferred for 4 years during which interest only is payable. Thereafter, there is a maximum period of 10 years during which annual installments of principal and interest must be paid. This deferral period extends beyond the estate tax repeal mandated in the Tax Relief Act of 2001. For those estates relying on the Section 6166 deferral provisions, the estate tax remains due and payable, despite repeal. All remaining payments may be accelerated if either installment or interest payments are not made within six months of the due date, in addition to the payment of a 5 percent per month penalty. The remaining payments can also be accelerated if a significant portion (50 percent or more) of the business is disposed of by sale or liquidation before the estate tax is paid in full. For more information, see Deferring the Need for Liquidity.

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Navigating Estate Plans Through Uncharted Waters Uncertainty caused by the temporary federal estate tax repeal The failure of Congress to preserve the federal estate and generation-skipping transfer (GSTT) taxes has created a challenging estate planning environment. The Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA) brought about the repeal of these transfer taxes for 2010, but the federal gift tax remains intact with a $1 million lifetime exemption and a top tax rate of 35 percent. Further, a modified carryover basis system replaces the long-standing step-up in basis rule promoting the income taxation of appreciated assets when these assets are sold by the estate's heirs. And, these changes are only temporary--in 2011, the estate and GST taxes are scheduled to return to their 2001 status (i.e., $1 million exemption and top rate of 55 pecent). On top of that, Congress could reinstate these taxes (retroactive to January 1 or otherwise) or enact an entirely new transfer tax regime, adding to the uncertainty currently surrounding estate planning. How should an estate planning professional proceed under these circumstances?

Estate tax planning vs. capital gains tax planning As of January 1, 2010, federal estate and GST taxes are repealed, meaning that estates, in general, may transfer assets of any value without being subject to these taxes (although state death taxes may still be imposed, see below for further discussion). While dying in 2010 could mean the avoidance of transfer taxes, there is instead the potential imposition of federal capital gains tax on the sale of appreciated assets when they are sold by estate beneficiaries. Thus, for individuals who are very old, very ill, or terminally ill, immediate attention may be needed to steer an estate plan away from minimizing estate taxes and towards minimizing capital gains taxes. Prior to 2010, in general, the basis of estate property was its fair market value on the date of the decedent's death. In 2010, the basis of estate property is the lesser of the asset's fair market value on the date of death or the decedent's (carryover) basis. For example, assume the decedent's basis in property is $2 million with a date-of-death fair market value of $4 million. Beneficiaries inheriting the property will receive it with the lower $2 million carryover basis. If the property is subsequently sold for $4 million, the beneficiary may realize a captial gain on the difference between the selling price ($4 million) and the carryover basis ($2 million). However, two special basis adjustments may apply. The first adjustment allows estates to exempt up to $1.3 million of appreciation or gain on property that is passed to any beneficiary. The second adjustment allows estates to exempt up to $3 million of property that passes to a surviving spouse, or as " qualified terminable interest property " (QTIP). These exemptions are separate, so an exemption of $4.3 million can be applied towards property going to a surviving spouse (with nothing left over for property passing to other beneficiaries). Example(s): Assume an unmarried decedent's estate consists of a farm worth $1.5 million with a basis of $500,000 ($1 million gain), and stock worth $1 million with a basis of $500,000 ($500,000 gain). The estate administrator may exempt up to $1.3 million of the total gain ($1.5 million). The exemption can be allocated to assets at the discretion of the executor, unless the decedent specifically directs otherwise in the will or trust. Thus, the entire $1 million gain from the farm can be exempted with the remaining exemption ($300,000) applied to the stock (leaving $200,000 of taxable gain). Or the entire gain from the stock can be exempted, with the exemption balance applied to the farm (leaving a capital gain of $200,000). Tip: Determining a decedent's basis can be very important. Special attention must be paid to determining and documenting how and when assets are acquired or received, the acquisition cost, and any additional increases in basis. Caution: There are other rules that may also affect the basis of property. For example, the decedent's basis in property can be increased by unused capital loss carryovers, net operating loss carryovers, and by Internal Revenue Code (IRC) Section 165 claims for theft losses and worthless

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securities, among other things. You may need to consult with a tax professional to understand all these issues. How these exemptions are allocated among various estate assets will take careful consideration. Some questions to consider include: • What type of asset is it? • What is the basis of the property? • Do other adjustments need to be applied to the asset's basis? • Who is the intended beneficiary of the asset, and what is his or her tax bracket? • What is the intended use of the inherited asset, (i.e., is it expected to be sold or held)? • If the asset is a principal residence, is the federal income tax home sale exclusion ($250,000) available to reduce the gain from the sale?

Review plans for formula clauses Many wills and trusts were drafted in contemplation of transfer taxes, so they contain provisions that allocate or direct the distribution of assets based on formulas or other directions in order to minimize these taxes. In particular, wills and trusts created for married couples frequently employ a formula to minimize potential federal estate tax by utilizing the federal estate tax exclusion amount of the first spouse to die. This is usually accomplished by dividing the estate of the deceased spouse into a marital trust for the benefit of the surviving spouse and a family trust (also referred to as a credit shelter trust or bypass trust) for the benefit of children. The family trust is funded up to the decedent's unused estate tax exclusion amount and the marital trust receives the balance of the estate. But if there is no estate tax in the year of death, how is such a provision to be interpreted? For example, if the document references funding of the family trust with an amount equal to the maximum that will pass free of estate tax (i.e., up to the applicable exclusion amount), if there is no estate tax, could this language be construed to mean that the entire estate passes to the family trust? If the surviving spouse is the beneficiary of both trusts, there may be no problem, but if the spouse has no right or access to assets in the family trust, then the surviving spouse could theoretically be left with nothing. Similarly, for donors who are charitably inclined, estate planning documents may leave a percentage of the estate or a dollar amount to a charity out of that portion of the estate exceeding the applicable estate tax exclusion amount. Again, if there is no estate tax, it's conceivable that no gift will be made to the charity. In light of these and other potential issues, it is best to review estate planning documents and make necessary revisions to accomplish the intent of the owner. Wills and trusts should be drafted to clearly reference what should happen if the owner dies when there is no estate tax, or if the exclusion amount is greater or less than the 2009 amount ($3.5 million). Thus, documents will need to provide flexibility in their distribution provisions to accommodate the possibility of many varied scenarios.

Gifting opportunities and issues caused by the repeal of the GST tax The temporary repeal of the GSTT provides an opportunity to make gifts to skip beneficiaries free from the GSTT. In 2010, large gifts to grandchildren, subject to both the gift tax and the GSTT in prior years, now are subject only to the gift tax (at a 35 percent tax rate). Creating and funding a dynasty trust for skip beneficiaries (i.e., grandchildren and younger generations) also may be a viable planning option that takes advantage of the temporary GSTT repeal. In addition, if the trust proceeds are used to provide for the beneficiary's education or health care, even if the GSTT is reintroduced, those distributions are not subject to the tax. For those who have begun gifting through the use of dynasty or similar trusts, 2010 may be the time to

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accelerate trust distributions or terminate the trust altogether. The trust may allow the trustee discretion to make distributions to or for any of the trust beneficiaries. In general, the GSTT applies to taxable distributions to skip persons, and on taxable terminations resulting in a shift from one generation to the next. If the trust corpus exceeds the applicable GSTT exclusion amount ($3.5 million in 2009, $1 million in 2011), trust distributions or terminations may be subject to the GSTT. In 2010, unless the law changes, there is no GSTT to infringe on these transactions. However, if the GSTT is imposed retroactively, gifts thought to have escaped the GSTT may be captured by it after all. This possibility must be weighed against the potential tax savings of gifting without the GSTT to determine the best course of action. Testamentary gifts to skip beneficiaries may be based on the applicable GSTT exemption (gifts to skip beneficiaries up to the applicable GSTT exclusion amount, the remainder to children or other beneficiaries). For deaths in 2010, the repeal of the GSTT could result in the entire gift being made to skip beneficiaries with nothing to remainder beneficiaries. Documents may need to be amended to include a different formula to account for the possibility that there is no GSTT exemption when allocating gifts to grandchildren.

Addressing the impact of state death taxes Prior to 2001, many states tied their death tax (sometimes called a credit estate tax, sponge tax, or pickup tax) to the federal state death tax credit. The passage of EGTRRA eventually replaced the state death tax credit with a deduction. Thus, states that coupled their death tax to the federal credit saw its elimination. Some states responded by simply linking their death tax to the federal credit that was in effect prior to 2001 ($675,000) or some other amount. Other states decoupled from the federal system altogether and enacted a separate inheritance or estate tax. And, those states that did nothing anticipate the potential reinstitution of their death tax in 2011 when the federal credit is scheduled to return. Planning for both federal and state transfer taxes (some states also have a gift tax and/or GSTT) has become extremely difficult and complex. Creative planning will be required.

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Wills What is a will? A will may be the most vital piece of your estate plan, even if your estate is a modest one. It is a legal document that lets you direct how your property will be dispersed (among other things) when you die. It becomes effective only after your death. It also allows you to nominate an estate executor as the legal representative who carries out your wishes. In addition, in many states, your will is the only legal way you can name a guardian for your minor children. Without a will, your property will be distributed according to the intestacy laws of your state. The laws of your state also govern the validity of a will.

What are the requirements? Requirements vary from state to state. Generally, for your will to be valid, the following requirements must be satisfied. You must be 18 and of sound mind Generally, you must be 18 years of age to execute a will, although some states have a different minimum age requirement. You also must be of sound mind. That means that you must have testamentary capacity--that you know and understand what property you own, its nature, who would inherit it, and the plan for disposition outlined in the will. You must also be free of undue influence or fraud at the time the will is drafted. In other words, you must draw up a will of your own free will. Will must be properly executed Your will must be properly executed. Generally, this means that the will must be: • Written--The general rule is that a will must be written. Usually, the will is typewritten or in some printed form. The one exception to the general rule is a nuncupative (oral) will. Nuncupative wills are generally valid only if made during your last illness and only if the witnesses reduce it to writing very soon afterward. • Signed by you (the testator)--You or someone in your presence and at your direction must sign the will. • Witnessed--Generally, your signature must be witnessed by two competent persons. Some states require three witnesses and some require no witnesses in certain cases, such as when a holographic will is executed. A holographic will is a will that is valid despite not being witnessed because it is completely in the testator's handwriting. Other states may also require that the signatures be notarized. Technical Note: Competency is a legal term. It means that the witnesses are of legal age (generally 18) and understand what they are witnessing. A witness is generally not considered competent if he or she is a beneficiary under the will and would not inherit if you died intestate. If this happens, the state will generally void the devise or legacy to that beneficiary. Some states void bequests to all witnesses.

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What does your will do? Avoids intestacy Probably the greatest advantage to a will is that it allows you to avoid intestacy. State intestate succession laws, in effect, provide a will if you fail to do so. This "intestate's will" distributes your property the way the state thinks you would have if you had made a will (i.e., to your spouse or closest blood relatives). However, this may not necessarily be what you would want. Also, intestacy has many other disadvantages (e.g., thwarts tax minimization planning). Distributes property according to your wishes With a will, you can leave: (1) a specific bequest (such as jewelry, an heirloom, furniture, or cash), (2) a general bequest (such as a percentage of your property), or (3) your residuary estate (what's left over) to a surviving spouse, a child, another relative, a friend, a trust, a charity, or anyone, according to your wishes. Caution: There are some limits imposed on how you can distribute your property with a will (e.g., you cannot completely avoid a spouse's right to inherit). For more on this topic, see Limits on Rights to Transfer Property in Will. Most states will not let you leave property directly to a pet, nor will they let you set up a trust for a pet in the pet's name. However, you can leave money in your will for someone to care for your pet after your death. A more expensive option is to establish a trust in someone's name, and specify in the trust document that the funds are to be used for looking after your pet. Make sure the caretaker agrees in advance to look after your pet. Nominates a guardian for your minor children In many states, a will is your only means of stating which individual(s) you wish to act as legal guardian for your minor children after you die. You can name a guardian of the person, who takes personal custody of the children, and a guardian of the property or estate, who manages the children's assets. This can be the same or a different person. Caution: The probate court has final approval, but it will usually approve whomever you nominate unless there are compelling reasons not to do so. Nominates an executor A will allows you to designate a person to act as your legal representative after your death. An executor carries out many estate settlement tasks, including locating and probating your will, collecting your assets, paying legitimate creditor claims, paying any taxes owed by the estate, and distributing any remaining assets to your beneficiaries. Caution: The probate court has final approval, but it will usually approve whomever you nominate unless there are compelling reasons not to. Specifies how to pay estate taxes and other expenses Unless you direct otherwise in your will, the beneficiaries will bear liability for estate taxes and other expenses according to state law. To ensure that your beneficiaries receive what you intend for them to have, you can provide in your will that these costs be paid from the residuary estate (what's left over). Or, you can specify which assets should be used or sold to pay these costs. Creates a testamentary trust You can create a trust in your will, which comes into being when your will is probated. Your will sets out the terms of the trust, such as who the trustee is, who the beneficiaries are, how the trust is funded, how the

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distributions should be made, and when the trust terminates. Tip: Using a trust may be especially important if you have a spouse or minor children who are unable to manage property themselves. Funds a living trust If you have or plan to establish a living trust (one that is created while you are living), your will can transfer ( pourover) any assets that were not already transferred to the trust. Minimizes taxes Your will gives you the chance to minimize taxes and other costs. Example(s): Ken drafts a will that leaves his entire estate to his wife, Sue. Ken dies. None of Ken's property is taxable because he left it all to his wife, and it is therefore fully deductible under the unlimited marital deduction.

Are there any tradeoffs? Although the benefits of a will far outweigh the drawbacks, there are some tradeoffs. Assets disposed of through a will are subject to probate Probate (the court-supervised process of administering your will) can be expensive and time-consuming. The length of probate can be affected by several factors including the size and complexity of the estate, any challenges to the will or its provisions, creditor claims against the estate, who your beneficiaries are, state probate laws and the state court system, and tax issues. Owning property in more than one state can result in multiple probate proceedings. This is called ancillary probate. Generally, real estate is probated in the state in which it is located, and personal property is probated in the state in which you are domiciled (i.e., reside) at the time of your death. Will provisions can be challenged in court The validity of your will can be challenged in court. Usually, an unhappy beneficiary or a disinherited heir will present the challenge. Some common claims include: • You lacked testamentary capacity when you drew up the will • You were unduly influenced by another individual when you drew up the will • The will was forged or was otherwise improperly executed • The will was revoked. Tip: You can attempt to discourage challenges to your will by including a "no contest" provision. Stipulate in your will that if beneficiaries try to gain a greater portion of the estate, they will be disinherited entirely. For the "no contest" provision to have any bite, however, you must make a bequest to a beneficiary you expect may contest the will, so that he or she has something to lose by contesting your will. The degree to which "no contest" provisions will be enforced varies by state. A typical provision would look like this: "If any beneficiary should contest the probate or validity of my will, then all benefits for the beneficiary shall cease and this instrument shall be interpreted as if the beneficiary had predeceased me"

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Wills are public documents Once probated, a will becomes a public document, available to anyone who wishes to read it. This can be discomfiting for anyone who has privacy concerns. Anyone can find out what you have left in your estate and to whom you have left it, thus exposing your beneficiaries to fraud or other crimes. Also, if you make negative or embarrassing statements about a person in your will, you leave your estate vulnerable to a libel suit.

How do you make a will? Hire an attorney Although a will need not be drafted by an attorney to be valid, it is highly recommended that you seek an attorney's advice to ensure that your will does what you intend. Determine what you leave in your will You must determine whether (1) you can dispose of an asset in your will and (2) whether you should dispose of an asset in your will. Before you can give away what you own, you must figure out what it is that you own. The way in which you own property will determine whether you can transfer that asset in your will. Solely owned property is property owned by you alone and generally can be transferred by will. Property held in joint tenancy, tenancy by the entirety, and community property, on the other hand, generally passes in whole or in part directly to the joint owner at your death. Property held as joint tenants or tenants by the entirety can't be transferred by will. Also, remember that property in which you have already named a beneficiary does not pass by your will (e.g., life insurance, pension plans, IRAs, Totten Trust accounts, Payable on Death accounts). For further information on property that passes outside the will, see Will Substitutes. Once you have determined what you can give away in your will, you need to decide if you should. It may be better to dispose of property while you are living, rather than at death. For example, you may want some transfers to remain private or you may want to reduce estate taxes by giving away during your lifetime property that is likely to greatly appreciate (increase in value). Tell someone your funeral wishes Because your will might not be read immediately after your death, it may not be possible to have your funeral and burial wishes honored if you include them in your will. Instead, put funeral wishes in a separate letter of instruction; leave the letter with a trusted friend, close relative, or your executor; and have it read immediately upon your death. Choose your beneficiaries Beneficiaries are the people and organizations to whom you leave property. They can be relatives, friends, trusts, or charities. The essence of the will-making process revolves around thinking about the property you own and who you want to have it after your death. Select a guardian for your minor children If you have minor children, you will want to nominate a guardian in your will to care for them and their property after you die, should their other parent not be able to care for them. This is an extremely important decision. Select an executor Your executor is responsible for carrying out the instructions of your will and managing the probate process. This includes locating your will, collecting your assets, paying legitimate creditor claims, paying any taxes owed by the estate, and distributing any remaining assets to your beneficiaries. Choosing an executor is another very

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important decision. Draft a will Each state has its own laws governing the validity of will provisions, the format a will must take, and execution formalities. Here are some tips: • Include a clause revoking any prior wills and codicils • Use specific and definite language to avoid questions later about your intent. Example(s): "I leave my daughter, Judy, nothing. I intentionally omit Judy from my will, not because I do not love her, but because she is wealthy in her own right and does not need my money." • Mention personal effects (especially valuable articles) specifically • Mention outright cash gifts specifically • Mention dispositions of real estate specifically • Make special provisions for any business interests • Make special provisions for the payment of taxes and other costs • Consider making special provisions to reduce the amount of specific bequests and legacies in the event that the value of your estate falls below a certain level Properly execute the will Your will must be properly executed. Generally, this means that the will must be: • Written--The general rule is that a will must be written. Usually, the will is typewritten or in some printed form. However, some states allow a holographic (handwritten) will. The one exception to the general rule is a nuncupative (oral) will. Nuncupative wills are generally valid only if made during your last illness and only if the witnesses put it in writing very soon afterward. • Signed by you (the testator)--You, or someone in your presence and at your direction, must sign the will. • Witnessed--Generally, your signature must be witnessed by two competent persons. Some states require three witnesses and some don't require any in certain circumstances. Others require that the signatures be notarized. Technical Note: Competency is a legal term. It means that the witnesses are of legal age (generally 18) and understand what they are witnessing. A witness is generally not competent if he or she is a beneficiary under the will and would not inherit if you died intestate. If this happens, the state will generally void the devise or legacy to that beneficiary. Some states void bequests to all witnesses, which has the effect of making interested witnesses competent and the will validly witnessed. Store the will in a safe, accessible place Wills should be stored in a secure and accessible place. Your executor and at least one close family member should know where you keep your will. Storage options include a file in your attorney's office or a fireproof safe at home. In some areas, it is possible to keep a copy of your will on file at the local probate court. Caution: It is not recommended that you store your will in a bank safe deposit box. Some states seal safe deposit boxes upon the owner's death, and the box can be opened only after obtaining the probate court's approval.

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Review your will annually or upon certain events A will is not a static document and should be reviewed at least annually or whenever your life situation changes. Here are some circumstances under which you may want to revise your will: • You marry or remarry • You have a child • You divorce • Your spouse or child dies • You move to another state • Your income changes • You retire • The value of your estate changes • Tax laws change

Can you change or revoke your will? You can amend (change) your will by executing a codicil. A codicil is a separate, written, and formally executed document that becomes part of your will. A codicil generally should be used only for minor changes to your will. You should execute a new will if there are many changes or a major change. Revoking your will must be done very carefully. If not done correctly, the will remains valid until properly revoked or superseded. Most state laws require that the will be revoked by a subsequent instrument (a new will) or by a physical act (e.g., destroying or defacing it). That means that the will must be either burned, torn, or canceled with the intent to revoke. Example(s): Example A: Mary executes a valid will leaving her entire estate to Jason. Mary throws her will in the trash by mistake. The will is burned. The will is not revoked because there was no intent on Mary's part to revoke. Example(s): Example B: Steven executes a valid will leaving his entire estate to Jill. Steven later changes his mind and decides to leave one-half of his estate to Jack. Steven executes another will and includes a provision that specifically revokes the first will. Steven also writes "REVOKED" on the top and across all signatures on the first will, dates it, and signs it. The court will probably honor the revocation of the first will and uphold the validity of the second will.

What types of wills are there? Preprinted wills Preprinted wills or wills generated by computer software packages are legally valid in some states. However, they are generally inappropriate for people with more than small, uncomplicated estates because of their one-size-fits-all nature. Instead, they may be an appropriate starting place for determining what type of property you own and to whom you want to leave it.

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Holographic wills Holographic wills are permitted in some states, but only under certain conditions. A holographic will is a will that is valid despite not being witnessed, because it is written entirely in the testator's handwriting. Nuncupative wills Oral or nuncupative wills are recognized by very few states and only in very limited circumstances--usually when a person is near death, has no will, and has no time to write one. Often, states require that the provisions of an oral will be committed to writing soon after they are stated, and they limit the value and type of property that can be distributed in this manner. Video wills Currently, no state accepts a videotaped will. However, if you are concerned about challenges to your will, a video showing how the will was executed may help prove that you were of sound mind or that the will was executed properly. Pourover will With a pourover will, you can leave all or part of your estate to a trust after your death. Joint will A joint will is a single will that serves two or more people. Joint wills are extremely rare and generally undesirable. Mutual will A mutual will is drawn up by one individual and is conditioned on an agreement with a second individual to dispose of his or her property in a particular way. It is sometimes called a contractual will. Like joint wills, mutual wills are quite rare and generally undesirable. Living will Unlike a traditional will, which disposes of your property, a living will specifies which medical means, if any, are to be used to keep you alive under certain conditions.

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Selecting an Executor What is an executor? An executor is a personal representative who acts for you after your death. You nominate or designate an executor in your will to settle your estate. The person chosen will act in your place to make decisions you would have made if you were still alive. The probate court has final approval, but the court will generally confirm your nomination unless there are compelling reasons not to. An executor's responsibilities typically last from nine months to three years (although, an estate may remain open for several years because of will contests or tax problems). The functions of an executor are varied, but generally your executor: • Locates and probates your will • Inventories, collects, and sells (if necessary) your assets • Pays legitimate creditor claims • Pays any taxes owed by your estate • Distributes any remaining assets to your beneficiaries Tip: Your executor is entitled to a fee from your estate for services rendered. The fee can be waived (usually, a close family member will waive the fee).

What are the duties of an executor? Your executor acts in a fiduciary capacity. This means that he or she must exercise a high degree of care at all times. Additionally, your executor is under court supervision, subject to its control and approval. Some states require executors to post a bond, which is later paid back to the executor from the estate (though you may be able to waive this requirement through a will provision). In addition, your executor is personally responsible for ensuring that all the proper tax returns are filed and that any estate taxes due are paid. Finally, your executor is accountable to the court and to your beneficiaries on completion of his or her duties.

How do you select an executor? Your choice of executor is a very important one. Ideally, you want someone you can trust, who has a close relationship to your family, who has some understanding of tax laws, and who has a keen sense of business (especially if you are a business owner). Typically, spouses are named. Other choices include older children, siblings, or parents. Friends, attorneys, and bank or trust officers are also common. You can name multiple executors to oversee different aspects of your affairs. However, coexecutors may result in an increase in paperwork and a slowdown in the probate process. Some of the attributes you should look for in a good executor are: • Ability to serve • Willingness to serve • Competency • Trustworthiness • Appreciation of your family's needs

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• Knowledge and experience Individual versus professional When choosing an executor, you can name an individual or a professional (e.g., an attorney or a bank trust department) to handle your affairs. A family member or close friend has knowledge of your affairs and would take a personal interest in the settlement of your estate and the well-being of your beneficiaries. However, he or she may not be the best choice. Serving as an executor is a time consuming and stressful task. Some of the executor's duties are very demanding: preparing and filing tax returns, obtaining appraisals, making an accurate accounting, and these are things best left to professionals. By naming a professional to manage your affairs, you gain some permanence. A professional executor is unlikely to refuse to serve or to resign. In addition, it may be easier to hold a professional executor financially accountable for mismanagement than a nonprofessional. A professional who makes money from managing estates will have the investment expertise as well as the legal, tax, accounting, and computer abilities to do the job well and efficiently. You also gain some impartiality by having a professional manage your affairs. A professional executor should be more impartial to your beneficiaries or heirs. You also reduce the risk that your executor will make hardship loans to friends. However, by nominating a professional, you lose that personal touch from a friend or a relative who is not managing any other estates. Technical Note: In general, state laws require that the person who manages your affairs be an adult U.S. citizen. Additionally, your executor cannot be a convicted felon. State laws may also give special powers to your executor, or spell out what your executor can or cannot do. You can also use your will to grant your executor any special powers needed to carry out the instructions in your will.

What if you don't leave a will? If you leave no will, if you do not name an executor in your will, or if your executor refuses or fails to serve, the probate court will appoint an administrator (or curator). If this happens, you have no say about who will manage your final affairs. An administrator performs many of the same functions as an executor but has much less power and authority.

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Life Insurance: Estate Planning What is life insurance? A contract Technically, life insurance is a contract between the policyowner (which can be you, "the insured," or a separate party) and an insurer. The policyowner agrees to make premium payments, and the insurer agrees to provide a specified sum to a designated third party (the beneficiary) upon your death. Tip: Contracts, including life insurance contracts, are governed by state law. And a will substitute Because proceeds are paid directly to the beneficiary, life insurance can bypass the probate process, saving both expense and delay. Purchased for four primary reasons Life insurance is one of the biggest players in the estate planning game. For some, it is the only way to ensure that family members will be able to support themselves after the death of the primary wage earner. For those with larger estates, life insurance can provide the funds needed to pay estate taxes (and other costs) without liquidating estate assets. For those with a business interest, life insurance can be used as a vehicle for business succession. Finally, for those with a generous spirit, life insurance can permit you to make charitable gifts. Advance planning needed to avoid taxes Although life insurance proceeds are generally received by the beneficiaries income-tax free, they may be subject to estate taxes if you do not plan in advance.

Is it life insurance? The following are considered life insurance proceeds under the Internal Revenue Code: • Death benefits paid under regular life insurance contracts • Death benefits paid under a workmen's compensation insurance contract • Death benefits paid under an endowment policy where death occurs before the contract matures • Death benefits paid under a group life policy • Death benefits paid under a National Service or U.S. Government Life Insurance policy • Death benefits paid under a double-indemnity provision • Death benefits paid under an accident (or accident and health) policy • Death benefits attributable to paid-up additions and term additions purchased with dividends paid on a policy

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Why buy life insurance? Provides an income for your family Life insurance can provide your family with immediate cash to cover their day-to-day living expenses after your death. This may be desirable if your estate is small so there would be little left for your family to fall back on after payment of debts and expenses. This may also be desirable if: (1) your property has a high value but is not income-producing, (2) you have heavily invested in speculative securities, (3) you have parents, young or disabled children, or other family members who are dependent on you, or (4) your property is weighted heavily on the variable side. Provides for the special needs of your family Life insurance can provide funds for your children's (or grandchildren's) education, or it can be used to satisfy the special needs of individual family members (e.g., financial demands of a physically or mentally handicapped or learning disabled child, aging parents, or other dependents with physical or mental limitations). Provides for children of a previous marriage In today's world, a family is often a mixture of "yours, mine, and ours." If this is the case in your family, you may need to plan ahead to ensure that your assets are sufficient to provide for your new family as well as your children from a previous marriage. Life insurance may be one option that is right for you. Provides cash for payment of estate expenses and debts Life insurance can provide funds for payment of federal and state death taxes and other estate settlement costs. Can be used to fill business needs If you are a business owner, life insurance proceeds can be used to: • Fund a buy-sell agreement • Finance nonqualified deferred compensation arrangements • Finance death benefit only (DBO) plans Can be used to fund a charitable gift Life insurance proceeds can be used to fund or supplement charitable donations. This can be accomplished in two ways: by having the proceeds paid directly to the charity or by using the proceeds to replace other assets given to charity.

What are the advantages? Provides large amounts of cash at a relatively low cost Life insurance can provide your family with a large amount of cash immediately upon your death. Usually, the proceeds exceed the amount you paid in policy premiums. Is relatively risk-free Investment in life insurance is fairly safe (i.e., life insurance companies rarely fail or become insolvent) as compared to other investment vehicles, and generally offers a higher return than traditional savings accounts.

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Avoids income tax In most cases, life insurance proceeds are not taxed as income to the beneficiary. Caution: There are a few exceptions, such as the transfer-for-value rule. Avoids estate tax In many cases, life insurance proceeds are not subject to federal estate tax (with some exceptions). Exempt from some state death taxes Some states completely exempt life insurance proceeds from death taxes. Avoids probate Where the beneficiary is someone other than the insured's estate, life insurance proceeds are not included in the insured's probate estate, thereby avoiding the cost and delay of probate. Ensures privacy Because life insurance proceeds generally are not subject to probate, there is no public record of who receives the death benefit or how much each beneficiary receives. May be protected from creditors In some states, life insurance policies or proceeds are not subject to claims of creditors of the owners or beneficiaries of the policies.

What are the tradeoffs? May not be available to everyone Life insurance may be difficult or impossible to obtain if you are in very poor health. Shopping isn't easy Life insurance is a complex product, to say the least. Gathering information about various life insurance products and understanding it is a difficult task. To make the right choices, you must do some comparison shopping. Seeking a professional's help is advisable. Premium payments deplete your current funds Of course, life insurance isn't free. You will have to make premium payments in one form or another. The money you spend on premiums is money not spent on something else. Money spent on premiums is, in most cases, money not included in the insured's estate (i.e., is not used to purchase assets which are included in the insured's estate) and may therefore lower the overall impact of estate taxes for some persons.

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Maximizing the Estate Planning Value of Life Insurance What is maximizing the estate planning value of life insurance? Simply put, maximizing the estate planning value of life insurance means getting the most bang for your buck. That is, it involves keeping as much of the proceeds as possible away from the IRS and in the hands of your beneficiaries. When you die, all your worldly goods (e.g., your money, house, car, stocks, bonds, as well as your life insurance proceeds) become a pie. The pie is then cut into slices and served. One slice goes to your heirs and beneficiaries, one slice to the federal government, one slice to your creditors, and so on. The size of the slice that goes to the federal government can be as big as 45 percent of the pie for the estates of persons who die in 2008, and what goes to the federal government does not go to your heirs and beneficiaries. You need to plan now to make sure that the slice that goes to the federal government is as small as possible, leaving a bigger slice for your loved ones.

How is it done? Understand how life insurance is taxed If you want to reduce estate taxes, a good first step is to understand how the estate tax system works. Although this is a technical area best left to the experts, the basics can be grasped fairly easily and will give you some direction regarding how to make the wisest arrangements. Arrange proper ownership of the policy Who owns the policy and for how long can affect how life insurance is taxed for estate tax purposes. If you own a life insurance policy on your own life when you die, the proceeds of the policy are includable in your gross estate for estate tax purposes, regardless of who your designated beneficiaries are. If you own a policy and transfer it to another owner within three years of your death, the transfer is not recognized for estate tax purposes and the proceeds are therefore includable in your gross estate. However, if you transfer ownership of the policy to someone else more than three years before your death, the transfer is recognized for estate tax purposes and the proceeds will therefore not be included in your estate. Since insurance that you own on your death (or within three years of your death) is included in your estate and therefore may be subject to estate tax, someone other than yourself (or your spouse in a community property state) should own the policy if you wish to avoid subjecting the proceeds to estate tax. The owner of the policy can be another individual or a trust such as an irrevocable life insurance trust (ILIT). Designate the right beneficiary Who your beneficiaries are can also affect how life insurance is taxed for estate tax purposes. For example, if the designated beneficiary of a policy on your life is your estate, the proceeds are generally includable in your gross estate for estate tax purposes even if you do not own the policy on your death (or did not own it within three years of your death). If the designated beneficiary is your executor or your estate, the proceeds may be includable in your gross estate. The primary reason for not naming your estate or your executors as beneficiaries of policies on your life is that doing so subjects the proceeds to the expense of probate and claims of creditors. If you own the policy and name a third party as a beneficiary, the proceeds will be included in your estate for estate tax purposes but they will pass by operation of law outside of the probate process and will not be subject to the claims of creditors of your estate. Proceeds payable to your children are not subject to estate tax unless you own the policy on your death or within three years of your death. If you own the policy, the proceeds are includable in your estate (and therefore subject to the estate tax) regardless of who your beneficiaries are. However, as noted above, if you name your children as beneficiaries they will receive a greater benefit from the policy than if you named your estate as the beneficiary and then directed that the proceeds be distributed from

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your estate to your children, because proceeds paid to your estate will be reduced by probate expenses and claims of creditors while proceeds paid directly to your children will not.

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Irrevocable Life Insurance Trust What is it? An irrevocable life insurance trust (ILIT), sometimes referred to as a wealth replacement trust, is a trust that is funded, at least in part, by life insurance policies or proceeds. If properly implemented, an ILIT can help minimize estate taxes and provide a source of liquid funds to your estate for the payment of taxes, debts, and expenses. Generally, assets you own at death are subject to federal estate tax. This includes life insurance policies and proceeds. Estates in excess of the exemption amount ($3.5 million in 2009) may have to pay estate tax at rates as high as 45 percent for estates of persons dying in 2009. If you're an insured individual whose estate will have to pay estate tax, your family may receive less money from your life insurance than you originally planned for. An ILIT can solve this problem, and may be especially appropriate if your estate would not have to pay estate taxes were it not for the inclusion of the policy proceeds. Tip: Although this discussion concerns federal estate taxes only, an ILIT can also help minimize state death taxes.

How does it work? Because an ILIT is an irrevocable trust, policies and proceeds (and any other assets) held by the trust are considered owned by the trust entity and not owned by you. Since you won't own the policy at your death, the proceeds will not be included in your estate. They will be received by the ILIT and ultimately pass to your family members undiminished by estate taxes. Your family members can use the proceeds to pay estate expenses. This may save your family members from having to sell assets at fire sale prices, and allow them to keep assets that may generate needed income or are valued family keepsakes. One key to this strategy is that you must relinquish all power over and benefits from the property in the trust. In a typical scenario, an insurable person (the grantor) first creates an ILIT, names an independent trustee (e.g., a bank trust department), and names the beneficiaries of the trust (usually his or her spouse and/or children). The trustee then applies for life insurance on the grantor's life and designates the ILIT as the sole beneficiary. The trustee also opens a checking account for the ILIT. The grantor gives the trustee funds for the initial premium, which the trustee deposits into the ILIT checking account. The trustee writes a check from the ILIT checking account, pays the premium to the insurance company, and coverage becomes effective. As premiums come due, the grantor and trustee repeat the same procedure. Whenever the ILIT receives funds from the grantor, the trustee provides a special notice (a Crummey notice) to each of the beneficiaries. This Crummey notice lets the beneficiaries know that they have a right to withdraw the recently deposited funds, but only within a certain limited time frame (e.g., 30 to 60 days). The trustee waits until this time frame passes before remitting the funds to the insurance company. This notice procedure serves to qualify the gift for the annual gift tax exclusion (see the section on Crummey withdrawal rights). At the grantor's death, the ILIT trustee collects the total proceeds and distributes them to the beneficiaries according to the terms of the trust. Tip: An ILIT can hold almost any type of life insurance policy, including a second-to-die (survivorship) policy. A second-to-die policy covers the lives of yourself and your spouse, and pays off at the death of the survivor. If your ILIT will hold this type of policy, extra care must be taken when drafting and funding the trust.

Why use an ILIT? There are many reasons to use a trust rather than have an individual own your life insurance policy. For example, having your spouse own the policy may defeat the purpose of the ILIT, as the proceeds will be subject to estate taxes in his or her estate. Having an adult child or any other individual own the policy may expose the policy or proceeds to that individual's creditors, or may create disharmony among family members. An ILIT can

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accomplish some or all of the following: • Avoid inclusion of the proceeds in your (and your spouse's) estate • Make the cash liquidity provided by the total proceeds available to the estate of the insured • Insulate the proceeds from estate taxes over multiple generations • Provide professional management of the proceeds • Protect the policy and proceeds from future creditors and potential ex-spouses • Provide incentives to beneficiaries

Creating the ILIT Trust must be irrevocable To enjoy its benefits, a life insurance trust must be irrevocable. That means you (the grantor) can't change the terms of the trust or the beneficiaries, end the trust, or retain any power over or interest in the trust. Further, any property transfers made to the trust must be complete and permanent. This also applies to your spouse if the ILIT is funded with a second-to-die policy. Tip: Because it will be difficult, or even impossible, for you to make changes to the trust without adverse tax consequences, it's important to build flexibility into the trust document. Be sure to consult an attorney experienced with ILITs. Naming a trustee Your choice of trustee, the person who will administer the trust, is an important decision. For the ILIT to be effective, you cannot serve as trustee, and you shouldn't even retain the power to name yourself as trustee. The IRS has clearly stated that proceeds will be included in an insured's estate if the insured serves as trustee. If the ILIT holds a second-to-die policy, your spouse cannot serve as trustee for the same reason. Tip: The trust document should expressly prohibit the insured(s) from serving as trustee. Further, the trust document should contain language that limits your power to change the trustee. You can change the trustee so long as the successor trustee is not related or subordinate. The term "related or subordinate" includes spouses, parents, descendants, siblings, and employees, but not nieces, nephews, in-laws, or partners. A noninsured spouse can serve as trustee, but it is not recommended. Remember, one key to an ILIT is relinquishing all control over and interest in the trust property. If your spouse is administering the trust, you may be regarded as retaining some control, albeit indirectly. If you choose this course, however, your spouse must not make any gifts to the trust. If your spouse is also a beneficiary, a co-trustee is recommended to handle distributions to your spouse, or a successor trustee should assume all duties at your death. Other beneficiaries can serve without adverse tax consequences, but this is generally not a good idea because there may be conflicts of interest. Other non-beneficiary family members or friends can serve as long as you trust them to perform their duties competently. A professional trustee may be the best choice because a professional will have the experience to properly administer your ILIT, and you can be fairly assured of competent asset management and impartiality. The key duties of an ILIT trustee include: • Opening and maintaining a trust checking account • Obtaining a taxpayer identification number for the trust entity, if necessary

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• Applying for and purchasing life insurance policies • Accepting funds from the grantor • Sending Crummey withdrawal notices (see the section on Crummey withdrawal rights) • Paying premiums to the insurance company • Making cash value investment decisions • Claiming insurance proceeds at your death • Distributing trust assets according to the terms of the trust • Filing tax returns, if necessary Naming the beneficiaries To keep the proceeds out of your estate, do not name your executor, your estate, your creditors, or the creditors of your estate as beneficiaries of the trust. The proceeds will be considered payable to your estate if your ILIT requires the trustee to use the proceeds to pay your estate's debts, taxes, or other obligations. If the ILIT merely gives the trustee the authority to pay such expenses, however, the proceeds will not be included in your estate unless the trustee actually uses them to satisfy such obligations. To make the proceeds available to your estate, the ILIT should include language that permits the trustee to buy property from your estate or make loans to the estate. If the trustee does either, the transaction must be completed in a reasonable, arm's-length manner. If you want to name your spouse as a beneficiary and also keep the proceeds out of your spouse's estate, the ILIT must be drafted so that access by your spouse to the proceeds is limited. Your spouse can receive some or all of the annual income from the ILIT, but access to trust principal must be limited to ascertainable standards (i.e., for support, health, or education only). Further, your spouse can hold a right of withdrawal not to exceed the greater of five percent of the trust balance or $5,000 each year. Your spouse can also be given a limited (or special) power of appointment, but not a general power of appointment. In other words, your spouse can name subsequent beneficiaries, but cannot name himself/herself, his/her creditors, or the creditors of his/her estate.

Funding the ILIT You can create an ILIT and leave it unfunded during your lifetime. An unfunded ILIT is one that holds a life insurance policy only, and does not hold any other assets. With an unfunded ILIT, you will need to gift money to the trust so the trustee can pay policy premiums. If the trust holds a permanent life insurance policy and the policy allows it, premiums can be paid with accumulated cash values or dividends, and you may not need to gift additional funds. Alternatively, you can fund an ILIT during your lifetime with assets in addition to your life insurance policy. Funding an ILIT with income-producing assets can provide the trustee with the money needed to pay the policy premiums. An additional benefit of funding your ILIT is that any future appreciation in the assets will be sheltered from estate taxes, again because the trust is irrevocable. Funding your ILIT also allows you to coordinate the asset's final disposition with the insurance proceeds. After you die, the ILIT (unfunded or funded) will receive the policy proceeds and the trustee will administer them according to the terms of the trust. The trust can receive other assets at your death along with the insurance proceeds, such as assets poured over from your will, or death benefits paid by your employer or employer benefit plan. The trust terms can direct that the proceeds be distributed to the beneficiaries immediately, or the trust terms can direct that the proceeds remain in the trust and under the trustee's management for a period of time before being distributed. The latter option may be desirable if you anticipate that your heirs might mismanage the funds or if your heirs are minor children. Caution: Funding an ILIT with assets in addition to your life insurance policy may trigger gift tax and income tax consequences (see the section on Tax Considerations).

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Caution: If you live in a community property state and your spouse is a beneficiary, do not fund the trust with community property. If you do, half of the insurance proceeds will be included in your spouse's estate. To avoid this situation, be sure to initially fund the trust and make any subsequent contributions with separate property only. The three-year rule You may have existing life insurance policies you want to transfer to an ILIT. While this is possible (merely execute an absolute assignment of ownership form provided by the issuing insurer), it is not advisable because transferring existing policies triggers the three-year rule. This rule states that, if you transfer a life insurance policy to an ILIT within the three years preceding your death, all the proceeds will be brought back into your estate for estate tax purposes. Because of the three-year rule, it is not advisable to transfer policies unless you're no longer insurable or can't afford the cost of replacement policies. Caution: Funding an ILIT with policies that have accumulated cash values may trigger gift tax consequences (see the section on Tax considerations). You can avoid the three-year rule by allowing the trustee, on behalf of the trust, to apply for and purchase a new policy. If the trust owns the policy from the outset, the three-year rule will not apply. Because the purchase must be purely discretionary, be sure the trustee is not obligated to buy the policy, but is permitted to do so. The ownership problem To keep the proceeds out of your estate and your spouse's estate, you and your spouse must not retain any incidents of ownership in the policies held by the trust. Though the IRS doesn't specifically define incidents of ownership, the phrase generally refers to any rights you retain that might benefit you economically. Those rights include: • The right to transfer, or to revoke the transfer, of ownership rights • The right to change certain policy provisions • The right to surrender or cancel the policy • The right to pledge the policy for a loan or to borrow against its cash value • The right to name and to change a beneficiary • The right to determine how beneficiaries will receive the death proceeds You must not retain any of these rights. Further, the trust document should expressly state that the trust is irrevocable and that the insured is retaining no rights to the policies held by the trust. Tip: You can, however, retain the power to change the trustee so long as the successor trustee is not related or subordinate. Crummey withdrawal rights Transfers of cash (or any other property, including cash values accumulated in existing policies) to your ILIT may be subject to gift tax. However, you can minimize or eliminate your actual gift tax liability by structuring the transfer so that it qualifies for the annual gift tax exclusion. Generally, a gift must be a present interest gift in order to qualify for the exclusion, which allows you to gift $13,000 per beneficiary gift-tax free in 2009 (up from $12,000 in 2008). A present interest gift means that the recipient is able to immediately use, possess, or enjoy the gift. Gifts made to a trust are usually considered gifts of future interests and do not qualify for the exclusion unless they fall within an exception. One such exception is when the beneficiaries are given the right to demand, for a limited period of time, any amounts transferred to the trust. This is referred to as Crummey withdrawal rights or powers.

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The beneficiaries (or their parents/guardians) must also be given notice of their rights to withdraw whenever you transfer funds to the ILIT, and they must be given reasonable time to exercise their rights. The basic requirement is that actual written notice must be made in a timely manner. It is best to give written notice at least 30 to 60 days before the expiration of the withdrawal period. It is the duty of the trustee to provide notice to each beneficiary. Of course, so as not to defeat the purpose of the trust, your beneficiaries should not actually exercise their Crummey withdrawal rights, but should let their rights lapse. Lapsed withdrawal rights, however, are considered gifts to the other trust beneficiaries, and are generally includible in a beneficiary's estate. To address this problem, the Internal Revenue Code provides an exception, referred to as the five or five power. The Code states that the lapse of rights to withdraw will not be treated as a gift, and will not be included in the beneficiary's estate, to the extent it does not exceed the greater of five percent of the trust balance or $5,000 each year. Because the beneficiaries' withdrawal powers are limited to five percent or $5,000 of the trust's assets each year, your annual gift tax exclusion is also limited to the five or five amount. If you need to contribute more than this to cover the policy premium, the excess will be subject to gift tax. You may be able to avoid this result with the use of hanging powers. The hanging power throws the excess into future years, until all of it is used.

Tax considerations Income Tax Trust's income generally attributed to the grantor If you fund your ILIT with income-producing assets and the trust is a grantor trust, income from the trust will be taxed to you, and you can use any gains, losses, deductions, and credits realized by the trust (most ILITs are grantor trusts). If the trust is not a grantor trust, the income tax rules are generally as follows: • Income used to pay premiums is taxed to you (the grantor) • Income paid to the beneficiaries is taxed to them • Income retained by the trust is taxed to the trust If the trust is not a grantor trust, the trustee must obtain a taxpayer identification number (TIN), which can be obtained online, over the phone, or by mail. If the trust is a grantor trust, a TIN is not required while you are alive, but the trust will need one upon your death. That being the case, it may make sense to obtain a TIN at the outset.

Gift Tax Transfers to an ILIT are taxable gifts Transfers to an ILIT are taxable gifts. Crummey rights of withdrawal held by the beneficiaries, however, allow the transfers to qualify for the annual gift tax exclusion. Transfers that do not qualify for the annual gift tax exclusion are exempt from gift tax to the extent of your $1 million lifetime gift tax exemption, which is automatically applied. If existing life insurance policies are transferred to your ILIT, they will be valued at the interpolated terminal reserve value (which is approximately the same as the cash surrender value of the policy). Upon request, your insurance company can give you the exact terminal reserve value. Depending on the size of the policy, your health, and the length of time that the policy has been in place, this terminal reserve value may be quite large. Tip: One possible strategy to reduce the size of the gift is to take out a loan against the cash value of the policy prior to the gift. Such a loan will reduce the interpolated terminal reserve value.

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Community property considerations If you live in a community property state, special attention should be paid to the drafting and funding of your ILIT. For example, you should create a separate property agreement and fund the trust with separate property. Beneficiaries may incur gift tax or estate tax due to withdrawal right lapses When a beneficiary allows his or her right to withdraw money gifted to the trust to lapse, he or she is considered to have made a taxable gift to the remaining beneficiaries of the trust and the funds are includible in the beneficiary's estate. Five percent of the trust balance or $5,000, whichever is greater, is exempted. Gift tax consequences on lapses in excess of this so-called five or five power can be avoided using hanging powers, or by giving the beneficiaries the right to appoint the unwithdrawn amounts in their wills (those amounts will still be includible in their estates, however). Caution: This is an extremely technical area. You will need to consult your accountant or tax attorney.

Estate Tax Proceeds from life insurance policy not included in grantor's estate If the ILIT is drafted, funded, and administered properly, the proceeds from insurance policies held by the trust will not be included in your estate. This is one of the main benefits of setting up this type of trust. Caution: If an existing insurance policy is transferred to the trust and you die within three years of the transfer, however, the proceeds will be included in your estate.

Generation-Skipping Transfer Tax Transfers to trust with beneficiaries two or more generations below grantor are subject to generation-skipping transfer tax An ILIT can be an excellent vehicle for generation-skipping transfer tax (GSTT) planning for life insurance proceeds. If your ILIT has beneficiaries that are two or more generations below you (your grandchildren, for example), gifts to the trust may be subject to both gift tax and GSTT. The GSTT rate is a flat rate at the highest estate tax rate in effect (45 percent in 2009). Fortunately, there is an annual exclusion ($13,000 per skip beneficiary in 2009) similar to the annual gift tax exclusion, and a lifetime exemption ($3.5 million in 2009). Your ILIT can be designed as a dynasty trust meant to last for several generations, leveraging your GSTT exemption, and avoiding successive generations of taxes. This is a complicated strategy, however, requiring careful planning. Caution: Unlike the gift tax exemption, which is allocated automatically, you may have to explicitly allocate your GSTT exemption on Form 709.

How do you implement an ILIT? Contact your insurance professional Your insurance professional will help you decide what kind of policy is best for you. Do not purchase the policy, however.

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Hire an attorney For an ILIT to work according to your intentions, careful drafting of the trust document is essential. One error can negate all your planning. In addition, there are many complex legal issues that can arise when you set up a trust. You should hire an experienced attorney to draft the trust document and advise you on the complex legal issues. Fund the trust You must transfer cash to the ILIT trustee so the trustee can purchase the policy (and additional amounts as premiums come due). As noted before, the trustee should buy the policy in order to avoid the three-year rule. In addition, you may want to transfer other assets to the trust. Your attorney should assist you in properly transferring ownership. Serve Crummey notice to the beneficiaries The ILIT trustee must fulfill the Crummey notice requirements to keep the ILIT effective. This means that when the trust is initially funded, and whenever you make any subsequent contributions, the trustee must give actual written notice to each beneficiary at least 30 to 60 days prior to the expiration of the withdrawal period. Tip: The trustee should consider sending the notices so that the recipient's signature is required, and should keep the signatures on file. File federal gift tax return (Form 709), if necessary If the transfers you make to the trust exceed the annual gift tax exclusion and you have used up your $1 million lifetime gift tax exemption, you may have to file a federal gift tax return (Form 709) and pay gift tax. If you want to allocate a portion of your generation-skipping transfer tax exemption, you will also need to file Form 709. You may want to consult your accountant or tax attorney prior to making any gifts. Caution: If your state imposes gift tax, you may also need to file a state gift tax return. Include trust income on your personal annual income tax return, if required Income earned by the trust that is taxable to you (the grantor) must be included on your personal income tax return for the year in which it is earned.

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Minimizing Estate Taxes What is minimizing estate taxes? The act of giving away your property, either during life or at death, will probably be subject to one or more of several types of taxes (collectively referred to here as estate taxes), either on the federal level, state level, or both. These tax liabilities may be the largest potential expenses you or your estate may have to pay; federal estate tax alone may reach as high as 45 percent of your estate if you die in 2009. This also means that property you intend to go to your loved ones or others when you die may go instead to the IRS or to your state. Therefore, understanding how these taxes can be minimized is vital if you want to preserve your estate for others.

What are estate taxes? Estate taxes are actually transfer taxes. Transfer taxes are imposed when you give your property to someone else. This can be done during life (this kind of transfer is called a gift) or at death (this kind of transfer is called a bequest or legacy if you leave a will, and intestate succession if you don't leave a will). There are five transfer taxes that may affect your estate: (1) state gift tax, (2) state death taxes, (3) state generation-skipping transfer tax (GSTT), (4) the federal gift and estate tax, and (5) the federal GSTT. State gift tax Currently, Connecticut, Louisiana, North Carolina, Tennessee, and Puerto Rico impose a gift tax. A gift is a transfer of property you (the donor) make during your lifetime. The person or organization you give to is called the donee. When you make a gift, it is in exchange for nothing or in exchange for property of lesser value (in other words, it is not a bona fide sale). Generally, gifts must be reported, and gift tax paid in the year following the year in which the gift is made (e.g., gift tax on a gift made in 2009 would be due in 2010). If your state imposes a gift tax and you intend to make lifetime gifts, you should contact your state's department of revenue to find out what gifts need to be reported, how to compute the gift tax, and when and how to file a gift tax return. State death taxes State death taxes are imposed on property distributed after your death. You should be especially aware of state death taxes because they may affect even the smallest estates. There are three types of state death taxes: inheritance tax, estate tax, and credit estate tax (commonly referred to as a sponge tax or pickup tax). Every state imposes at least one type. State generation-skipping transfer tax (GSTT) Currently, some states impose a GSTT. The GSTT is imposed on property transferred to a family member who is two or more generations below you (e.g., a grandchild or great-nephew). You can contact your state's department of revenue to find out what transfers may be subject to state GSTT, and when and how to file a return. Federal gift and estate tax Generally speaking, the federal gift and estate tax is imposed on property transferred to others either while you are living or at the time of your death. Unlike the individual states which impose at least one type of death tax, and some of which impose a separate gift tax, the federal tax system is unified. In other words, the IRS adds lifetime and deathtime transfers and treats them the same. This is how the unified tax system works: Before 1976, the federal tax system worked much like that of the states. Gifts made during life ( taxable gifts) were reported, and any gift tax owed was paid on an annual basis. After death, estate tax was imposed only on property owned at death ( gross taxable estate). Since 1976, generally, taxable gifts are still reported, and any gift tax owed is paid annually (generally, you must file a gift tax return and pay gift tax due, if any, by April 15 of the year following the year in which you make a taxable gift). But upon death, all taxable gifts are added to your

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gross taxable estate for estate tax calculation purposes, even though a gift tax return may already be filed and gift tax paid (gift tax paid is deducted from the estate tax owed). The IRS unified the gift tax and estate tax systems so that: (1) you can't avoid estate tax by giving your wealth away before you die, and (2) you pay tax on the cumulative amount of wealth you give away (this pushes your estate into a higher tax bracket). The federal generation-skipping transfer tax (GSTT) Like the state-imposed GSTT, the federal GSTT is a tax imposed on property you transfer to a family member who is two or more generations below you (e.g., a grandchild or great-nephew). The IRS wants to levy a tax on property as it is passed from generation to generation at each and every level. The purpose of the GSTT is to keep families from avoiding estate tax by skipping an intermediate generation. A flat tax rate equal to the highest estate tax rate is imposed on every generation-skipping transfer you make over a certain lifetime amount ($3.5 million in 2009). Tip: The GSTT rate is the same as the maximum estate tax rate, and the GSTT exemption is the same amount as the estate tax applicable exclusion amount.

How do you minimize estate taxes? You can minimize estate taxes by: (1) taking advantage of certain allowable tax exclusions, deductions, and credits, (2) using an estate freeze technique, or (3) employing post-mortem planning. Exclusions, deductions, and credits Under the federal tax system, individuals are generally allowed to make gifts of up to $13,000 (2009 figure, up from $12,000 in 2008) per donee each year gift tax free under the annual gift tax exclusion. In addition, individuals are allowed to exempt a certain amount of property from the gift and estate tax. Further, transfers of property between U.S. citizen spouses are fully deductible, as are transfers of property to qualified charitable organizations. There are many exclusions, deductions, and credits that if effectively used can minimize estate taxes. You need to understand what these exclusions, deductions, and credits are, and how they work in order to take full advantage of them. Tip: States also have their own exclusions, deductions, and credits, although they may not be the same as the federal system. Estate freeze An estate freeze is any planning device that allows you to freeze the present value of your estate and shift any future growth (or potential growth) to your successors. Example(s): You give land valued at $100,000 to your children. Twenty-five years later, you die. The land is valued at $500,000 on the date of your death, but only $100,000 is included in your taxable estate because the value of the land froze on the date you gave it to your children. There are many ways you can freeze the value of property. Estate freezing techniques range from relatively simple (e.g., installment sale or private annuity) to the more complex (e.g., gift- or sale-leaseback). You need to know what these techniques are and how they are used in order to know which, if any, is best for you. Tip: This generally works for state taxes also. Post-mortem planning There are many post-mortem (i.e., "after death") techniques that can help keep the value of your property as low as possible in order to minimize federal estate taxes. There are 10 post-mortem techniques in particular that you

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should know about. Even though these techniques are implemented after your death, you should understand each of them now because if you believe your estate might benefit from them, there may be things you need to do now to ensure that your estate will qualify for these elections after your death.

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Trusts What is a trust? A trust is a legal entity that is created when you transfer property to a trustee for the benefit of a third person. The trustee manages the property for the beneficiary in accordance with the terms and the instructions in the trust document. In legal terms, the trustee has legal ownership of the property, while the beneficiary has beneficial ownership. Creator of trust The person who creates the trust is called the grantor, settlor, donor, or trustor. The grantor usually decides what assets will be transferred to the trust, who the beneficiaries will be, what the terms and conditions of the trust will be, and who will be the trustee. The grantor may also be a trustee and/or a beneficiary. Moreover, a beneficiary can be a trustee. The only arrangement that will not work is if the sole trustee is also the sole beneficiary (the legal and beneficial interests are said to merge and the trust is therefore disregarded as a legal entity). Trust document To create a trust, you usually have to have a written document (called a deed or agreement) that provides the terms of the trust. In most cases, an attorney should draft the trust document. Among other things, the trust document names a trustee, directs the trustee about how to manage and invest the assets in the trust, names the beneficiaries of the trust, and instructs the trustee regarding when to pay out income and principal to the beneficiaries. The trust document may give explicit and detailed instructions about these duties. Alternatively, the trust document may give only very broad and simple guidance. Furthermore, the trust document may give instructions for the distribution of principal which differ from instructions for the distribution of the income generated by the trust. For example, it is very common that a trust document will instruct the trustee to distribute the income to one or more beneficiaries and then pay out the principal to completely different beneficiaries at some point in the future. Trustee The grantor selects the trustee. There can be one trustee or multiple trustees. The trustee can be an individual or a corporate trustee (such as a bank trust department). Some trusts may have both a corporate trustee and an individual trustee. The trustee assumes responsibility for the management and distribution of the assets in the trust. The trustee's duties include making numerous complex legal, investment, and fiduciary decisions. Therefore, the selection of trustee should not be taken lightly. There are many factors that should be considered before selecting a trustee, such as the size of the trust, the purpose of the trust, the duration of the trust, the location of beneficiaries, and the tax ramifications. In certain situations, the grantor can name himself or herself as trustee. A family member can be appointed as trustee, as can a friend, the attorney who drafts the trust, or your accountant. Finally, a corporate trustee, such as a bank trust department or an independent trust company can be named. You should probably discuss all of these options with an attorney. Location of trust In addition to choosing a trustee, you must also decide where the trust will be located. You have the option of setting up a trust in any state. State law governs how a trust is created and maintained, and these laws vary dramatically from state to state. There are also variations in state gift, estate, and income tax laws, as well as differences from state to state in the rights and obligations of the trustee and the beneficiaries. For example, some states provide better creditor protection to trusts than other states. Therefore, the decision regarding where to set up your trust should be discussed with your attorney.

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Trust assets Another decision you will face in setting up a trust is: Which assets should you transfer to the trust? The type of asset that you may transfer to a trust is almost limitless. You can transfer cash, stocks, bonds, insurance policies, real estate, your personal residence, artwork, and almost any other type of asset. The type of asset that you might transfer to a trust depends on what assets you currently own and what your goals are. For example, if you want to provide the beneficiaries with income, you may want to transfer bonds or high-yield stocks. If your goal is to provide the beneficiaries with liquidity to pay estate taxes, you may want to transfer a life insurance policy.

Types of trusts There are several different types of trusts that you can create. You can create a trust in your will (this is called a testamentary trust), or you can create a trust during your life (this is called a living trust). You can create a revocable trust (this kind of trust you can amend or revoke), or an irrevocable trust (this kind of trust you cannot amend or revoke). Testamentary trust A testamentary trust is one that is created and funded under the terms of your will. It does not come into existence until your death. Assets that are transferred to the trust must pass through probate. Until your death, you can change the terms of the trust by amending your will. Upon your death, the trust becomes irrevocable. A testamentary trust can be contingent. That means that it will be created upon your death only if certain conditions are present (e.g., your children are under a certain age). Living trust A living trust, also called an inter vivos trust, is created while you are living. A living trust can either end or continue at your death. Property in the trust is distributed according to the terms of the trust, not your will. Living trust assets avoid probate. Revocable trust As the name implies, you can revoke or amend the terms of a revocable trust. You can change the beneficiaries or trustee. You can add or remove assets from the trust. You can also change the provisions of the trust. You can even dissolve the trust. Furthermore, at your death, the assets in the revocable trust do not pass by the terms your will (and thus do not pass through probate). Instead, the assets in a revocable trust are distributed in accordance with the terms of the trust. In fact, many people set up a revocable living trust simply to avoid the delay and cost of probate. However, one big disadvantage to a revocable trust is that the assets in trust will be included in your gross estate for estate tax purposes. Thus, a revocable trust is not used to avoid estate taxes. Caution: A revocable trust may become an irrevocable trust at the death of the grantor, unless the grantor gives someone else the power to amend the trust. The spouse of the decedent, for example, cannot change the terms of the trust unless he or she is given a special power of appointment. Irrevocable trust Again, as the name implies, an irrevocable trust is one that you cannot revoke or amend once the trust has been established. This means that you cannot dissolve the trust, change the beneficiaries, remove assets from the trust, or change the terms of the trust. The main advantage to setting up an irrevocable trust is that the assets in the trust, including any future appreciation, are not included in your gross estate for estate tax purposes. Of course, the transfer to an irrevocable trust may be a taxable gift, and gift taxes may have to be paid at the time of the transfer. A secondary benefit of an irrevocable trust may be that the assets in the trust are beyond the reach

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of your creditors. Irrevocable trusts are used primarily as estate planning tools. With careful planning, you may be able to save substantial amounts in estate taxes. There are many different types of irrevocable trusts that can be set up. To name a few, there is an irrevocable life insurance trust (to hold an insurance policy), a qualified personal residence trust (to hold a personal residence), and a grantor retained annuity trust (to provide you with income).

Why use a trust? There are many different reasons why you may want to use a trust. For example, you may want to: (1) avoid probate, (2) have professional management of your assets, (3) provide for your minor children, (4) avoid estate taxes, and (5) protect your assets from creditors. Avoid probate As noted, assets in both a revocable and irrevocable trust do not pass through probate at your death. The assets are distributed in accordance with the terms of the trust, which may even continue past your death. Your estate, therefore, avoids the cost and delay of probate. A further benefit of using a trust is that you will have increased privacy. A will is a public document (i.e., anyone can go down the probate court and review the contents of your will). However, a trust remains private. Protect against old age and disability Another reason to use a trust is to protect yourself in case of a mental or physical disability or other age-related problems. You can set up a trust, name yourself as the beneficiary, and then name yourself and another person as the trustees. If you become infirm or mentally incapacitated, the other trustee can manage your assets for you and distribute those assets in a way that is in your best interest. Provide for your minor children You may want to use a trust if you plan to leave your assets to minor children (generally, under age 18). Because you cannot predict when you might die, you may want to set up a contingent trust in your will in case you die when your children are still minors. The assets could then be transferred to the trust, and the trustee could manage the assets and make the necessary distributions when your children reach an older age. Avoid estate taxes Assets that have been transferred to an irrevocable trust are not included in your gross estate when you die for estate tax purposes. (This result assumes that the creator of the trust is not a beneficiary of the trust. Furthermore, if the creator is also the trustee, then his or her ability to make distributions to the beneficiaries must be limited to ascertainable standards.) It is important to note, however, that gift taxes may have to be paid at the time of the original transfer to the trust. However, any appreciation in the assets after the transfer will avoid both estate and gift taxes. Caution: One exception to the general rule that assets transferred to an irrevocable trust are not included your gross estate is a life insurance policy. If you transfer a life insurance policy to an irrevocable trust within three years of your death, then the insurance policy will be pulled back into your gross estate. Reduce income taxes By transferring income-producing assets to certain types of trusts, you may be able to transfer income to those heirs who are in a lower income tax bracket than you. By doing this, you may be able to reduce your own income taxes.

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Benefit a charity There are certain types of trusts where you transfer assets to the trust, receive income from the trust for a period of time, and then leave the assets to a charity upon your death. These types of trusts may provide you with both income and estate tax benefits, and also allow you to give to your favorite charity. Other benefits There are numerous other reasons why you may want to transfer your assets using a trust. These other benefits are beyond the scope of this general discussion. Please consult an estate planning attorney or other resources.

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Charitable Gifting What constitutes a gift to charity? A gift to charity is simply a gratuitous transfer of property to a charitable organization. The key is that your gift must be some kind of property--your time or personal services do not count. There are several different types of property that can be donated to charity, and a gift is limited only by your imagination. Are you the type who wants to donate cash, stock, or your lunch box collection from a 1960s sitcom?

How do you decide whether to donate to charity? The decision to donate to charity is a personal one. Although the IRS does not require that you have any charitable motivation when you donate to charity--you can do it strictly for the tax benefits--most people who decide to donate to charity have a charitable intent. There are an infinite number of charities from which to choose. Most people have a particular charity in mind when they decide to make a contribution.

What are the tax benefits of donating to charity? Through tax legislation, Congress has attempted to encourage charitable giving because it is good social policy. Most every charity depends on individual contributions to remain financially solvent, especially in this era of fewer direct government dollars. As a result, charitable giving has become interconnected with the tax laws, which have grown more and more complex. Congress has sweetened the pot for taxpayers who donate to qualified charities. First, you generally receive an income tax deduction in the year you make the gift. Second, you do not have to worry about gift tax because federal gift tax does not apply to charitable gifts. Third, charitable gifts serve to reduce your taxable estate, thus reducing your potential estate tax liability. For more information, see Charitable Deduction. It is this last area--estate tax--where charitable giving may produce the greatest tax benefits. Over the next 30 years, an estimated $8 trillion of assets will pass from one generation to the next, resulting in the assessment of significant estate taxes. One solution to minimize these estate taxes is charitable giving.

What options do you have for donating to charity? An outright gift In the typical situation, your gift will be for the charity's benefit only, and the charity will take possession of the gift immediately. This type of gift is called an outright gift. This arrangement satisfies the general rule that a gift to charity must be paid to the charity in the form of money or property before the end of the tax year to be deductible for income tax purposes. Split interest gift in trust Another option is for your gift to be split between a charity and a noncharitable beneficiary. Here, one party (usually the noncharitable beneficiary) receives the use of the donated property for a specific period of time, which means he or she is paid a certain sum every year out of the donated property. Then, after this time period is up, the remaining property passes to the charity. Such gifts can be used to provide for a dependent child or a surviving spouse. In this arrangement, the charity's right to enjoyment and possession of the gift is delayed because the noncharitable beneficiary has the first interest in the donated property. Ordinarily, this delay would mean no tax deductibility for your gift. However, Congress has voiced its approval of such arrangements as long as the gift is set up as one of a number of special trusts expressly created for this purpose. If your split interest gift is set up as one of these trusts, you receive federal income, gift, and estate tax deductions.

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CRAT (charitable remainder annuity trust) A CRAT is a split interest gift between a noncharitable beneficiary and a charitable beneficiary. The noncharitable beneficiary has the first interest, and the charity has the remainder interest or second-in-line interest. The trust pays out a fixed amount of income every year (an annuity) to the noncharitable beneficiary for the term of the trust, and the remaining assets pass to the charity at the end of the term. CRUT (charitable remainder unitrust) A CRUT is a split interest gift between a noncharitable beneficiary and a charitable beneficiary. As with a CRAT, the noncharitable beneficiary has the first interest, and the charity has the remainder interest. However, instead of paying out a fixed amount each year, a CRUT pays the noncharitable beneficiary a fluctuating amount each year, depending on the value of the trust assets for that year. This amount is calculated as a percentage of the assets in the trust on a specified date each year. At the end of the trust term, the remaining assets pass to the charity. Tip: There are several varieties of CRUTs ( NI-CRUT, NIMCRUT, or Flip CRUT), each with slightly different rules regarding how the noncharitable beneficiary is paid. Pooled income fund A pooled income fund is a split interest gift between a noncharitable beneficiary and a charitable beneficiary. Like the CRAT and CRUT, the noncharitable beneficiary has the first interest and the charity has the remainder interest. A pooled income fund is managed by the charity (much like a mutual fund) and is made up of donations from several donors. The charity pays the noncharitable beneficiary a fluctuating amount each year, depending on the value of the fund in that year. These income distributions are made to the noncharitable beneficiary for his or her lifetime, after which the portion of the fund assets attributable to the noncharitable beneficiary is severed from the fund and used by the charity for its charitable purposes. Charitable lead trust A charitable lead trust is a split interest gift between a noncharitable beneficiary and a charitable beneficiary. Here, the charity has the first or lead interest and the noncharitable beneficiary has the remainder interest. The charity is paid a certain amount every year for the term of the trust, and then the remaining assets pass to the noncharitable beneficiary at the end of the trust term. Bargain sale A bargain sale in the context of charitable giving is a sale to charity at a bargain price (i.e., a price below the fair market value of the item sold, fair market value being the price a willing buyer would pay a willing seller in an arm's length transaction). The difference between the sale price and the actual fair market value of the asset equals your donation to charity. A bargain sale involves two separate transactions for tax purposes: a sale and a charitable gift. The IRS treats each event as a separate transaction. Consequently, each is reported separately on your income tax return. Private foundation Donors with sufficient resources may want to create a private foundation. A private foundation is a separate legal entity (often named for the donor) than can endure for many generations after the original donor's death. The donor creates the foundation, then transfers assets (typically appreciated assets) to the foundation, which in turn makes grants to public charities. The donor and his or her descendants retain complete control over which charities receive grants. Community foundation A type of organization related to a private foundation is called a community foundation. A community foundation concentrates its activities within a defined geographic area and is typically controlled by a representative group of community members, which may include the donor. In practice, a community foundation is a public charity,

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though it appears to share some of the characteristics of a private foundation. Donor-advised fund Similar in some respects to a private foundation, a donor-advised fund (DAF) offers an easier way for a donor to make significant charitable gifts over a long period of time. A DAF actually refers to an account that is held within a charitable organization. The charitable organization is a separate legal entity, but the donor's account is not--it is merely a component of the charitable organization that holds the account. Once the donor has transferred assets to the account, the charitable organization becomes the legal owner of the assets and has ultimate control over them. The donor can only advise--not direct--the charitable organization on how the donor's contributions will be distributed to other charities.

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Charitable Trusts What is a charitable trust? A charitable trust is a trust established for the dual purpose of donating to charity and providing for a noncharitable beneficiary (such as your children). When a charitable trust is used, the gift to charity is also referred to as a split-interest gift because the gift is split between a charitable beneficiary and a noncharitable beneficiary. In a charitable trust, one party (usually the noncharitable beneficiary) receives the first or lead interest in the trust property, and the second party (usually the charity) receives the remainder or second-in-line interest. What this means is that for a period of years or for life, the first party receives an income stream from the donated trust property in the form of annual payments, and thereafter the second party receives the remaining property in a lump sum. In the charitable trust arrangement, the charity's right to enjoyment and possession of the gift is either delayed (when the noncharitable beneficiary has the first interest in the donated property) or limited by a period of years (when the charity has the first interest in the donated property). Ordinarily, this would mean no tax deductibility for your gift due to the general rule that a gift to charity must be immediate and unconditional in order for it to be deductible for income tax purposes. However, Congress has approved the tax deductibility of split-interest gifts to charity, as long as they are implemented as one of a number of special trusts created by Congress for this purpose. If you comply with all the requirements of such charitable trusts, you will receive federal income, gift, and estate tax benefits.

What are the different types of charitable trusts? There are four main types of charitable trusts. Charitable Remainder Annuity Trust (CRAT) In a charitable remainder annuity trust, or CRAT, the noncharitable beneficiary has the first interest, and the charitable beneficiary has the remainder interest in the trust property. The trust pays out a fixed amount of income to the noncharitable beneficiary every year (an annuity) for the term of the trust, and then the remaining assets pass to the charity. Charitable Remainder Unitrust (CRUT) The charitable remainder unitrust, or CRUT, is similar to the CRAT in that the non-charitable beneficiary has the first interest, and the charitable beneficiary has the remainder interest. However, instead of paying out a fixed amount each year, a CRUT pays the noncharitable beneficiary a fluctuating amount each year, equal to a specified percentage of the total value of the trust assets for that year. At the end of the trust term, the remaining assets pass to charity. Tip: There are three variations on a CRUT that revolve around how the noncharitable beneficiary is paid. These subtrusts are called the net income with makeup charitable remainder unitrust ( NIMCRUT), the net income only charitable remainder unitrust ( NI-CRUT), and the flip charitable remainder unitrust ( Flip-CRUT). Pooled income fund A pooled income fund is similar to a CRAT and CRUT in that the noncharitable beneficiary has the first interest, and the charity has the remainder interest. However, unlike these individual created trusts, a pooled income fund is established and managed by the charity. It consists of donations from several donors and operates similarly to

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a mutual fund. The charity pays the noncharitable beneficiary a fluctuating amount each year, depending on the total income of the fund for that year. At the end of the trust term, the remaining assets pass to the charity. Charitable lead trust A charitable lead trust is the reverse of the above-named trusts. In a charitable lead trust, the charity has the first or lead interest, and the noncharitable beneficiary has the remainder interest. The trust pays the charity a certain amount every year for the term of the trust (you can specify either the annuity or unitrust method), and then the remaining assets pass to the non-charitable beneficiary.

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Conducting a Periodic Review of Your Estate Plan What is conducting a periodic review of your estate plan? With your estate plan successfully implemented, one final but critical step remains: carrying out a periodic review and update. Imagine this: since you implemented your estate plan five years ago, you got divorced and remarried, sold your house and bought a boat to live on, sold your legal practice and invested the money that provides you with enough income so you no longer have to work, and reconciled with your estranged daughter. This scenario may look more like fantasy than reality, but imagine how these major changes over a five-year period may affect your estate. And that's without considering changes in tax laws, the stock market, the economic climate, or other external factors. After all, if the only constant is change, it isn't unreasonable to speculate that your wishes have changed, the advantages you sought have eroded or vanished, or even that new opportunities now exist that could offer a better value for your estate. A periodic review can give you peace of mind.

When should you conduct a review of your estate plan? Every year for large estates Those of you with large estates (over the applicable exclusion amount -- $3.5 million in 2009) should review your plan annually or at certain life events that are suggested in the following paragraphs. Not a year goes by without significant changes in the tax laws. You need to stay on top of these to get the best results. Every five years for small estates Those of you with smaller estates (under the applicable exclusion amount) need only review every five years or following changes in your life events. Your estate will not be as affected by economic factors and changes in the tax laws as a larger estate might be. However, your personal situation is bound to change, and reviewing every five years will bring your plan up to date with your current situation. Upon changes in estate valuation If the value of your estate has changed more than 20 percent over the last two years, you may need to update your estate plan. Upon economic changes You need to review your estate plan if there has been a change in the value of your assets or your income level or requirements, or if you are retiring. Upon changes in occupation or employment If you or your spouse changed jobs, you may need to make revisions in your estate plan. Upon changes in family situations You need to update your plan if: (1) your (or your children's or grandchildren's) marital status has changed, (2) a child (or grandchild) has been born or adopted, (3) your spouse, child, or grandchild has died, (4) you or a close family member has become ill or incapacitated, or (5) other individuals (e.g., your parents) have become dependent on you. For example, many states have a law revoking all or part of your will if you divorce or remarry.

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Upon changes in your closely held business interest A review is in order if you have: (1) formed, purchased, or sold a closely held business, (2) reorganized or liquidated a closely held business, (3) instituted a pension plan, (4) executed a buy-sell agreement, (5) deferred compensation, or (6) changed employee benefits. Upon changes in the estate plan Of course, if you make a change in part of your estate plan (e.g., create a trust, execute a codicil, etc.), you should review the estate plan as a whole to ensure that it remains cohesive and effective. Upon major transactions Be sure to check your plan if you have: (1) received a sizable inheritance, bequest, or similar disposition, (2) made or received substantial gifts, (3) borrowed or lent substantial amounts of money, (4) purchased, leased, or sold material assets or investments, (5) changed residences, (6) changed significant property ownership, or (7) become involved in a lawsuit. Upon changes in insurance coverage Making changes in your insurance coverage may change your estate planning needs or may make changes necessary. Therefore, inform your estate planning advisor if you make any change to life insurance, health insurance, disability insurance, medical insurance, liability insurance, or beneficiary designations. Upon death of trustee/executor/guardian If a designated trustee, executor, or guardian dies or changes his or her mind about serving, you need to revise the parts of your estate plan affected (e.g., the trust agreement and your will) to replace that individual. Upon other important changes None of us has a crystal ball. We can't think of all the conditions that should prompt us to review and revise our estate plans. Use your common sense. Have your feelings about charity changed? Has your son finally become financially responsible? Has your spouse's health been declining? Are your children through college now? All you need to do is give it a little thought from time to time.

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Planning for Succession of a Business Interest Business succession planning--what is it? One of the important decisions a business owner must face is when and how to step out of the business--in other words, business succession planning. Do you expect to retire from your business? Do you have a plan in place? What would happen to your business if you were to die today? Do you have children you hope to bring into the business? These are questions only you can answer, and your answers will lead you and your financial and legal advisors to a course of action. When you develop a succession plan for your business you have two basic choices: you can sell your business, or you can give it away. Once you choose to either sell or gift, you can structure your plan to go into effect during your lifetime or at your death.

Transferring your business interest with a buy-sell agreement You can transfer your business interest with a buy-sell agreement, a legal contract that prearranges the sale of your business interest. It allows you to keep control of your interest until the occurrence of an event specified in the agreement, such as your death, disability, or retirement. A buy-sell agreement can help you to solve the problems inherent in attempting to sell a closely held business. When you structure your agreement, you can tailor it to your needs. With a buy-sell agreement, you choose the events requiring a sale When you draft your buy-sell agreement, you establish the triggering events, meaning those events under which the sale can or must happen. Common triggering events include death, disability, or retirement. Other events like divorce or bankruptcy can also be included as triggering events under a buy-sell agreement. A buy-sell agreement provides a ready buyer for your interest At the occurrence of the triggering event, the buyer is obligated to buy your interest from you or your estate. The buyer can be a person, a group (such as co-owners), the business itself, or a combination. You (or your family or estate) are spared the task of trying to find a buyer when you are ready to sell. Price and sale terms are prearranged A major function of the buy-sell agreement is the establishment of the pricing mechanism for the sale of the business interest. The payment method is typically also determined at the time the agreement is drafted. The major sale negotiation is conducted at a time when there is no pressure to sell. This eliminates the need for a fire sale when you retire, become ill, or die; and it may result in greater overall fairness in the deal. A buy-sell agreement can interfere with other estate planning Once you are bound under a buy-sell agreement, you can't sell or give your business to anyone except the buyer named in the agreement without the buyer's consent. This could restrict your ability to reduce the size of your estate through lifetime gifts of your business interest, unless you carefully consider and coordinate your estate planning goals with the terms of your buy-sell agreement.

Sell your business interest The major benefits when you sell your business interest are control and cash: you keep control of your interest or business assets until you are ready to let go, and you decide how much or how little you want to sell.

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Selling allows you to receive cash (or convertible assets) and choose the timing When you sell your business interest or assets, you receive cash (or assets you can convert to cash) that can be used to maintain your lifestyle or pay your estate expenses. You can choose when you want to sell--now, at your retirement, at your death, or at some point in-between. You can sell your interest during your lifetime, and receive cash to use for your retirement, a new business venture, or that trip around the world you've been putting off. When done at your death, an asset sale can provide cash for your estate to use in paying your final expenses or for distribution to your beneficiaries. A limited market means a sale could be difficult There is often no market for the sale of a closely held business, which could make finding a buyer for your interest difficult. Some assets, such as equipment, may have a specialized use or a short time frame of technological usefulness. If your business is a service business, it may be hard to find a buyer for intangible assets such as your customer list. The level of competition in your geographic area or business field could also affect your ability to find a buyer. When the sale occurs after your death, your family or estate may be at a distinct disadvantage when negotiating with a potential buyer. The interested buyer can be expected to try to take advantage of your family's need for cash to settle your estate expenses and offer a price that is below a fair market value. A buy-sell agreement might be the solution to prevent this from happening, because it guarantees a buyer for your interest. Size of business interest, estate could make sale difficult The larger the size of your business interest, the more difficult it may be to find a buyer with access to sufficient cash or credit on short notice. In addition, the larger the size of your business relative to your entire estate, the greater the need for cash to settle your estate expenses. Again, transferring your business interest with a buy-sell agreement might help you to solve these potential problems. Smaller business interests are not without their own problems. Buyers may be reluctant to purchase a minority interest because such an interest doesn't carry with it the ability to control the business.

Transfer your business interest through lifetime gifts You can transfer your business interest through lifetime gifts by doing just that--making gifts during your lifetime. You can choose to make smaller gifts of portions of your business interest over a period of time or make a gift in total at your retirement. Lifetime gifting reduces the value of your estate and could lower your estate taxes A lifetime gifting program removes the value of the business from your estate as you make gifts to the recipient. The benefit to you is a reduction in the value of your total estate, thus the possibility of lower estate taxes at your death. Not only do you remove the value of the gift itself from your estate, but you also remove the future appreciation on the gift and taxes that would be associated with the gain. Lifetime gifting allows you to take advantage of the annual gift tax exclusion, which may help you reduce total gift and estate taxes You could make gifts of unrestricted stock over a period of time by arranging the gifting program to maximize the annual gift tax exclusion, which allows you to (currently) gift up to $13,000 per donee per year without incurring federal gift tax (although you may have to pay state gift tax). The benefit to you is a tax-free, systematic reduction in the size of your estate. When you make gifts of portions of your stock, you ultimately pay less total gift tax than if you made one large gift, thanks to the valuation discount. Lifetime gifting requires you to give up part or all of your business As you make gifts of your business interest, you might also be giving up some of your ownership control over the business, while the recipient of the gift gains control. If you have co-owners, your relative percentage of control will diminish. If you are the majority stockholder, it might take a long time before you are in a position of

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significantly less control. If you hold equal ownership with co-owners, it may not take long before you become a minority shareholder.

Transfer your business interest at death through your will or trust If you wish to keep control of your business until your death and transfer your interest to someone at that time, you could transfer your business interest at death through your will or trust. This method of business succession can be effective when the intended receiver of your bequest is currently active in your business and would be able to carry on the business activities. Will provisions can authorize the continuation of your business A will provision can direct the executor of your estate to continue your business for a specified period of time or purpose, thus granting permission to carry out activities that otherwise may not be allowed. If the business is continued, the executor may be held personally liable for losses of the business. Caution should be taken by authorizing the executor to incorporate the business, which may limit liability to the activities of the continued business. After your death, the business can be maintained until your family can take control and continued income from your business can be provided to your family and heirs. With a living trust, you can see your continuation plan in action A living trust would allow you to make a revocable transfer of your business interest, providing you with the opportunity to see your continuation plan in action while you are alive. You can see your successor management operating the business while you are afforded continued control and input. This gives you the chance to be completely satisfied with your decision before it becomes irrevocable at your death. A living trust can provide income to you or your heirs Depending upon the structure of your living trust, you may receive an income from the trust during your retirement until your death. At your death, the business may provide income to your family or heirs or the business can be maintained until your family or heirs can take over. Use of a trust can be efficient and private When you establish a living trust, it requires you to organize your property during your lifetime. In doing so, your assets are transferred at death in an orderly fashion as you intended and not at the discretion of the court. The use of a trust will be less expensive overall, because your assets pass from the trust directly to the people you designate to receive them, avoiding the costly probate court process. This would be considered a private transaction, keeping the transfer free of any publicity.

Choosing the right type of succession plan The various succession strategies can be used to achieve specific goals for your business interest. Depending upon your particular situation, one or more of these tools may be appropriate for you. The tricky part is, how do you decide? Take a look at our decision tools which were created to help you analyze and compare the various business succession strategies. Once you have narrowed down your choices, meet with your attorney and tax or financial planner to develop your personal business succession plan.

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Table of Federal Estate Tax Brackets and Exemption Limits Current federal estate tax law (1) increases the estate tax exemption from $2 million in 2008 to $3.5 million in 2009, (2) imposes a top estate tax rate of 45 percent, (3) repeals the estate tax for 2010 only, and (4) reinstates the estate tax in 2011, with an exemption amount of $1 million and a top tax rate of 55 percent. Year

Amount exempt from federal estate tax

Highest federal estate tax rates

2008

$2 million

45%

2009

$3.5 million

45%

2010

federal estate tax scheduled to be repealed*

federal estate scheduled to be repealed - no tax*

2011

scheduled to revert to prior law*

scheduled to revert to prior law*

*The previous federal estate tax will be reinstated in 2011 under the sunset provisions of the Tax Relief Act of 2001 unless Congress takes additional action. The top federal estate tax rate will be restored to 55 percent, and the federal estate tax exemption amount will return to $1 million.

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Common Incapacity Documents Durable Power of Attorney for Health Care (DPAHC)/Health-Care Proxy Advantages

Disadvantages

• Is flexible--allows your representative to act on your behalf and make medical decisions based on current circumstances • Generally, your representative can make any decision you would be allowed to make • Generally can be used any time you become incompetent

• Not practical in an emergency--your representative must be present to act on your behalf • Not permitted in some states

Living Will Advantages

Disadvantages

• Allows you to convey decisions regarding your medical care without relying on any one person to carry out your wishes

• Generally can be used only if you are terminally ill or injured, or in a persistent vegetative state • Generally used only to make decisions regarding life-sustaining treatments • Emergency medical personnel generally cannot withhold emergency care based on a living will • Not permitted in some states

Do Not Resuscitate (DNR) Order Advantages

Disadvantages

• Allows you to decline CPR if your heart or breathing fails • Effective in an emergency--your doctor should note an in-hospital DNR order on your chart. Out-of-hospital DNR orders take various forms, depending on the laws of your state. ID bracelets, MedicAlert ®necklaces, and wallet cards are some methods of noting DNR status.

• Some states allow DNR orders only for hospitalized patients--others do not restrict eligibility • Only used to decline CPR in case of cardiac or respiratory arrest • Not permitted in some states

Durable Power of Attorney (DPOA) Advantages

Disadvantages

• You control who acts and what they can do with your property • Low cost to implement • Decreases the chance of court intervention

• Some states do not permit a "springing" DPOA (i.e., a DPOA that is effective only after you have become incapacitated)

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The Best Property to Give to Charity Giving to charity is not only personally satisfying, the IRS (and possibly your state) also rewards you with generous tax breaks. • Current income tax deduction if you itemize, subject to certain percentage limitations for any one year • Tax benefit received reduces the cost of the donation (e.g., a $100 donation from someone in a 30 percent tax bracket has a net cost of $70) • Reduces or eliminates capital gains tax if appreciated property is given • No transfer (gift and estate) taxes imposed • Removes any future appreciation of the donated property from your taxable estate

Highly appreciated or rapidly appreciating property* Such as: • Intangible personal and real property (e.g., stock or real estate) • Tangible personal property (e.g., art, jewelry)

Cash • Easy to give--the type of donation most charities like best • Be sure to get a receipt or keep a bank record, regardless of the amount

Income-producing property* Such as: • Artwork (if given by the artist) • Inventory • Section 306 stock (stock acquired in a nontaxable corporate transaction)

Tangible personal property* Such as: • Cars • Jewelry • Paintings

Remainder interests in property Lets you use the property, or income from the property, until a later date. Gift and estate tax deductions are not allowed unless a trust is used. You may only take the income tax deduction in the year that the gift is actually conveyed.

* You may need to have certain types of property appraised.

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Estate Planning Pyramid

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Steps to Estate Planning Success

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The World of Estate Planning A successful estate plan is shaped by goals. Key estate planning goals are minimizing taxes, avoiding probate, retaining control over property, protecting assets, and protecting against incapacity. These goals are represented in the outer rings of the illustration. There are a number of devices that can be employed to accomplish these goals; among them are gifts, wills, trusts (living or irrevocable), joint ownership arrangements, and beneficiary designations. These devices are represented within the world's core (the pie-shaped pieces). This tool has been designed to easily match goals with devices that can achieve those goals.

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Advantages of Trusts Why you might consider discussing trusts with your attorney • Trusts may be used to minimize federal estate taxes for married individuals with substantial assets. • Trusts provide management assistance for your heirs.* • Contingent trusts for minors (which take effect in the event that both parents die) may be used to avoid the costs of having a court-appointed trustee.** • Properly funded trusts avoid many of the administrative costs of probate (e.g., attorney fees, document filing fees).

What is a trust? A trust is a legal entity that is created for the purpose of transferring property to a trustee for the benefit of a third person (beneficiary). The trustee manages the property for the beneficiary according to the terms specified in the trust document.

• Generally, revocable living trusts will keep the distribution of your estate private.

• Trusts can be used to dispense income to intermediate beneficiaries (e.g., children, elderly parents) before final property distribution. • Trusts can ensure that assets go to your intended beneficiaries. For example, if you have children from a prior marriage you can make sure that they, as well as a current spouse, are provided for. • Trusts can minimize income taxes by allowing the shifting of income among beneficiaries. • Properly structured irrevocable life insurance trusts can provide liquidity for estate settlement needs while removing the policy proceeds from estate taxation at the death of the insured.

*This is particularly important for minors and incapacitated adults who may need support, maintenance, and/or education over a long period of time.

**With a court-appointed trustee, the court must be petitioned each time funds are needed for the minor. In addition, the assets are generally invested in very conservative investments.

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A/B Trust Diagram: $7 Million Estate

* Because each spouse is making full use of his or her $3.5 million applicable exclusion amount, this strategy allows a married couple to pass $7 million to their children or others free from federal estate taxes in 2009.

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Estate Shrinkage

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How a Charitable Remainder Trust Works

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How a Charitable Lead Trust Works

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How a Grantor Retained Income Trust (GRIT) Works

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Estate Planning: An Introduction By definition, estate planning is a process designed to help you manage and preserve your assets while you are alive, and to conserve and control their distribution after your death according to your goals and objectives. But what estate planning means to you specifically depends on who you are. Your age, health, wealth, lifestyle, life stage, goals, and many other factors determine your particular estate planning needs. For example, you may have a small estate and may be concerned only that certain people receive particular things. A simple will is probably all you'll need. Or, you may have a large estate, and minimizing any potential estate tax impact is your foremost goal. Here, you'll need to use more sophisticated techniques in your estate plan, such as a trust. To help you understand what estate planning means to you, the following sections address some estate planning needs that are common among some very broad groups of individuals. Think of these suggestions as simply a point in the right direction, and then seek professional advice to implement the right plan for you.

Over 18 Since incapacity can strike anyone at anytime, all adults over 18 should consider having: • A durable power of attorney: This document lets you name someone to manage your property for you in case you become incapacitated and cannot do so. • An advanced medical directive: The three main types of advanced medical directives are (1) a living will, (2) a durable power of attorney for health care (also known as a health-care proxy), and (3) a Do Not Resuscitate order. Be aware that not all states allow each kind of medical directive, so make sure you execute one that will be effective for you.

Young and single If you're young and single, you may not need much estate planning. But if you have some material possessions, you should at least write a will. If you don't, the wealth you leave behind if you die will likely go to your parents, and that might not be what you would want. A will lets you leave your possessions to anyone you choose (e.g., your significant other, siblings, other relatives, or favorite charity).

Unmarried couples You've committed to a life partner but aren't legally married. For you, a will is essential if you want your property to pass to your partner at your death. Without a will, state law directs that only your closest relatives will inherit your property, and your partner may get nothing. If you share certain property, such as a house or car, you should consider owning the property as joint tenants with rights of survivorship. That way, when one of you dies, the jointly held property will pass to the surviving partner automatically.

Married couples Married couples have unique estate planning challenges and opportunities. On the one hand, you can transfer your entire estate to your spouse gift and estate tax free under the unlimited marital deduction. This will postpone taxation until the death of the surviving spouse. While this may be a good outcome for couples with smaller estates, couples with combined assets in excess of the estate tax exemption amount ($3.5 million per person in 2009) may wind up paying more in estate taxes than is necessary because they've wasted the exemption of the first spouse to die. Couples in this situation need to plan in advance to avoid this result (perhaps by using a "credit shelter" or "bypass" trust, or some combination of marital trusts, often referred as an "A/B or A/B/C trust arrangement"). Note: Funding a bypass trust with funds from a retirement plan could have adverse income tax consequences.

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Note: In the states that have "decoupled" their death tax systems from the federal system, using a formula provision to fund a bypass trust may increase the chance of having to pay state death taxes. Married couples where one spouse is not a U.S. citizen have special planning concerns. The marital deduction is not allowed if the recipient spouse is a non-citizen spouse (although a $133,000 annual exclusion, for 2009, is allowed). If certain requirements are met, however, a transfer to a qualified domestic trust (QDOT) will qualify for the marital deduction.

Married with children If you're married and have children, you and your spouse should each have your own will. For you, wills are vital because they can name a guardian for your minor children in case both of you die simultaneously. If you fail to name a guardian in your will, a court may appoint someone you might not have chosen. Furthermore, without a will, some states dictate that at your death some of your property goes to your children and not to your spouse. If minor children inherit directly, the surviving parent will need court permission to manage the money for them. You may also want to consult an attorney about establishing a trust to manage your children's assets in the event that both you and your spouse die at the same time. Certainly, you will also need life insurance. Your surviving spouse may not be able to support the family on his or her own and may need to replace your earnings to maintain the family.

Comfortable and looking forward to retirement If you're in your 30s, you're probably feeling comfortable. You've accumulated some wealth and you're thinking about retirement. Here's where estate planning overlaps with retirement planning. It's just as important to plan to care for yourself during your retirement as it is to plan to provide for your beneficiaries after your death. You should keep in mind that even though Social Security may be around when you retire, those benefits alone may not provide enough income for your retirement years. Consider saving some of your accumulated wealth using other retirement and deferred vehicles, such as an individual retirement account (IRA).

Wealthy and worried Depending on the size of your estate when you die, you may need to be concerned about estate taxes. Current federal estate tax law (1) increases the estate tax exemption from $2 million in 2008 to $3.5 million in 2009, (2) imposes a top estate tax rate of 45 percent, (3) repeals the estate tax for 2010 only, and (4) reinstates the estate tax in 2011, with an exemption amount of $1 million and a top tax rate of 55 percent. There is uncertainty about the exact form the federal estate tax system will take in future years. However, it appears that individuals with estates valued at under $1 million need not worry too much about federal estate taxes, those with estates between $1 million and $3.5 million should have some flexibility built into their plans, and those with over $3.5 million need to implement plans now to avoid having to pay federal estate tax. TWhether your estate will be subject to state death taxes depends on the size of your estate and the tax laws in effect in the state in which you are domiciled.

Elderly or ill If you're elderly or ill, you'll want to write a will or update your existing one, consider a revocable living trust, and make sure you have a durable power of attorney and a health-care directive. Talk with your family about your wishes, and make sure they have copies of your important papers or know where to locate them.

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Gift and Estate Taxes If you give away money or property during your life, those transfers may be subject to federal gift tax and perhaps state gift tax. The money and property you own when you die (i.e., your estate) may also be subject to federal estate taxes and some form of state death tax. You should understand these taxes and when they do and do not apply, especially since the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (the 2001 Tax Act). This law contains several changes that are complicated and uncertain, making estate planning all the more difficult.

Federal gift tax and federal estate tax--background Under pre-2001 Tax Act law, no gift tax or estate taxes were imposed on the first $675,000 of combined transfers (those made during life and those made at death). The tax rate tables were unified into one--that is, the same rates applied to gifts made and property owned by persons who died in 2001. Like income tax rates, gift and estate tax rates were graduated. Under this unified system, the recipient of a lifetime gift received a carryover basis in the property received, while the recipient of a bequest, or gift made at death, got a step-up in basis (usually fair market value on the date of death of the person who made the bequest or gift). The law substantially changed this tax regime.

Federal gift tax The 2001 Tax Act increased the applicable exclusion amount for gift tax purposes to $1 million. The top gift tax rate is 45 percent in 2009 and 35 percent in 2010 (the top marginal income tax rate in 2010 under the 2001 Tax Act). In 2011, the gift tax rates revert to pre-2001 Tax Act levels. The carryover basis rules remain in effect. However, many gifts can still be made tax free, including: • Gifts to your U.S. citizen spouse (you may give up to $133,000 in 2009 tax free to your noncitizen spouse) • Gifts to qualified charities • Gifts totaling up to $13,000 (in 2009) to any one person or entity during the tax year, or $26,000 if the gift is made by both you and your spouse (and you are both U.S. citizens) • Amounts paid on behalf of any individual as tuition to an educational organization or to any person who provides medical care for an individual State gift tax may also be owed if you are a resident of Connecticut, Louisiana, North Carolina, Tennessee, or Puerto Rico.

Federal estate tax Under the 2001 Tax Act, the applicable exclusion amount for estate tax purposes is $3.5 million in 2009 (the applicable exclusion amount for gift tax purposes remains fixed at $1 million). The top estate tax rate is 45 percent in 2009. The estate tax (but not the gift tax) is repealed in 2010, but the estate tax applicable exclusion amount and rates revert to pre-2001 Tax Act levels in 2011. When the estate tax is repealed in 2010, the basis rules will be changed to those similar to the gift tax basis rules. The step-up in basis rules return in 2011.

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Federal generation-skipping transfer tax The federal generation-skipping transfer tax (GSTT) taxes transfers of property you make, either during life or at death, to someone who is two or more generations below you, such as a grandchild. The GSTT is imposed in addition to, not instead of, federal gift tax or federal estate tax. You need to be aware of the GSTT if you make cumulative generation-skipping transfers in excess of the GSTT exemption, which is $3.5 million (in 2009). A flat tax equal to the highest estate tax bracket in effect in the year you make the transfer is imposed on every transfer you make after your exemption has been exhausted. Some states also impose their own GSTT. Note: The GSTT exemption is the same amount as the applicable exclusion amount for estate tax purposes.

State death taxes The three types of state death taxes are estate tax, inheritance tax, and credit estate tax, which is also known as a sponge tax or pickup tax.

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Wills: The Cornerstone of Your Estate Plan If you care about what happens to your money, home, and other property after you die, you need to do some estate planning. There are many tools you can use to achieve your estate planning goals, but a will is probably the most vital. Even if you're young or your estate is modest, you should always have a legally valid and up-to-date will. This is especially important if you have minor children because, in many states, your will is the only legal way you can name a guardian for them. Although a will doesn't have to be drafted by an attorney to be valid, seeking an attorney's help can ensure that your will accomplishes what you intend.

Wills avoid intestacy Probably the greatest advantage of a will is that it allows you to avoid intestacy. That is, with a will you get to choose who will get your property, rather than leave it up to state law. State intestate succession laws, in effect, provide a will for you if you die without one. This "intestate's will" distributes your property, in general terms, to your closest blood relatives in proportions dictated by law. However, the state's distribution may not be what you would have wanted. Intestacy also has other disadvantages, which include the possibility that your estate will owe more taxes than it would if you had created a valid will.

Wills distribute property according to your wishes Wills allow you to leave bequests (gifts) to anyone you want. You can leave your property to a surviving spouse, a child, other relatives, friends, a trust, a charity, or anyone you choose. There are some limits, however, on how you can distribute property using a will. For instance, your spouse may have certain rights with respect to your property, regardless of the provisions of your will. Gifts through your will take the form of specific bequests (e.g., an heirloom, jewelry, furniture, or cash), general bequests (e.g., a percentage of your property), or a residuary bequest of what's left after your other gifts.

Wills allow you to nominate a guardian for your minor children In many states, a will is your only means of stating who you want to act as legal guardian for your minor children if you die. You can name a personal guardian, who takes personal custody of the children, and a property guardian, who manages the children's assets. This can be the same person or different people. The probate court has final approval, but courts will usually approve your choice of guardian unless there are compelling reasons not to.

Wills allow you to nominate an executor A will allows you to designate a person as your executor to act as your legal representative after your death. An executor carries out many estate settlement tasks, including locating your will, collecting your assets, paying legitimate creditor claims, paying any taxes owed by your estate, and distributing any remaining assets to your beneficiaries. Like naming a guardian, the probate court has final approval but will usually approve whomever you nominate.

Wills specify how to pay estate taxes and other expenses The way in which estate taxes and other expenses are divided among your heirs is generally determined by state law unless you direct otherwise in your will. To ensure that the specific bequests you make to your beneficiaries are not reduced by taxes and other expenses, you can provide in your will that these costs be paid from your residuary estate. Or, you can specify which assets should be used or sold to pay these costs.

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Wills can create a testamentary trust You can create a trust in your will, known as a testamentary trust, that comes into being when your will is probated. Your will sets out the terms of the trust, such as who the trustee is, who the beneficiaries are, how the trust is funded, how the distributions should be made, and when the trust terminates. This can be especially important if you have a spouse or minor children who are unable to manage assets or property themselves.

Wills can fund a living trust A living trust is a trust that you create during your lifetime. If you have a living trust, your will can transfer any assets that were not transferred to the trust while you were alive. This is known as a pourover will because the will "pours over" your estate to your living trust.

Wills can help minimize taxes Your will gives you the chance to minimize taxes and other costs. For instance, if you draft a will that leaves your entire estate to your U.S. citizen spouse, none of your property will be taxable when you die (if your spouse survives you) because it is fully deductible under the unlimited marital deduction. However, if your estate is distributed according to intestacy rules, a portion of the property may be subject to estate taxes if it is distributed to heirs other than your U.S. citizen spouse.

Assets disposed of through a will are subject to probate Probate is the court-supervised process of administering and proving a will. Probate can be expensive and time consuming, and probate records are available to the public. Several factors can affect the length of probate, including the size and complexity of the estate, challenges to the will or its provisions, creditor claims against the estate, state probate laws, the state court system, and tax issues. Owning property in more than one state can result in multiple probate proceedings. This is known as ancillary probate. Generally, real estate is probated in the state in which it is located, and personal property is probated in the state in which you are domiciled (i.e., reside) at the time of your death.

Will provisions can be challenged in court Although it doesn't happen often, the validity of your will can be challenged, usually by an unhappy beneficiary or a disinherited heir. Some common claims include: • You lacked testamentary capacity when you signed the will • You were unduly influenced by another individual when you drew up the will • The will was forged or was otherwise improperly executed • The will was revoked

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Understanding Probate When you die, you leave behind your estate. Your estate consists of your assets--all of your money, real estate, and worldly belongings. Your estate also includes your debts, expenses, and unpaid taxes. After you die, somebody must take charge of your estate and settle your affairs. This person will take your estate through probate, a court-supervised process that winds up your financial affairs after your death. The proceedings take place in the state where you were living at the time of your death. Owning property in more than one state can result in multiple probate proceedings. This is known as ancillary probate.

How does probate start? If your estate is subject to probate, someone (usually a family member) begins the process by filing an application for the probate of your will. The application is known as a petition. The petitioner brings it to the probate court along with your will. Usually, the petitioner will file an application for the appointment of an executor at the same time. The court first rules on the validity of the will. Assuming that the will meets all of your state's legal requirements, the court will then rule on the application for an executor. If the executor meets your state's requirements and is otherwise fit to serve, the court generally approves the application.

What's an executor? The executor is the person whom you choose to handle the settlement of your estate. Typically, the executor is a spouse or a close family member, but you may want to name a professional executor, such as a bank or attorney. You'll want to choose someone whom you trust will be able to carry out your wishes as stated in the will. The executor has a fiduciary duty--that is, a heightened responsibility to be honest, impartial, and financially responsible. Now, this doesn't mean that your executor has to be an attorney or tax wizard, but merely has the common sense to know when to ask for specialized advice. Your executor's duties may include: • Finding and collecting your assets, including outstanding debts owed to you • Inventorying and appraising your assets • Giving notice to your creditors (e.g., credit card companies, banks, retail stores) • Filing an estate tax return and paying estate taxes, if any • Paying any debts or other taxes • Distributing your assets according to your will and the law • Providing a detailed report of how the estate was settled to the court and all interested parties The probate court supervises and oversees the entire process. Some states allow a less formal process if the estate is small and there are no complicated issues to resolve. In those states allowing informal probate, the court may be involved only indirectly. This may speed up the probate process, which can take years.

What if you don't name an executor? If you don't name an executor in your will, or if the executor can't serve for some reason, the court will appoint an administrator to settle your estate according to the terms of your will. If you die without a will, the court will also appoint an administrator to settle your estate. This administrator will follow a special set of laws, known as intestacy laws, that are made for such situations.

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Is all of your property subject to probate? Although most assets in your estate may pass through the probate process, other assets may not. It often depends on the type of asset or how an asset is titled. For example, many married couples own their residence jointly with rights of survivorship. Property owned in this manner bypasses probate entirely and passes by "operation of law." That is, at death, the property passes directly to the joint owner regardless of the terms of the will and without going through probate. Other assets that may bypass probate include: • Investments and bank accounts set up to pass automatically to a named person at death (payable on death) • Life insurance policies with a named beneficiary (someone other than the estate) • Retirement plans with a named beneficiary • Other property owned jointly with rights of survivorship

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Trust Basics Whether you're seeking to manage your own assets, control how your assets are distributed after your death, or plan for incapacity, trusts can help you accomplish your estate planning goals. Their power is in their versatility--many types of trusts exist, each designed for a specific purpose. Although trust law is complex and establishing a trust requires the services of an experienced attorney, mastering the basics isn't hard.

What is a trust? A trust is a legal entity that holds assets for the benefit of another. Basically, it's like a container that holds money or property for somebody else. You can put practically any kind of asset into a trust, including cash, stocks, bonds, insurance policies, real estate, and artwork. The assets you choose to put in a trust depend largely on your goals. For example, if you want the trust to generate income, you may want to put income-producing securities, such as bonds, in your trust. Or, if you want your trust to create a pool of cash that may be accessible to pay any estate taxes due at your death or to provide for your family, you might want to fund your trust with a life insurance policy. When you create and fund a trust, you are known as the grantor (or sometimes, the settlor or trustor). The grantor names people, known as beneficiaries, who will benefit from the trust. Beneficiaries are usually your family and loved ones but can be anyone, even a charity. Beneficiaries may receive income from the trust or may have access to the principal of the trust either during your lifetime or after you die. The trustee is responsible for administering the trust, managing the assets, and distributing income and/or principal according to the terms of the trust. Depending on the purpose of the trust, you can name yourself, another person, or an institution, such as a bank, to be the trustee. You can even name more than one trustee if you like.

Why create a trust? Since trusts can be used for many purposes, they are popular estate planning tools. Trusts are often used to: • Minimize estate taxes • Shield assets from potential creditors • Avoid the expense and delay of probating your will • Preserve assets for your children until they are grown (in case you should die while they are still minors) • Create a pool of investments that can be managed by professional money managers • Set up a fund for your own support in the event of incapacity • Shift part of your income tax burden to beneficiaries in lower tax brackets • Provide benefits for charity The type of trust used, and the mechanics of its creation, will differ depending on what you are trying to accomplish. In fact, you may need more than one type of trust to accomplish all of your goals. And since some of the following disadvantages may affect you, discuss the pros and cons of setting up any trust with your attorney and financial planner before you proceed: • A trust can be expensive to set up and maintain--trustee fees, professional fees, and filing fees must be paid

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• Depending on the type of trust you choose, you may give up some control over the assets in the trust • Maintaining the trust and complying with recording and notice requirements can take up considerable time • Income generated by trust assets and not distributed to trust beneficiaries may be taxed at a higher income tax rate than your individual rate

The duties of the trustee The trustee of the trust is a fiduciary, someone who owes a special duty of loyalty to the beneficiaries. The trustee must act in the best interests of the beneficiaries at all times. For example, the trustee must preserve, protect, and invest the trust assets for the benefit of the beneficiaries. The trustee must also keep complete and accurate records, exercise reasonable care and skill when managing the trust, prudently invest the trust assets, and avoid mixing trust assets with any other assets, especially his or her own. A trustee lacking specialized knowledge can hire professionals such as attorneys, accountants, brokers, and bankers if it is wise to do so. However, the trustee can't merely delegate responsibilities to someone else. Although many of the trustee's duties are established by state law, others are defined by the trust document. If you are the trust grantor, you can help determine some of these duties when you set up the trust.

Living (revocable) trust A living trust is a special type of trust. It's a legal entity that you create while you're alive to own property such as your house, a boat, or mutual funds. Property that passes through a living trust is not subject to probate--it doesn't get treated like the property in your will. This means that the transfer of property through a living trust is not held up while the probate process is pending (sometimes up to two years or more). Instead, the trustee will transfer the assets to the beneficiaries according to your instructions. The transfer can be immediate, or if you want to delay the transfer, you can direct that the trustee hold the assets until some specific time, such as the marriage of the beneficiary or the attainment of a certain age. Living trusts are attractive because they are revocable. You maintain control--you can change the trust or even dissolve it for as long as you live. Living trusts are also private. Unlike a will, a living trust is not part of the public record. No one can review details of the trust documents unless you allow it. Living trusts can also be used to help you protect and manage your assets if you become incapacitated. If you can no longer handle your own affairs, your trustee (or a successor trustee) steps in and manages your property. Your trustee has a duty to administer the trust according to its terms, and must always act with your best interests in mind. In the absence of a trust, a court could appoint a guardian to manage your property. Despite these benefits, living trusts have some drawbacks. Assets in a living trust are not protected from creditors, and you are subject to income taxes on income earned by the trust. In addition, you cannot avoid estate taxes using a living trust.

Irrevocable trusts Unlike a living trust, an irrevocable trust can't be changed or dissolved once it has been created. You generally can't remove assets, change beneficiaries, or rewrite any of the terms of the trust. Still, an irrevocable trust is a valuable estate planning tool. First, you transfer assets into the trust--assets you don't mind losing control over. You may have to pay gift taxes on the value of the property transferred at the time of transfer. Provided that you have given up control of the property, all of the property in the trust, plus all future appreciation on the property, is out of your taxable estate. That means your ultimate estate tax liability may be less, resulting in more passing to your beneficiaries. Property transferred to your beneficiaries through an irrevocable trust will also avoid probate. As a bonus, property in an irrevocable trust may be protected from your creditors.

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There are many different kinds of irrevocable trusts. Many have special provisions and are used for special purposes. Some irrevocable trusts hold life insurance policies or personal residences. You can even set up an irrevocable trust to generate income for you.

Testamentary trusts Trusts can also be established by your will. These trusts don't come into existence until your will is probated. At that point, selected assets passing through your will can "pour over" into the trust. From that point on, these trusts work very much like other trusts. The terms of the trust document control how the assets within the trust are managed and distributed to your heirs. Since you have a say in how the trust terms are written, these types of trusts give you a certain amount of control over how the assets are used, even after your death.

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Life Insurance and Estate Planning Life insurance has come a long way since the days when it was known as burial insurance and used mainly to pay for funeral expenses. Today, life insurance is a crucial part of many estate plans. You can use it to leave much-needed income to your survivors, provide for your children's education, pay off your mortgage, and simplify the transfer of assets. Life insurance can also be used to replace wealth lost due to the expenses and taxes that may follow your death, and to make gifts to charity at relatively little cost to you. To illustrate how life insurance can help you plan your estate wisely, let's compare what happened upon the death of two friends: Frank, who bought life insurance, and Dave, who did not. (Please note that these illustrations are hypothetical.)

Life insurance can protect your survivors financially by replacing your lost income Frank bought life insurance to help ensure that his survivors wouldn't suffer financially when he died. When Frank died and his paycheck stopped coming in, his family had enough money to maintain their lifestyle and live comfortably for years to come. And since Frank's life insurance proceeds were available very quickly, his family had cash to meet their short-term financial needs. Life insurance proceeds left to a named beneficiary don't pass through the process of probate, so Frank's family didn't have to wait until his estate was settled to get the money they needed to pay bills. But Dave didn't buy life insurance, so his family wasn't so lucky. Even though Dave left his assets to his family in his will, those assets couldn't be distributed until after the probate of his estate was complete. Since probate typically takes six months or longer, Dave's survivors had none of the financial flexibility that a life insurance policy would have provided in the difficult time following his death.

Life insurance can replace wealth that is lost due to expenses and taxes Frank planned ahead and bought enough life insurance to cover the potential costs of settling his estate, including taxes, fees, and other debts that his estate would have to pay. By comparison, these expenses took a big bite out of Dave's estate, which had to sell valuable assets to pay the taxes and expenses that arose as a result of his death.

Life insurance lets you give to charity, while your estate enjoys an estate tax deduction Using life insurance, Frank was able to leave a substantial gift to his favorite charity. Since gifts to charity are estate tax deductible, this gift was not subject to estate taxes when he died. Dave always dreamed of leaving money to his alma mater, but his family couldn't afford to give any money away when he died.

Life insurance won't increase estate taxes--if you plan ahead Before buying life insurance, Frank talked to his attorney about the potential tax consequences. Frank's attorney told him that if he was leaving behind a taxable estate worth less than a certain amount ($3.5 million in 2009, under the applicable exclusion amount), his survivors generally wouldn't owe estate taxes on a life insurance policy left to them. Since Frank's estate was larger than that, Frank and his attorney put a plan in place that helped minimize the estate tax burden on his family.

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Be like Frank, not like Dave Throughout his life, Dave worked hard to support his family. Frank did, too, but went one step further--he bought life insurance to protect his family after his death. Here's how you can be like Frank: • Use life insurance to ensure that your family has access to cash to help them meet both their short-term and long-term financial needs • Plan ahead--buy enough life insurance to cover the potential costs of settling your estate and to ensure that the assets you leave to your survivors aren't less than you intended • Consider using life insurance to give to charity • Consult an experienced attorney about income and estate tax consequences before purchasing life insurance

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Facing the Possibility of Incapacity Incapacity means that you are either mentally or physically unable to take care of yourself or your day-to-day affairs. Incapacity can result from serious physical injury, mental or physical illness, mental retardation, advancing age, and alcohol or drug abuse.

Incapacity can strike anyone at anytime Even with today's medical miracles, it's a real possibility that you or your spouse could become incapable of handling your own medical or financial affairs. A serious illness or accident can happen suddenly at any age. Advancing age can bring senility, Alzheimer's disease, or other ailments that affect your ability to make sound decisions about your health, or to pay your bills, write checks, make deposits, sell assets, or otherwise conduct your affairs.

Planning ahead can ensure that your wishes are carried out Designating one or more individuals to act on your behalf can help ensure that your wishes are carried out if you become incapacitated. Otherwise, a relative or friend must ask the court to appoint a guardian for you, a public procedure that can be emotionally draining, time consuming, and expensive. An attorney can help you prepare legal documents that will give individuals you trust the authority to manage your affairs.

Managing medical decisions with a living will, durable power of attorney for health care, or Do Not Resuscitate order If you do not authorize someone to make medical decisions for you, medical care providers must prolong your life using artificial means, if necessary. With today's modern technology, physicians can sustain you for days and weeks (if not months or even years). If you wish to avoid this, you must have an advanced medical directive. You may find that one, two, or all three types of advanced medical directives are necessary to carry out all of your wishes for medical treatment (make sure all documents are consistent). A living will allows you to approve or decline certain types of medical care, even if you will die as a result of the choice. However, in most states, living wills take effect only under certain circumstances, such as terminal injury or illness. Generally, one can be used only to decline medical treatment that "serves only to postpone the moment of death." Even in states that do not allow living wills, you might want to have one anyway to serve as evidence of your wishes. A durable power of attorney for health care (known as a health-care proxy in some states) allows you to appoint a representative to make medical decisions for you. You decide how much power your representative will have. A Do Not Resuscitate order (DNR) is a doctor's order that tells all other medical personnel not to perform CPR if you go into cardiac arrest. There are two types of DNRs. One is effective only while you are hospitalized. The other is used while you are outside the hospital.

Managing your property with a living trust, durable power of attorney, or joint ownership If no one is ready to look after your financial affairs when you can't, your property may be wasted, abused, or lost. You'll need to put in place at least one of the following options to help protect your property in the event you become incapacitated. You can transfer ownership of your property to a revocable living trust. You name yourself as trustee and retain complete control over your affairs as long as you retain capacity. If you become incapacitated, your successor

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trustee (the person you named to run the trust if you can't) automatically steps in and takes over the management of your property. A living trust can survive your death, but it can be expensive to maintain and administer. A durable power of attorney (DPOA) allows you to authorize someone else to act on your behalf. There are two types of DPOAs: a standby DPOA, which is effective immediately, and a springing DPOA, which is not effective until you have become incapacitated. A DPOA should be fairly simple and inexpensive to implement. It also ends at your death. A springing DPOA is not permitted in some states, so you'll want to check with an attorney. Another option is to hold your property in concert with others. This arrangement may allow someone else to have immediate access to the property and to use it to meet your needs. Joint ownership is simple and inexpensive to implement. However, there are some disadvantages to the joint ownership arrangement. Some examples include (1) your co-owner has immediate access to your property, (2) you lack the ability to direct the co-owner to use the property for your benefit, (3) naming someone who is not your spouse as co-owner may trigger gift tax consequences, and (4) if you die before the other joint owner(s), your property interests will pass to the other owner(s) without regard to your own intentions, which may be different.

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Charitable Giving When developing your estate plan, you can do well by doing good. Leaving money to charity rewards you in many ways. It gives you a sense of personal satisfaction, and it can save you money in estate taxes.

A few words about estate taxes Current federal estate tax law (1) increases the estate tax exemption from $2 million in 2008 to $3.5 million in 2009, (2) imposes a top estate tax rate of 45 percent, (3) repeals the estate tax for 2010 only, and (4) reinstates the estate tax in 2011, with an exemption amount of $1 million and a top tax rate of 55 percent. Whether you are subject to federal estate taxes depends on the size of your estate and the year you die. Tax law changes only increase the need for careful planning, and charitable giving can play an important role in many estate plans. By leaving money to charity when you die, the full amount of your charitable gift may be deducted from the value of your taxable estate.

Make an outright bequest in your will The easiest and most direct way to make a charitable gift is by an outright bequest of cash in your will. Making an outright bequest requires only a short paragraph in your will that names the charitable beneficiary and states the amount of your gift. The outright bequest is especially appropriate when the amount of your gift is relatively small, or when you want the funds to go to the charity without strings attached.

Make a charity the beneficiary of an IRA or retirement plan If you have funds in an IRA or employer-sponsored retirement plan, you can name your favorite charity as a beneficiary. Naming a charity as beneficiary can provide double tax savings. First, the charitable gift will be deductible for estate tax purposes. Second, the charity will not have to pay any income tax on the funds it receives. This double benefit can save combined taxes that otherwise could eat up a substantial portion of your retirement account.

Use a charitable trust Another way for you to make charitable gifts is to create a charitable trust. There are many types of charitable trusts, the most common of which include the charitable lead trust and the charitable remainder trust. A charitable lead trust pays income to your chosen charity for a certain period of years after your death. Once that period is up, the trust principal passes to your family members or other heirs. The trust is known as a charitable lead trust because the charity gets the first, or lead, interest. A charitable remainder trust is the mirror image of the charitable lead trust. Trust income is payable to your family members or other heirs for a period of years after your death or for the lifetime of one or more beneficiaries. Then, the principal goes to your favorite charity. The trust is known as a charitable remainder trust because the charity gets the remainder interest. Depending on which type of trust you use, the dollar value of the lead (income) interest or the remainder interest produces the estate tax charitable deduction.

Why use a charitable lead trust? The charitable lead trust is an excellent estate planning vehicle if you are optimistic about the future performance of the investments in the trust. If created properly, a charitable lead trust allows you to keep an asset in the family while being an effective tax-minimization device.

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For example, you create a $1 million charitable lead trust. The trust provides for fixed annual payments of $80,000 (or 8 percent of the initial $1 million value of the trust) to ABC Charity for 25 years. At the end of the 25-year period, the entire trust principal goes outright to your beneficiaries. To figure the amount of the charitable deduction, you have to value the 25-year income interest going to ABC Charity. To do this, you use IRS tables. Based on these tables, the value of the income interest can be high--for example, $900,000. This means that your estate gets a $900,000 charitable deduction when you die, and only $100,000 of the $1 million gift is subject to estate tax.

Why use a charitable remainder trust? A charitable remainder trust takes advantage of the fact that lifetime charitable giving generally results in tax savings when compared to testamentary charitable giving. A donation to a charitable remainder trust has the same estate tax effect as a bequest because, at your death, the donated asset has been removed from your estate. Be aware, however, that a portion of the donation is brought back into your estate through the charitable income tax deduction. Also, a charitable remainder trust can be beneficial because it provides your family members with a stream of current income--a desirable feature if your family members won't have enough income from other sources. For example, you create a $1 million charitable remainder trust. The trust provides that a fixed annual payment be paid to your beneficiaries for a period not to exceed 20 years. At the end of that period, the entire trust principal goes outright to ABC Charity. To figure the amount of the charitable deduction, you have to value the remainder interest going to ABC Charity, using IRS tables. This is a complicated numbers game. Trial computations are needed to see what combination of the annual payment amount and the duration of annual payments will produce the desired charitable deduction and income stream to the family.

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Bypassing Probate You may have heard about the horrors of probate, but in truth, probate has gotten an undeservedly bad reputation, especially in recent years. If you bypass probate, your estate will go to your beneficiaries without any court proceeding, and you may save a certain amount of time and expenses. However, there is usually little reason for most people to avoid probate today. States continue to revise their probate laws, making them more consumer friendly, particularly for small estates. For most modestly sized estates, the probate process now costs little. In fact, there are some good reasons to distribute your property by will. Decisions are binding and have legal finality once your will is probated. Creditors who fail to file claims against your estate within a specific amount of time--usually six months after receiving notice--are out of luck. However, some major drawbacks to probate do exist, including the time it can take. The process averages six to nine months to complete but may take up to two years or more for some complex estates, tying up the assets that your family may need immediately. Also, for a larger estate, the cost may be as high as 5 percent of the estate's value. If you feel that the size and complexity of your estate warrant exploring alternatives to probate, you may want to consider one or more of the following:

Transfer your assets to a revocable living trust A trust is like a basket that holds your assets. A revocable living trust (also known as an inter vivos trust) is flexible enough to include almost any asset that you own. While you are living, you can act as the trustee and can add or remove property as you see fit. You can also terminate or amend the trust at any time. When you die, your successor trustee distributes the trust assets to the trust beneficiaries, according to the trust agreement. Trusts require a significant amount of paperwork, are costly to create and maintain, and usually require a lawyer to draw up the trust documents. Also, a revocable living trust does not shield your estate from your creditors, creditors of your estate, or estate taxes.

Own property as joint tenancy with rights of survivorship Assets owned as joint tenancy with rights of survivorship pass automatically to the surviving joint owner(s) at your death. To establish joint ownership, you may need to record new real estate deeds, titles for your car or boat, stock and bond certificates, statements of account for mutual funds, registration cards for your bank accounts, and other assets. This costs little and usually does not require a lawyer. Some drawbacks are that the joint owner has immediate access to your property, and your joint owner's creditors may reach the jointly held property.

Designate beneficiaries Assets pass outside of probate if you establish payable-on-death provisions for your savings accounts and CDs. Ask your agent to set up transfer-on-death provisions for brokerage accounts containing stocks, bonds, or mutual funds. Your retirement accounts, such as profit-sharing plans, 401(k)s, and IRAs can also pass along to designated beneficiaries. Finally, life insurance death proceeds will avoid probate, provided you name a beneficiary other than your estate.

Make lifetime gifts Another way to avoid probate is to simply give away your property to your beneficiaries while you are living. Carefully planned gifting can also free those assets from gift and estate taxes. The following are usually nontaxable gifts: • Gifts to your spouse

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• Gifts to qualified charities • Gifts totaling $13,000 or less per person, per year ($26,000 if you and your spouse can split the gifts) • Tuition payments on behalf of an individual directly to an educational institution • Medical care expenses paid directly to the provider on behalf of an individual

Other ways to bypass or minimize probate If your estate is small enough to meet state guidelines, your beneficiaries can simply claim your assets by presenting a notarized affidavit. About half of the states set a limit of $10,000 to $20,000 of the qualified estate value; most of the other states allow as much as $100,000. You can generally deduct estate expenses from your qualified estate value, such as taxes, debts, loans, or family allowance payments, plus the value of any other assets that pass outside probate (e.g., a home jointly owned with a spouse). Real estate is usually disqualified from claims by affidavit. Therefore, your estate may qualify even if it is fairly large. Expect the process to take 30 to 45 days. Another method is for your executor to file for summary, or simplified probate. This streamlined process is generally a paper filing only, requiring no attorney. States vary widely regarding the allowable size of an estate for simplified probate.

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Asset Protection in Estate Planning You're beginning to accumulate substantial wealth, but you worry about protecting it from future potential creditors. Whether your concern is for your personal assets or your business, various tools exist to keep your property safe from tax collectors, accident victims, health-care providers, credit card issuers, business creditors, and creditors of others. To insulate your property from such claims, you'll have to evaluate each tool in terms of your own situation. You may decide that insurance and a Declaration of Homestead may be sufficient protection for your home because your exposure to a claim is low. For high exposure, you may want to create a business entity or an offshore trust to shield your assets. Remember, no asset protection tool is guaranteed to work, and you may have to adjust your asset protection strategies as your situation or the laws change.

Liability insurance is your first and best line of defense Liability insurance is at the top of any plan for asset protection. You should consider purchasing or increasing umbrella coverage on your homeowners policy. For business-related liability, purchase or increase your liability coverage under your business insurance policy. Generally, the cost of the premiums for this type of coverage is minimal compared to what you might be required to pay under a court judgment should you ever be sued.

A Declaration of Homestead protects the family residence Your primary residence may be your most significant asset. State law determines the creditor and judgment protection afforded a residence by way of a Declaration of Homestead, which varies greatly from state to state. For example, a state may provide a complete exemption for a residence (i.e., its entire value), a limited exemption (e.g., up to $100,000), or an exemption under certain circumstances (e.g., a judgment for medical bills). A Declaration of Homestead is easy to file. You pay a small fee, fill out a simple form, and file it at the registry where your deed is recorded.

Dividing assets between spouses can limit exposure to potential liability Perhaps you work in an occupation or business that exposes you to greater potential liability than your spouse's job does. If so, it may be a good idea to divide assets between you so that you keep only the income and assets from your job, while your spouse takes sole ownership of your investments and other valuable assets. Generally, your creditors can reach only those assets that are in your name.

Business entities can provide two types of protection--shielding your personal assets from your business creditors and shielding business assets from your personal creditors Consider using a corporation, limited partnership, or limited liability company (LLC) to operate the business. Such business entities shield the personal assets of the shareholders, limited partners, or LLC members from liabilities that arise from the business. The liability of these owners will be limited to the assets of the business. Conversely, corporations, limited partnerships, and LLCs provide some protection from the personal creditors of a shareholder, limited partner, or member. In a corporation, a creditor of an individual owner is able to place a lien on, and eventually acquire, the shares of the debtor/shareholder, but would not have any rights greater than the rights conferred by the shares. In limited partnerships or LLCs, under most state laws, a creditor of a partner or member is entitled to obtain only a charging order with respect to the partner or member's interest. The charging order gives the creditor the right to receive any distributions with respect to the interest. In all respects, the creditor is treated as a mere assignee and is not entitled to exercise any voting rights or other rights that the partner or member possessed.

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Certain trusts can preserve trust assets from claims People have used trusts to protect their assets for generations. The key to using a trust as an asset protection tool is that the trust must be irrevocable and become the owner of your property. Once given away, these assets are no longer yours and are not available to satisfy claims against you. To properly establish an asset protection trust, you must not keep any interest in the trust assets or control over the trust. Trusts can also protect trust assets from potential creditors of the beneficiaries of the trust. The extent to which a beneficiary's creditors can reach trust property depends on how much access the beneficiary has to the trust property. The more access the beneficiary has to the trust property, the more access the beneficiary's creditors will have. Thus, the terms of the trust are critical. There are many types of asset protection trusts, each having its own benefits and drawbacks. These trusts include: • Spendthrift trusts • Discretionary trusts • Support trusts • Blend trusts • Personal trusts • Self-settled trusts Since certain claims can pierce domestic protective trusts (e.g., claims by a spouse or child for support and state or federal claims), you can bolster your protection by placing the trust in a foreign jurisdiction. Offshore or foreign trusts are established under, or made subject to, the laws of another country (e.g., the Bahamas, the Cayman Islands, Bermuda, Belize, Jersey, Liechtenstein, and the Cook Islands) that does not generally honor judgments made in the United States.

A word about fraudulent transfers The court will ignore transfers to an asset protection trust if: • A creditor's claim arose before you made the transfer • You made the transfer with the intent to defraud a creditor • You incurred debts without a reasonable expectation of paying them

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Transferring Your Family Business As a business owner, you're going to have to decide when will be the right time to step out of the family business and how you'll do it. There are many estate planning tools you can use to transfer your business. Selecting the right one will depend on whether you plan to retire from the business or keep it until you die. Perhaps you have children or other family members who wish to continue the business after your death. Obviously, you'll want to transfer your business to your successors at its full value. However, with income, gift, and potential estate taxes, it takes careful planning to prevent some (or all) of the business assets from being sold to pay them, perhaps leaving little for your beneficiaries. Therefore, business succession planning must include ways not only to ensure the continuity of your business, but also to do so with the smallest possible tax consequences. Some of the more common strategies for minimizing taxes are explained briefly in the following sections. Remember, none are without drawbacks. You'll want to consult a tax professional as well as your estate planning attorney to explore all strategies.

You and your estate may get some relief under the Internal Revenue Code If you are prepared to begin transferring some of your business interest to your beneficiaries, a systematic gifting program can help accomplish this while minimizing the gift tax liability that might otherwise be incurred. This is done by utilizing your ability to gift up to $13,000 per year per recipient without incurring gift tax. By transferring portions of your business in this manner, over time you may manage to transfer a significant portion of your business free from gift tax. Clearly, the disadvantage of relying solely on this method of transferring your business is the amount of time necessary to complete the transfer of your entire estate. In addition, Section 6166 of the Internal Revenue Code allows any estate taxes incurred because of the inclusion of a closely held business in your estate to be deferred for 5 years (with interest-only payments for the first four years and interest plus principal due in the fifth year), and then paid in annual installments over a period of up to 10 years. This allows your beneficiaries more time to raise sufficient funds or obtain more favorable interest rates. The business must exceed 35 percent of your gross estate and must meet other requirements to qualify.

Selling your business interest outright When you sell your business interest to a family member or someone else, you receive cash (or assets you can convert to cash) that can be used to maintain your lifestyle or pay your estate taxes. You choose when to sell--now, at your retirement, at your death, or anytime in between. As long as the sale is for the full fair market value (FMV) of the business, it is not subject to gift tax or estate tax. But if the sale occurs before your death, it may be subject to capital gains tax.

Transferring your business interest with a buy-sell agreement A buy-sell agreement is a legal contract that prearranges the sale of your business interest between you and a willing buyer. A buy-sell agreement lets you keep control of your interest until the occurrence of an event that the agreement specifies, such as your retirement, disability, or death. Other events like divorce can also be included as triggering events under a buy-sell agreement. When the triggering event occurs, the buyer is obligated to buy your interest from you or your estate at the FMV. The buyer can be a person, a group (such as co-owners), or the business itself. Price and sale terms are prearranged, which eliminates the need for a fire sale if you become ill or when you die. Remember, you are bound under a buy-sell agreement: You can't sell or give your business to anyone except the buyer named in the agreement without the buyer's consent. This could restrict your ability to reduce the size

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of your estate through lifetime gifts of your business interest, unless you carefully coordinate your estate planning goals with the terms of your buy-sell agreement.

Grantor retained annuity trusts or grantor retained unitrusts A more sophisticated business succession tool is a grantor retained annuity trust (GRAT) or a grantor retained unitrust (GRUT). GRAT/GRUTs are irrevocable trusts to which you transfer appreciating assets while retaining an income payment for a set period of time. At either the end of the payment period or your death, the assets in the trust pass to the other trust beneficiaries (the remainder beneficiaries). The value of the retained income is subtracted from the value of the property transferred to the trust (i.e., a share of the business), so if you live beyond the specified income period, the business may be ultimately transferred to the next generation at a reduced value for estate tax or gift tax purposes.

Private annuities A private annuity is the sale of property in exchange for a promise to make payments to you for the rest of your life. Here, you transfer complete ownership of the business to family members or another party (the buyer). The buyer in turn makes an unsecured promise to make periodic payments to you for the rest of your life (a single life annuity) or for your life and the life of a second person (a joint and survivor annuity). A joint and survivor annuity provides payments until the death of the last survivor; that is, payments continue as long as either the husband or wife is still alive. Again, because a private annuity is a sale and not a gift, it allows you to remove assets from your estate without incurring gift tax or estate tax. Until recently, exchanging property for an unsecured private annuity allowed you to spread out any capital gain realized, deferring capital gains tax. However, this tax benefit has generally been eliminated. If you're considering a private annuity, be sure to talk to a tax professional.

Self-canceling installment notes A self-canceling installment note (SCIN) allows you to transfer the business to the buyer in exchange for a promissory note. The buyer must make a series of payments to you under that note. A provision in the note states that at your death, the remaining payments will be canceled. SCINs provide for a lifetime income stream and avoidance of gift tax and estate tax similar to private annuities. Unlike private annuities, SCINs give you a security interest in the transferred business.

Family limited partnerships A family limited partnership can also assist in transferring your business interest to family members. First, you establish a partnership with both general and limited partnership interests. Then, you transfer the business to this partnership. You retain the general partnership interest for yourself, allowing you to maintain control over the day-to-day operation of the business. Over time, you gift the limited partnership interest to family members. The value of the gifts may be eligible for valuation discounts as a minority interest and for lack of marketability. If so, you may successfully transfer much of your business to your heirs at significant transfer tax savings.

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Life Insurance Basics Life insurance is an agreement between you (the policy owner) and an insurer. Under the terms of a life insurance policy, the insurer promises to pay a certain sum to a person you choose (your beneficiary) upon your death, in exchange for your premium payments. Proper life insurance coverage should provide you with peace of mind, since you know that those you care about will be financially protected after you die.

The many uses of life insurance One of the most common reasons for buying life insurance is to replace the loss of income that would occur in the event of your death. When you die and your paychecks stop, your family may be left with limited resources. Proceeds from a life insurance policy make cash available to support your family almost immediately upon your death. Life insurance is also commonly used to pay any debts that you may leave behind. Life insurance can be used to pay off mortgages, car loans, and credit card debts, leaving other remaining assets intact for your family. Life insurance proceeds can also be used to pay for final expenses and estate taxes. Finally, life insurance can create an estate for your heirs.

How much life insurance do you need? Your life insurance needs will depend on a number of factors, including whether you're married, the size of your family, the nature of your financial obligations, your career stage, and your goals. For example, when you're young, you may not have a great need for life insurance. However, as you take on more responsibilities and your family grows, your need for life insurance increases. There are plenty of tools to help you determine how much coverage you should have. Your best resource may be a financial professional. At the most basic level, the amount of life insurance coverage that you need corresponds directly to your answers to these questions: • What immediate financial expenses (e.g., debt repayment, funeral expenses) would your family face upon your death? • How much of your salary is devoted to current expenses and future needs? • How long would your dependents need support if you were to die tomorrow? • How much money would you want to leave for special situations upon your death, such as funding your children's education, gifts to charities, or an inheritance for your children? Since your needs will change over time, you'll need to continually re-evaluate your need for coverage.

How much life insurance can you afford? How do you balance the cost of insurance coverage with the amount of coverage that your family needs? Just as several variables determine the amount of coverage that you need, many factors determine the cost of coverage. The type of policy that you choose, the amount of coverage, your age, and your health all play a part. The amount of coverage you can afford is tied to your current and expected future financial situation, as well. A financial professional or insurance agent can be invaluable in helping you select the right insurance plan.

What's in a life insurance contract? A life insurance contract is made up of legal provisions, your application (which identifies who you are and your medical declarations), and a policy specifications page that describes the policy you have selected, including any options and riders that you have purchased in return for an additional premium.

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Provisions describe the conditions, rights, and obligations of the parties to the contract (e.g., the grace period for payment of premiums, suicide and incontestability clauses). The policy specifications page describes the amount to be paid upon your death and the amount of premiums required to keep the policy in effect. Also stated are any riders and options added to the standard policy. Some riders include the waiver of premium rider, which allows you to skip premium payments during periods of disability; the guaranteed insurability rider, which permits you to raise the amount of your insurance without a further medical exam; and accidental death benefits. The insurer may add an endorsement to the policy at the time of issue to amend a provision of the standard contract.

Types of life insurance policies The two basic types of life insurance are term life and permanent (cash value) life. Term policies provide life insurance protection for a specific period of time. If you die during the coverage period, your beneficiary receives the policy death benefit. If you live to the end of the term, the policy simply terminates, unless it automatically renews for a new period. Term policies are available for periods of 1 to 30 years or more and may, in some cases, be renewed until you reach age 95. Premium payments may be increasing, as with annually renewable 1-year (period) term, or level (equal) for up to 30-year term periods. Permanent insurance policies provide protection for your entire life, provided you pay the premium to keep the policy in force. Premium payments are greater than necessary to provide the life insurance benefit in the early years of the policy, so that a reserve can be accumulated to make up the shortfall in premiums necessary to provide the insurance in the later years. Should the policyowner discontinue the policy, this reserve, known as the cash value, is returned to the policyowner. Permanent life insurance can be further broken down into the following basic categories: • Whole life: You generally make level (equal) premium payments for life. The death benefit and cash value are predetermined and guaranteed. Any guarantees associated with payment of death benefits, income options, or rates of return are based on the claims-paying ability of the insurer. • Universal life: You may pay premiums at any time, in any amount (subject to certain limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be decreased, and the cash value will grow at a declared interest rate, which may vary over time. • Variable life: As with whole life, you pay a level premium for life. However, the death benefit and cash value fluctuate depending on the performance of investments in what are known as subaccounts. A subaccount is a pool of investor funds professionally managed to pursue a stated investment objective. The policyowner selects the subaccounts in which the cash value should be invested. • Variable universal life: A combination of universal and variable life. You may pay premiums at any time, in any amount (subject to limits), as long as policy expenses and the cost of insurance coverage are met. The amount of insurance coverage can be decreased, and the cash value goes up or down based on the performance of investments in the subaccounts. Note:Variable life and variable universal life insurance policies are offered by prospectus, which you can obtain from your financial professional or the insurance company. The prospectus contains detailed information about investment objectives, risks, charges, and expenses. You should read the prospectus and consider this information carefully before purchasing a variable life or variable universal life insurance policy.

Your beneficiaries You must name a primary beneficiary to receive the proceeds of your insurance policy. You may name a contingent beneficiary to receive the proceeds if your primary beneficiary dies before the insured. Your beneficiary may be a person, corporation, or other legal entity. You may name multiple beneficiaries and specify what percentage of the net death benefit each is to receive. You should carefully consider the ramifications of

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your beneficiary designations to ensure that your wishes are carried out as you intend. Generally, you can change your beneficiary at any time. Changing your beneficiary usually requires nothing more than signing a new designation form and sending it to your insurance company. If you have named someone as an irrevocable (permanent) beneficiary, however, you will need that person's permission to adjust any of the policy's provisions.

Where can you buy life insurance? You can often get insurance coverage from your employer (i.e., through a group life insurance plan offered by your employer) or through an association to which you belong (which may also offer group life insurance). You can also buy insurance through a licensed life insurance agent or broker, or directly from an insurance company. Any policy that you buy is only as good as the company that issues it, so investigate the company offering you the insurance. Ratings services, such as A. M. Best, Moody's, and Standard & Poor's, evaluate an insurer's financial strength. The company offering you coverage should provide you with this information.

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Types of Life Insurance Policies You know that you need life insurance. However, with the wide variety of insurance policies available, you may find choosing the right one difficult. It's really not as confusing as it seems, however, once you understand the basic types of life insurance policies.

Term life insurance With a term policy, you get "pure" life insurance coverage. Term insurance provides a death benefit for only a specific period of time. If you die during the coverage period, your beneficiary (the person you named to collect the insurance proceeds) receives the death benefit (the face amount of the policy). If you live past the term period, your coverage ends, and you get nothing back. Term insurance is available for periods ranging from 1 year to 30 years or more. You may be able to renew the policy for a new term without regard to your health, but at a higher rate. Your premium goes toward administrative expenses, company profit, and a reserve account that pays claims to those who die during the term period. As you get older, the chance that you will die increases. To cover this increasing risk, your premiums will likewise rise at regular intervals. For this reason, premiums that were quite inexpensive at the time you initially purchased your term policy will become much more expensive as you get older. Most term insurance also has a conversion feature that allows you to switch your coverage to some type of permanent insurance without answering health questions.

Traditional whole life insurance--guaranteed premiums Whole life insurance is a type of permanent insurance or cash value insurance. Unlike term insurance, which provides coverage for a particular period of time, permanent insurance provides coverage for your entire life. When you make premium payments, you pay more than is needed to pay for the current costs of insurance coverage and expenses. The excess payment is credited to a cash value account. This cash value account allows the insurance company to charge a level, guaranteed premium* and to provide a death benefit and cash value throughout the life of the policy. As you make payments, the cash value account grows. With traditional whole life insurance, the cash value account is guaranteed* and held in the insurance company's general portfolio--you don't get to choose how the cash value account is invested. However, the cash value can potentially grow beyond its guaranteed amount through the payment of dividends (profits earned by a "mutual" insurer). The cash value grows tax deferred and can either be used as collateral to borrow from the insurance company or be directly accessed through a partial or complete surrender of the policy. It is important to note, however, that a policy loan or partial surrender will reduce the policy's death benefit, and a complete surrender will terminate coverage altogether. If you live to the policy's maturity date, the policy will "endow," and the insurance company will pay the accumulated cash value (equal at maturity to the death benefit) to you.

Universal life--openness and flexibility Universal life is another type of permanent life insurance with a death benefit and a cash value account. Like whole life insurance, the cash value is held in the insurance company's general portfolio--you don't get to choose how the account is invested. Unlike traditional whole life, universal life insurance allows you flexibility in making premium payments. A universal life insurance policy will generally provide very broad premium guidelines (i.e., minimum and maximum premium payments), but within these guidelines you can choose how much and when you pay premiums. Reducing or increasing premiums will impact the growth of the cash value component and possibly the death benefit. You are also free to change the policy's death benefit directly (again, within the limits set out by the policy) as your financial circumstances change. Be aware, however, that if you want to raise the amount of

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coverage, you'll need to go through the insurability process again, probably including a new medical exam, and your premiums will increase. Universal life policies reveal all aspects of the policy's cost structure, including the cost of insurance (the portion set aside to pay claims) and expenses. This information is not always available with other types of policies. Another feature of universal life is the option to add the cash value to the face amount when the death benefit is paid. For example, say you die when you have $200,000 of cash value within your $1 million policy. If you chose the enhanced benefit option, your beneficiary receives $1.2 million. Keep in mind, however, that nothing is free--the increased benefit is reflected in premium calculations.

Variable life--you make the investment decisions Like other types of permanent life insurance, variable life insurance has a cash value account. A variable life insurance policy, however, allows you to choose how your cash value account is invested. A variable life policy generally contains several investment options, known as subaccounts, that are professionally managed to pursue a stated investment objective. Choices can range from a fixed interest subaccount to a highly volatile international growth subaccount. Variable life insurance policies require a fixed annual premium for the life of the policy and may provide a minimum guaranteed death benefit*. If the cash value account exceeds a certain amount, the death benefit will increase.

Variable universal life--the ultimate in flexibility Variable universal life combines all of the options and flexibility of universal life with the investment choices of a variable policy. It is a true hybrid product, and you make most of the policy decisions. You decide how often and how much your premium payments are to be, within guidelines. With most variable universal life policies, you get no guaranteed minimum cash value or death benefit. Your premium payments in excess of administrative costs and the cost of insurance are invested in the variable subaccounts that you choose. As with both variable and universal life insurance, your policy may lapse if the cash value account falls below a certain level. Low-interest loans can be taken against your cash value account, and cash withdrawals are available. However, keep in mind that your policy's face amount is reduced by the amount of a policy withdrawal, and withdrawals may be taxable. You have the option of choosing a fixed or enhanced death benefit. Today, most variable universal life policies offer a rider that guarantees the death benefit at a certain level regardless of the performance of the subaccounts, provided that a stated minimum premium is paid for a predetermined number of years*. Note:Variable life and variable universal life insurance policies are offered by prospectus, which you can obtain from your financial professional or the insurance company. The prospectus contains detailed information about investment objectives, risks, charges, and expenses. You should read the prospectus and consider this information carefully before purchasing a variable life or variable universal life insurance policy. *Any guarantees associated with payment of death benefits, income options, or rates of return are subject to the claims-paying ability of the insurer.

Joint or survivorship life for you and your spouse Some married couples choose to buy insurance together within the same policy. These policies take the form of either a joint first-to-die or a joint second-to-die (survivorship) design. With first-to-die, the death benefit is paid at the death of the spouse who dies first. With second-to-die, no death benefit is paid until both spouses are deceased. Second-to-die policies are commonly used in estate planning to create a pool of funds to pay estate taxes and other expenses due at the death of the second spouse. Joint and survivorship policies are generally available under any type of permanent life insurance. Other than the fact that two people are insured under one policy, the policy characteristics remain the same.

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Can I transfer my business through my will? Question: Can I transfer my business through my will?

Answer: Yes, you can use your will to transfer your business interest after your death. You can also use your will to specify a long-term succession plan for your business if, for instance, you want one of your children (who may be currently active in the business) to take over and run it when you're gone. Without such a clause in your will, your interest could possibly be distributed equally to all of your children, even though you did not intend that result. A disadvantage of transferring your business through your will is that the full value of your interest will be included in your taxable estate. Unless you have made provisions for additional liquidity (e.g., by using life insurance), your heirs may be forced to sell the company just to pay the estate taxes. Assets disposed of through a will are subject to probate, the court-supervised process of administering a will. Probate can be expensive and time consuming. It could also result in business interruptions, which in turn could result in a loss of customers and employees if confusion develops over who's running the business and how it will continue to operate. The probate process is also public, which may allow others to discover details about your estate that you would rather not disclose. Talk to your lawyer and your financial professional about your business interest and what you would like to happen to it at your death. Transferring your interest through your will is just one method that can be used. Other options (or combinations of options) can also be used to accomplish your wishes. Some methods may allow you to equalize distributions to your heirs without splitting up the business. Some can help you minimize the taxable value of your business interest. A buy-sell agreement can be drafted now to establish a plan for the future succession of your business interest. Trusts may also be used to help accomplish your goals. All of these strategies take time to plan and implement, so the best time to begin planning is now.

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What is a buy-sell agreement? Question: What is a buy-sell agreement?

Answer: A buy-sell agreement is a contract that provides for the future sale of your business interest or for your purchase of a co-owner's interest in the business. Buy-sell agreements are also known as business continuation agreements and buyout agreements. Under the terms of a buy-sell agreement (assuming you are the seller), you and the buyer enter into a contract for the transfer of your business interest by you (or your estate) at the occurrence of a specified triggering event. Typical triggering events include death, disability, and retirement. Ideally, buy-sell agreements are fully funded, and life insurance is frequently used for this purpose. After determining the value of the business, you, your advisors, and the other parties to the agreement will determine the best way to fund the transaction, and the triggers appropriate for your business situation. If you own a business and are concerned about how the death of a co-owner might affect its operation, a funded buy-sell agreement can help by ensuring that you will be able to purchase your partner's share, eliminating any doubts about the continuation of the business. You can also avoid the dilemma of being in business with your partner's survivors. There are also costs and possible disadvantages involved in establishing a buy-sell agreement. One such disadvantage is that the agreement typically limits your freedom to sell the business to outside parties. If you think that a buy-sell agreement might benefit you and your business, consult your attorney and financial professional about the pros and cons of setting one up.

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Page 106 of 137

How can I determine what my business is worth for estate and gift tax purposes? Question: How can I determine what my business is worth for estate and gift tax purposes?

Answer: Determining the value of your business is something you should not attempt to do on your own, especially because the IRS could challenge your valuation. Even the IRS acknowledges that no one true fair market value (FMV) exists for a closely held business. There are appraisers who specialize in determining the value of businesses. Your CPA may be one of these specialists or know someone who is. FMV is defined by the federal estate and gift tax regulations as "the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts." It is the sale price that a hypothetical buyer and seller would reach, not necessarily the price that the actual owner would agree to or the price that an actual buyer might be willing to pay. You may have had your business appraised in the past for another purpose. As tempting as it might be, don't use an old appraisal for a new transaction. The purpose of the appraisal can affect the valuation assigned, and time can change the factors that go into the appraisal calculation. Numerous factors might affect the value of a business. However, the IRS has identified a number of relevant considerations: • Nature of the business and history of the company • Outlook for the economy in general and an industry in particular • Book value and financial condition of the company • Earnings capacity • Dividend-paying capacity • Goodwill/intangible value • Sales of stock and the size of block to be valued • Market value of stock in comparable businesses A number of different methods exist for determining the FMV for a closely held business. Generally, only an appraiser will know how to analyze these factors to reach a conclusion as to the FMV of your business.

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How can I keep my business in the family? Question: How can I keep my business in the family?

Answer: There are several ways to keep your business in the family. The method you choose will depend on whether you wish to keep ownership and control of the business until your death, or begin transferring ownership (and possibly control) to your family during your lifetime. In addition, your options will be affected by the business entity itself. A sole proprietorship, for example, may have different options than a partnership or a corporation. The presence of a buy-sell agreement or another restrictive agreement between current owners may also impact your options. Each of the options for keeping your business in the family bears its own tax consequences and can be affected by your overall estate planning goals. If you wish to maintain ownership until your death, you can transfer your business to family members using your will. Depending on the value of your estate and the year in which you die, your business interest may be included in your estate and subject to estate taxes under this method. However, under certain circumstances, valuation discounts may be available to lower the taxable value of your business interest. See a tax attorney for more information. If you want to begin transferring ownership of the business during your lifetime, you can structure the transfers to occur in such a manner that you retain the controlling interest until you are ready to fully remove yourself from the business. You can make lifetime gifts of interests in your business to your family members. Depending on the amount of the gift and to whom the gift is made, lifetime transfers of your business interest may be subject to federal and/or state gift tax. (See a tax attorney for more information.) Or, you can combine lifetime gifting with an outright sale of your interest. The sale can occur either during your lifetime or after your death. You may want to use a trust to facilitate the transfer of your business, or transfer ownership through the use of another entity, such as a family limited partnership. A buy-sell agreement can be established now to provide for the future sale of your business to one or more family members. Buy-sell agreements are legal agreements that establish a buyer for your business, the price or pricing mechanism to be used, and the events (such as retirement, death, or disability) that will trigger the sale. Be aware that once you are bound under such an agreement, you may not be allowed to make gifts of your business interest or sell to anyone other than the buyer named in the agreement, depending on the terms of the agreement.

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Page 108 of 137

What is the difference between a living will and a living trust? Question: What is the difference between a living will and a living trust?

Answer: These two very important estate planning devices are quite different from each other but serve similar purposes. A living will lets you manage your health-care decisions in case you become incapacitated. A living trust lets you manage your property in case you become incapacitated. A living will is not actually a will at all. It is a legal document that becomes effective if you become so ill or injured that you can't make responsible health-care decisions for yourself. It lets you approve or decline certain types of medical care in advance, even if you die as a result. A living will is allowed only in some states. If you don't live in one of those states, you may be able to accomplish the same goal using a durable power of attorney for health care, health-care proxy, or Do Not Resuscitate order. By comparison, a living trust is just what it says. It is a revocable trust you create while you are living. You transfer property to the trust, and the trust then "owns" it. You name yourself as trustee and someone else as a successor trustee. You manage the property in the trust unless you become incapacitated (or until you die), in which case your successor trustee automatically steps in to continue managing the property for you.

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Page 109 of 137

What is probate and why do I want to avoid it? Question: What is probate and why do I want to avoid it?

Answer: Probate is the court process of proving a decedent's will and/or supervising the administration of a decedent's estate. This process takes place in the probate court, which is a special court designed for this function. State law governs the proceedings in the probate court, so they vary from state to state. Generally, however, probate proceedings are initiated when someone petitions the court. If there is a will, the petitioner must first prove that the will is valid. The court then watches over the executor while he or she settles the estate. If there is no valid will, the court appoints an administrator to settle the estate. Why do you want to avoid probate? Because for some estates, it may be a time-consuming, costly, and public procedure. The entire process can take as little as three months or as much as two years (or longer if there is litigation). During this time, assets cannot be distributed to your heirs. These assets may lose value during this time, or your family may suffer because they cannot reach the funds they need for their support. Probate costs may consist of court costs, publication costs for legal notices, attorney fees, executor fees, bond premiums, and appraisal fees. The total cost for probating an estate can range from $250 to $10,000 (or more if there is litigation). Because probate costs are paid for by your estate, this money does not go to your heirs. Finally, probate is a public process that makes your will a public document, open to anyone who wants to see it. Your private affairs are no longer private.

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What will happen if I die without a will? Question: What will happen if I die without a will?

Answer: Some people leave instructions about who gets what property in a legal document known as a will. If you do not have a will, you leave no legal instructions about how your property is to be distributed to your heirs. The state then steps in and dictates how your property will be distributed. The state does this by following laws known as intestacy laws. Each of the states has adopted its own intestacy laws, so the pattern of distribution varies from state to state. However, a typical pattern may be that half of the property goes to the spouse, and the other half is split equally among the children. The major disadvantage of this is that your property may not be distributed according to your wishes. There are other drawbacks to this situation, as well. Instructions about other special matters, such as who will settle the estate or who will take care of minor children, are also left in a will. If you do not have a will, these matters will also be determined by the state. Although the state will do what it thinks is in the best interest of your family, its actions may not be consistent with what you would have wanted.

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Page 111 of 137

Does property owned jointly avoid probate? Question: Does property owned jointly avoid probate?

Answer: It depends. Generally, there are four forms of joint ownership. In legal terms, they are known as (1) joint tenancy with rights of survivorship, (2) tenancy in common, (3) tenancy by the entirety, and (4) community property. Ordinarily, interests in property held as joint tenancy with rights of survivorship, tenancy by the entirety, and community property held under joint tenancy avoid probate. An interest in property held as tenancy in common passes by will and thus does not avoid probate. Two or more people can hold property as joint tenants with rights of survivorship or tenants in common. Only married couples can hold property as tenants by the entirety, and only married couples who live in community property states can own property as community property. Although an interest in property held as tenancy in common must pass through probate, it is also freely transferable to anyone. Conversely, interests in property held as joint tenancy with rights of survivorship, tenancy by the entirety, or community property held under joint tenancy pass automatically to the remaining owner(s).

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Page 112 of 137

Isn't estate planning only for the rich? Question: Isn't estate planning only for the rich?

Answer: In a word, no. Estate planning allows you or anyone to implement certain tools now to ensure that your concerns and goals are fulfilled after you die. Your objective may be to simply make sure that your loved ones are provided for. Or you may have more complex goals, such as avoiding probate or reducing those dreaded estate taxes. Estate planning can be as simple as implementing a will (the cornerstone of any estate plan) and purchasing life insurance, or as complicated as executing trusts and exploring other sophisticated tax and estate planning techniques. Therefore, estate planning is important whether you are wealthy or whether you have only a small estate. In fact, estate planning may be more important if you have a smaller estate because final expenses will have a greater impact on your estate. Wasting even a single asset may cause your loved ones to suffer from lack of financial resources. You may also want to plan your estate if you have special circumstances such as any of the following: • You have minor or special needs children • Your spouse is uncomfortable with or incapable of handling financial matters • You have property in more than one state • You have special property, such as artwork or collectibles

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How can I minimize taxes on my estate? Question: How can I minimize taxes on my estate?

Answer: This question may seem simple, but the answer is not so easy. In fact, there are experts who make their living answering just this question. Estate tax liability depends on the year in which you die and the value of your estate when you die (see the following chart). Year of Death

Value of Estate on which Estate Tax May Be Imposed (estates in excess of the applicable exclusion amount)

2009

$3.5 million or more

2010

Estate taxes will not be imposed on any estate

2011 and thereafter $1 million or more Thus, you can minimize estate tax by reducing the value of your estate until it is below the applicable exclusion amount. There are many ways you can accomplish this. The best way(s) for you may not be the best ways for others and vice versa. (Note: We're discussing only federal estate tax here. Your estate may also be subject to state death taxes. See a tax attorney for more information about state death taxes.) One way is to make lifetime gifts. Be aware, however, that certain lifetime gifts may trigger gift tax (Note: Though estate taxes will not be imposed in 2010, the gift tax remains in effect.). Gifts that do not trigger gift tax include the following: • Gifts made to U.S. citizen spouses and certain charities • Gifts of $133,000 or less made to non-U.S. citizen spouses (in 2009) • Certain payments made for tuition or medical expenses on the behalf of others • Gifts up to the annual gift tax exclusion amount of $13,000 (in 2009) • Gifts made that fall under the gift tax applicable exclusion amount of $1 million (Note: Any portion of the gift tax applicable exclusion amount used for lifetime gifts effectively reduces the applicable exclusion amount that will be available for estate tax purposes.) See a tax attorney for more information about federal and state gifts taxes. Another common technique to minimize estate taxes is to transfer assets to an irrevocable trust. Such a transfer may be subject to gift tax on the value of the assets at the time of the transfer, but the assets, plus any future appreciation, are removed from your gross estate. There are many types of irrevocable trusts, each created for a specific purpose. Be aware, however, that as the name implies, an irrevocable trust cannot be revoked or amended. This is just a brief glimpse of some of the techniques used to minimize estate taxes. For more information, or to discuss how these techniques might apply to your own situation, you should consult a qualified tax attorney.

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I want my son to have my collection of baseball cards when I die. How do I make sure he gets it? Answer: The only way you can be absolutely certain that a specific individual gets a specific asset is to give it them before you die. If you don't choose that option however, you can make your wishes known in many ways: verbal instructions, written instructions, audio or video recordings, or labelling your instructions right on the objects themselves. However, those methods are not legally binding and might result in challenges or disputes. The best way is to make a specific bequest in your will or an addendum that is incorporated into your will.

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Can I disinherit relatives I don't like? Question: Can I disinherit relatives I don't like?

Answer: Disinheritance is intentionally depriving someone who would otherwise be a rightful heir from receiving your estate. Typically, your heirs include your spouse, your descendants, and possibly other relatives. Although you may feel you have a good reason for disinheritance, be aware that a majority of non-community-property states provide statutory protection for spouses. That is, most states provide that if a spouse is disinherited under the decedent's will, he or she may elect to take under the state intestacy laws instead. These laws vary from state to state but generally entitle the spouse to receive from one-third to one-half of the decedent's estate. Although only one state provides similar protection for the children of a decedent, simply leaving a child out of the will may not succeed in disinheriting that child. In the absence of any mention in the will, the child can either argue that this was an oversight on the part of the parent or contest the will on other grounds. Moreover, courts are often reluctant, in the absence of evidence to the contrary, to rule against the disinherited child. Therefore, if a child is disinherited, it is best to mention him or her in the will, even if only for a token amount.

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Do I need an attorney to prepare my will? Question: Do I need an attorney to prepare my will?

Answer: Legally, no. Practically speaking, yes. A will does not need to be prepared by an attorney for it to be legally effective. A will that you draft yourself, or even a preprinted will form purchased in an office supply store, will be legally effective if you are of legal age in your state (i.e., 18), are mentally competent, and execute the will properly. This means the will must be acknowledged and signed by you in front of witnesses. The required number and age of the witnesses varies from state to state, though two witnesses who are at least age 18 is typical. In addition, the witnesses should not be anyone who will benefit under your will. Some states also require that a will must be notarized to be legally effective. However, most people feel uncomfortable with a do-it-yourself will. They generally have some questions that should be addressed by an experienced estate planning attorney. In addition, some people have more than just basic concerns or are in complex situations where drafting the will properly is vital. Legal assistance can help ensure that your intentions are clearly communicated and no questions exist at the time of your death. You should also seriously consider professional assistance if your personal situation includes concerns such as: • You have minor children, children from a prior marriage, or a beneficiary with special needs • You own significant assets and are concerned about minimizing estate taxes at your death • You want to achieve certain goals, such as controlling the management and distribution of your property after your death • You have heirs you wish to disinherit, or there is a chance your will may be contested after your death

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Who should I name as guardian of my children in case my spouse and I should die at the same time? Question: Who should I name as guardian of my children in case my spouse and I should die at the same time?

Answer: This is an extremely important question. After all, what can be more important than choosing a surrogate parent for your minor children? This process takes careful consideration and may be emotionally difficult, so you'll want to take your time. The best guardian may not be the obvious choice. You generally name a guardian in your will. Of course, spouses typically name each other as guardian first and then name an alternate guardian or guardians in case the spouse cannot serve for any reason, including death. Some parents nominate one guardian or guardians to care for the children and a different guardian to care for the children's assets and finances. All of this is perfectly permissible. The court will have final approval but generally gives your selection the highest regard. Who is the right guardian for your children? It's customary for people to name parents, siblings, or best friends. You should select a responsible person with good character who shares your values and has the time and willingness to take on the job. When choosing a guardian, some of the things you may want to consider are: • Who loves and cares about your children? • Who do your children love and respect? • Who do you trust? • Who is financially and emotionally able to take on the responsibility? • Who is willing to take on the responsibility? Be sure to talk with any prospective guardian before you nominate that person. Impress upon him or her the gravity of your request. Discuss your wishes regarding how you want your children to be raised (e.g., you want them to have a religious upbringing, or you want them to go to college) and what financial resources will be available (e.g., you have life insurance). Give the potential guardian plenty of time to think over your request carefully.

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Who should I name as trustee? Question: Who should I name as trustee?

Answer: A trustee is an institution or person who is the legal owner of the property held by the trust and who is responsible for using the trust property for the benefit of the trust beneficiaries according to the terms of the trust document. The trustee can be held personally liable if those duties are breached. You may select one trustee or multiple trustees, depending on your needs. Who you name as trustee will depend on the type of trust you establish and your individual needs and goals. Generally, you want the trustee to be capable of administering the trust according to the terms of the trust document. In addition to the willingness to serve as trustee, the person or institution selected may need to have investment experience and good record-keeping abilities. You may also want a trustee who relates well with the beneficiaries and is sensitive and flexible regarding their changing needs. Sometimes, the creators of trusts, known as grantors, like to name themselves as trustee. However, there are two situations where this is inadvisable: • Where the grantor is also the sole beneficiary of the trust • Where an irrevocable trust has been created for the primary purpose of minimizing income and estate taxes

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What is a living trust? Question: What is a living trust?

Answer: A living trust is a popular estate planning tool that lets you (1) retain control over the trust property while you are alive, (2) avoid guardianship in case you become incapacitated and can no longer handle your own financial affairs, and (3) pass trust property outside of probate when you die. Legally, a living trust is a separate entity that you create while you are living to "own" property, such as a house, boat, jewelry, or mutual funds. The trust is revocable, which means that you can make changes to it, or even end it, at any time. For example, you may want to remove certain property from the trust or change the beneficiaries. Or you may decide not to use the trust anymore because it no longer meets your needs. A living trust gives you the flexibility to do any of these things. However, you do pay a price for this flexibility. A living trust does not avoid estate or income taxes, nor does it protect your assets from potential creditors. A big advantage of the living trust is that it allows a successor trustee to automatically take your place and manage the trust assets if you become incapacitated. For example, you have an accident and are in a coma for six months. Your successor trustee can take your place and manage the trust while you are unable to do so. That way, your affairs continue as usual, and you should suffer no financial setback. In addition, assets in the living trust do not pass through your will when you die. Instead, the assets in the trust are distributed by the trustee according to the terms you establish in the trust. Also, the assets in the trust are not part of your probate estate. This may get them into the hands of your beneficiaries faster or, if you desire, provide that the assets be held until the beneficiaries meet certain criteria or attain a certain age. Finally, since the trust is not subject to probate, the terms of the trust are private.

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What is the difference between a power of attorney and a durable power of attorney? Question: What is the difference between a power of attorney and a durable power of attorney?

Answer: A power of attorney is a legal document that authorizes someone to act for you. You name someone known as an agent or attorney-in-fact (though the person need not be an attorney) who steps into your shoes, legally speaking. You can authorize your agent to do such things as sign checks and tax returns, enter into contracts, buy or sell real estate, deposit or withdraw funds, run a business, or anything else you do for yourself. A power of attorney can be broad or limited. Since the power-of-attorney document is tailored for its specific purpose, your agent cannot act outside the scope designated in the document. For example, you may own a home in another state that you want to sell. Instead of traveling to that state to complete all the necessary paperwork, you can authorize someone already in that state to do this for you. When the transactions to sell the home are complete, the agency relationship ends, and the agent no longer holds any power. A regular power of attorney ends when its purpose is fulfilled or at your incapacity or death. A durable power of attorney serves the same function as a power of attorney. However, as its name implies, the agency relationship remains effective even if you become incapacitated. This makes the durable power of attorney an important estate planning tool. If incapacity should strike you, your agent can maintain your financial affairs until you are again able to do so, without any need for court involvement. That way, your family's needs continue to be provided for, and the risk of financial loss is reduced. A durable power of attorney ends at your death.

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What is an advanced directive for health care? Question: What is an advanced directive for health care, and will it help me avoid court involvement during incapacity?

Answer: At some point in your life, perhaps as a result of illness, accident, or advanced age, you may lack the mental capacity to make or communicate responsible decisions about your own health care. Without directions to the contrary, medical professionals are generally compelled to make every effort to save and maintain your life. Depending on your attitude toward various medical treatments and your views on the quality of life, you may want to take steps now to control your future health-care decisions. You can do so by adopting one or more advanced directives for health care. If you do not adopt such a directive for health care, a family member may have to petition the court for the authority to make those decisions for you. There are three types of advanced directives for health care. Each serves a different function, as described briefly below. Be aware that not all are allowed in every state. Check with your state to find out which one(s) you can consider. • Living will: A living will lets you decline certain types of medical care, even if you will die as a result. Generally, a living will can be used only to decline medical treatment that "serves only to postpone the moment of death." • Durable power of attorney for health care, or health-care proxy: A durable power of attorney for health care, or health-care proxy, lets you appoint a representative to make medical decisions on your behalf. It becomes effective only when you've become incapacitated. You decide how much power your representative will have. • Do Not Resuscitate order (DNR): A DNR is your doctor's order that tells all other medical personnel not to perform CPR if you go into cardiac arrest. There are two types of DNRs. One is used while you are hospitalized. The other is used while you are outside the hospital.

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What is a life insurance trust and why should I consider establishing one? Question: What is a life insurance trust and why should I consider establishing one?

Answer: A life insurance trust is a trust that has the power to purchase life insurance policies on the person who establishes the trust (the grantor), the grantor's spouse, or the trust beneficiaries. The trust owns the life insurance policy and collects the death proceeds when the insured dies. The trustee then distributes the death benefits to the trust beneficiaries according to the terms included in the trust document. The trust document will identify who the trust beneficiaries are, how and when trust beneficiaries may receive distributions from the trust, and how the money in the trust may be invested. Your life insurance trust may be revocable, meaning that you may make changes or revoke it, or irrevocable, meaning that you may not revoke, alter, or amend the trust once it has been established. The type you choose depends on your individual needs. Life insurance trusts may be established for a variety of estate planning purposes, including: • To provide security for your family after your death while providing control over how the death proceeds are invested or distributed to your beneficiaries • To provide liquidity to your estate to pay debts and obligations, such as estate taxes However, if the trust is revocable, if you are the trustee, or if the trust is required to use the death proceeds from the life insurance to pay your estate taxes and debts, the entire death benefit may be included in your taxable estate. The resulting taxes can significantly reduce the amount of the death proceeds available for your family. For many, keeping the death benefit out of their taxable estate is a key advantage of establishing a life insurance trust.

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Page 123 of 137

I just made a gift. Do I have to file a gift tax return? Answer: A federal gift tax return must be filed if any gifts you made during the calendar year were other than: • Gifts to your U.S. citizen spouse • Gifts to a political organization for its own use • Gifts to qualified charities, if no other interest has been transferred for less than adequate consideration or for other than a charitable use • Gifts totaling $13,000 or less to any one individual, unless you and your spouse are "gift-splitting" • Amounts paid on behalf of any individual as tuition to an educational organization or to any person who provides medical care for an individual However, you may want to file a gift tax return in certain circumstances even if the rules do not require it. For example, you should consider filing whenever you sell hard-to-value assets, such as real estate or stock in a family business, to a relative. This is because the IRS can claim that transactions between family members were actually gifts in disguise. Disclosing such transactions on a gift tax return means that the IRS has only three years to challenge the value. If you file a federal gift tax return, you must use Form 709 and file by April 15 of the year following the year in which the gift was made. The federal gift tax rules are complex. If you believe you have made gifts that might be subject to gift tax, you should consult an experienced tax specialist. Check with your state about its own rules regarding gifts, too.

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Do I have to accept a bequest I don't want? Question: Do I have to accept a bequest I don't want?

Answer: No, you don't. A bequest is a gift left to you in a decedent's will. You may not want the gift for a variety of reasons. For example, it may be a burden on you, or it may result in adverse tax consequences for you. Whatever your reason for not wanting the bequest, you can refuse it by disclaiming it. The bequest then goes to the recipient who is next in line under the will. But if you just say "No, thanks" to the bequest, you may be seen by the IRS as making a gift to the next recipient! This could cause federal and state gift tax consequences to you. To avoid these consequences, you must refuse the bequest by making a valid disclaimer. You must satisfy the following requirements for a disclaimer to be valid for federal gift tax purposes: • Your refusal must be irrevocable and unqualified. • The refusal must be in writing and signed. • The disclaimer must be received by the decedent's personal representative no later than nine months from the date of the decedent's death. • You must disclaim before receiving any benefit or interest in the bequest. • The disclaimed bequest must pass to the next recipient without any direction from you. • The disclaimer must be valid under state law. Check with your state to determine the requirements for a valid disclaimer.

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What makes up my taxable estate? Question: What makes up my taxable estate?

Answer: Your gross estate for federal estate tax purposes includes: • All property that you own at death (e.g., real estate, investments, business interests, personal property, mortgages held by you) • Property you have given away while retaining a lifetime interest in the income from the property, the use and enjoyment of the property, or the right to determine who ultimately receives the property • Gifts that don't take effect until you die • Property that you own jointly with another person except to the extent the other party contributed to the purchase price of the property • Property over which you possess a general power to appoint the property to yourself or others • Life insurance policies owned by you or in which you retained the right to change the beneficiary, cancel the policy, or make policy loans • Your one-half interest in community property • Annuities, pensions, and profit-sharing plans From your total gross estate, your estate may take deductions for funeral expenses, administration expenses (e.g., executor's fees, court costs, attorney's fees, appraiser's fees), certain debts and income taxes, state death taxes paid, and property left to your U.S. citizen spouse or to qualified charities. The net amount may be subject to estate taxes, if estate taxes are imposed in the year in which you die. However, the amount of taxes payable on your taxable estate may be reduced by the applicable exclusion amount (formerly known as the unified credit), and a credit for foreign death taxes.

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What is a family limited partnership, and will it help reduce estate taxes? Question: What is a family limited partnership, and will it help reduce estate taxes?

Answer: A family limited partnership (FLP) is a partnership created and governed by state law and generally comprises two or more family members. As a limited partnership, there are two classes of ownership: the general partner(s) and the limited partner(s). The general partner(s) has control over the day-to-day operations of the business and is personally responsible for the debts that the partnership incurs. The limited partner(s) is not involved in the operation of the business. Also, the liability of the limited partner(s) for partnership debts is limited to the amount of capital contributed. An FLP can be a powerful estate planning tool that may (1) help reduce income and transfer taxes, (2) allow you to transfer an ownership interest to other family members while letting you keep control of the business, (3) help ensure continued family ownership of the business, and (4) provide liability protection for the limited partner(s). An FLP is often formed by a member(s) of the senior generation who transfers existing business and income-producing assets to the partnership in exchange for both general and limited partnership interests. Some or all of the limited partnership interests are then gifted to the junior generation. The general partner(s) need not own a majority of the partnership interests. In fact, the general partner(s) can own only 1 or 2 percent of the partnership, with the remaining interests owned by the limited partner(s). There are several advantages to organizing your business as an FLP: • Limited partnership interests that are gifted to other family members are generally valued at less than the full fair market value of the underlying assets. That is, reasonable discounts to the value of the limited partnership interests are permitted for lack of marketability and lack of control. This means that by gifting the assets via a limited partnership interest instead of an outright transfer of the business assets themselves, you may be saving gift and estate taxes. • At death, only the value of your ownership interest in the partnership will be included in your gross estate. • The use of the partnership entity allows you to shift some of the business income and future appreciation of the business assets to other members of your family. • You maintain management control of the business while transferring limited ownership of the business to family members. • Restrictions within the partnership agreement limiting the transfer of the partnership interests may help ensure continuous family ownership of the business.

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Page 127 of 137

My life insurance’s death benefit will be paid to an ILIT. What if it’s needed to pay estate taxes? Question: The death benefit from insurance on my life will be paid to an irrevocable life insurance trust (ILIT). What if those funds are needed to pay my estate taxes?

Answer: Life insurance death proceeds paid to a valid ILIT may escape estate taxation in your estate as long as the trust owns the policy and you haven't retained any incidents of ownership in the policy, such as the right to change the beneficiary. Typically, the terms of the ILIT provide that the insurance proceeds be distributed from the trust to your beneficiaries in accordance with your wishes, which are spelled out in the trust document. Generally, life insurance is purchased within a trust to provide for your family while ensuring that the death benefit is not reduced by estate taxes. Unfortunately, to keep the death benefit from being included in your estate, you cannot require the trustee to use the proceeds to meet estate settlement costs. However, your estate may run into liquidity problems and need to have access to the cash in the ILIT to avoid having to sell assets in the estate. There are two ways to solve this dilemma. One is to include a provision in the ILIT that permits (but does not direct) the trustee to buy estate assets. The other is to give the trustee permission (but not instructions) to loan the estate some of the proceeds. If these techniques are used, the estate will have access to the funds it needs to meet its obligations without causing the assets in the ILIT to be included in your taxable estate.

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Page 128 of 137

What is the applicable exclusion amount? Question: What is the applicable exclusion amount?

Answer: The applicable exclusion amount (formerly known as the unified credit) exempts a certain amount of gifts made during your life from federal gift tax and exempts a certain amount of your estate from federal estate tax. In other words, if you are a U.S. citizen or resident, you will be able to leave a certain amount of your property free from gift tax or estate tax. The gift tax applicable exclusion amount is $1 million. Here is the current table for the estate tax applicable exclusion amount: Estates of those who die during: The applicable exclusion amount is: 2009

$3.5 million

2010

Estate tax is scheduled to be repealed

2011 and thereafter

$1 million (estate tax is scheduled to be reinstated)

Keep in mind that the applicable exclusion amount for gift tax purposes is $1 million even though the applicable exclusion amount for estate tax purposes is $3.5 million in 2009. Any portion of the applicable exclusion amount used for gift tax purposes effectively reduces the applicable exclusion amount that will be available for estate tax purposes. In addition, although estate tax is scheduled to be repealed in the year 2010, the gift tax will remain in effect. It is especially important for spouses to understand the applicable exclusion amount. Without advance planning, the applicable exclusion amount of the first spouse to die may be lost. It is wise to seek advice from an experienced estate planning attorney so that each spouse can make maximum use of the shelter that the applicable exclusion amount provides.

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Page 129 of 137

How will estate taxes be paid if I leave no provision in my will? Question: How will estate taxes be paid if I leave no provision in my will?

Answer: The IRS places an automatic lien against your estate for any estate taxes that may be due. If your will leaves no specific provision about how these taxes are to be paid, state law generally controls how the burden of paying the taxes will be distributed among your beneficiaries. As a result, your beneficiaries may end up paying taxes out of their own pockets or selling some of the property that you left to them to meet this obligation. Most state apportionment statutes impose the tax payment liability only on those assets that contributed to the tax imposed. Thus, your spouse will not be responsible for any taxes if he or she received all your property free of tax under the unlimited marital deduction. Likewise, charities that received property free of tax under the charitable deduction will not have to carry any of the tax burden. In addition, most state apportionment acts divide up the tax burden on a prorated basis. For example, if your taxable estate was evenly split between two beneficiaries, each beneficiary would be responsible for 50 percent (one-half) of the taxes due. Beneficiaries who received the taxable portion of your estate must pay their share of the taxes owed when they are due--generally nine months from the date of your death. They may have to sell their inheritances to get the cash. If their inheritances are already spent, however, they still must pay the taxes, and the IRS can go after any of their other assets to satisfy the lien.

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Page 130 of 137

What is a Crummey power? Question: What is a Crummey power?

Answer: A Crummey power is a provision contained in certain irrevocable trusts that permits specified trust beneficiaries to withdraw gifts you make to the trust for a limited period of time. The provision allows gifts to the trust to qualify for the federal annual gift tax exclusion. The exclusion effectively exempts annual gifts up to $13,000 (in 2009) per trust beneficiary from the federal gift tax. Over your lifetime, regular gifting to the trust may reduce the size of your gross estate. Without a Crummey power, all gifts you make to your irrevocable trust will be subject to gift tax. Here's how it works. You transfer funds to an irrevocable trust containing a Crummey power. The trustee must then give adequate notice to each beneficiary stating that the funds can be withdrawn. The time frame for withdrawal should be reasonable (e.g., 30 days). Whether or not the beneficiaries exercise their right, the gift still qualifies for the annual gift tax exclusion. If the withdrawal right is not exercised, the trustee may use these gifts for other purposes permitted under your trust document, such as investing the money or making premium payments on a life insurance policy that the trust owns. Crummey powers are commonly used in irrevocable trusts. But for them to succeed in qualifying gifts for the annual exclusion, the rules must be followed carefully. That is, the beneficiaries must receive prompt notice that a gift has been made and be given reasonable time and opportunity to request a withdrawal. Consult your estate planner or tax advisor to learn more about this complex tool.

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Page 131 of 137

How often do I need to review my estate plan? Question: How often do I need to review my estate plan?

Answer: Although there's no hard-and-fast rule about when you should review your estate plan, the following suggestions may be of some help: • You should review your estate plan immediately after a major life event • You'll probably want to do a quick review each year because changes in the economy and in the tax code often occur on a yearly basis • You'll want to do a more thorough review every five years Reviewing your estate plan will not only give you peace of mind, but will also alert you to any other changes that need to be addressed. There will be times when you'll need to make changes to your plan to ensure that it still meets all of your goals. For example, an executor, trustee, or guardian may change his or her mind about serving in that capacity, and you'll need to name someone else. Other reasons you should do a periodic review include: • There has been a change in your marital status (many states have laws that revoke part or all of your will if you marry or get divorced) or that of your children or grandchildren • There has been an addition to your family through birth, adoption, or marriage (stepchildren) • Your spouse or a family member has died, has become ill, or is incapacitated • Your spouse, your parents, or other family member has become dependent on you • There has been a substantial change in the value of your assets or in your plans for their use • You have received a sizable inheritance or gift • Your income level or requirements have changed • You are retiring • You have made a change in your estate plan (e.g., you created a trust or executed a codicil to your will)

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Page 132 of 137

Can I be buried in a national cemetery even though I got out of the Army years ago? Question: Can I be buried in a national cemetery even though I got out of the Army years ago?

Answer: The U.S. Department of Veterans Affairs (http://www.va.gov), formerly known as the Veterans Administration, sets the rules and guidelines for military burials. In general, you can choose a national cemetery as your final resting place if you were honorably discharged or retired from the Army in the usual manner. The guidelines are based on factors such as your length of service, type of service, and, in some instances, the specific years of service. You can confirm your eligibility for burial benefits by calling a veteran's benefits counselor at (800) 827-1000. You can also view the guidelines at www.cem.va.gov. Keep in mind that any military person who received a dishonorable discharge or was convicted of a state or federal capital crime--either before or after being discharged from the military--will be denied the privilege of interment in a national cemetery.

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Page 133 of 137

Is it possible to name a charity as the beneficiary of my life insurance policy? Question: Is it possible to name a charity as the beneficiary of my life insurance policy?

Answer: Yes, you can name a charity as your beneficiary. After you die, the charity will receive the death benefits from your life insurance policy just as any other beneficiary would. You won't have to worry about gift taxes, and although the policy proceeds will be included in your taxable estate, you'll get an offsetting estate tax charitable deduction. On the downside, though, you won't be able to deduct your insurance premium payments (as a charitable income tax deduction) on your federal income tax return. There are other ways you can help your favorite charity while still deriving an income tax benefit. For example, if you own an existing insurance policy on your life, you can donate the policy to a charity. You'd then make income-tax-deductible cash gifts to the charity, which the charity would use to continue the premium payments on the policy. You'd be eligible to claim an income tax deduction in the year of donation, for either the fair market value of the policy or your adjusted tax basis in it, whichever is less. For information about other ways to help a charity while lowering your income taxes, speak with an attorney or tax advisor.

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Page 134 of 137

What is funeral insurance, and do I need it? Question: What is funeral insurance, and do I need it?

Answer: Funeral insurance is a way to spare your loved ones the financial burden of having to pay for your final expenses. However, not all funeral insurance policies are alike. Different types of funeral insurance are available, and policies can vary widely. In general, they work by you purchasing a policy that will cover your final expenses, usually a few thousand dollars. You pay the premiums (either in a lump sum or spread out over a certain number of years), and when you die, the death benefit is used to pay for your funeral. Funeral insurance policies are often sold through a funeral director acting as an agent on behalf of an insurance company. However, some of the larger national funeral home chains are beginning to sell funeral insurance. If you're concerned that funds won't be available to pay for your funeral costs, or that these costs would be a large burden to your family, a funeral insurance policy might be appropriate for you. However, before you decide, explore the possibility of purchasing a small term life insurance policy as an alternative. If you have sufficient assets to pay for your own funeral, you probably don't need funeral insurance. Currently, there is no federal law regulating funeral insurance, and state regulations vary. And many individuals--especially the elderly--have been victimized by funeral insurance scams. As a result, it may be wise to consult a professional advisor to find out if funeral insurance fits into your overall estate plan.

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Page 135 of 137

When I die, is my beneficiary required to take a lump-sum payment of my life insurance benefit? Question: When I die, is my beneficiary required to take a lump-sum payment of my life insurance death benefit?

Answer: It isn't necessary for your beneficiary to take a lump sum, although many people prefer that option. Many settlement options for life insurance proceeds exist. Some of the more common options are as follows: • Interest option, where the life insurance company retains the proceeds and pays only the interest earned to the beneficiary at regular intervals • Fixed-period option, where the company pays the proceeds together with the interest at regular intervals for a fixed period of time • Fixed-amount option, where benefits are paid in fixed amounts at regular intervals until the proceeds and the interest are depleted • Annuity option, where the proceeds and the interest are used to provide regular payments to the beneficiary for the remainder of his or her life • Lump sum, where the life insurance company pays the total amount of the benefit in one single payment at the death of the insured Your beneficiary may have flexibility within the options, as well. For example, if your beneficiary chooses the fixed-amount option, your beneficiary might elect to receive $250 per month for the first five years, and then $500 per month until the proceeds are depleted. Your beneficiary may also choose a combination of options. For example, your beneficiary could receive the interest option until retirement and then receive the remainder of the benefit as an annuity. Your company will allow your beneficiary to choose how the proceeds are received when they become payable. If you think it's necessary, you may choose how the beneficiary will receive the proceeds when you purchase the policy. Consult your financial professional to see what choices your life insurance company offers.

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Page 136 of 137

I own a business. Are there any creative ways I can use life insurance in my business? Question: I own a business. Are there any creative ways I can use life insurance in my business?

Answer: You can use life insurance in several ways to help your business. You might consider purchasing a key-person life insurance policy that covers the loss of services when a key employee or partner dies. The benefits can be used to cover any lost profit and the cost of replacing the employee or partner. The insurance is owned by your business, which also receives the benefits. Another way to insure against the death of a business partner is through a buy-sell agreement. For example, three partners in a business each own the same amount of stock. One partner, Mr. Clark, dies, and his stock goes to his wife through his will. If the business had written a buy-sell agreement and funded it with life insurance, the surviving partners would have received a life insurance benefit when Mr. Clark died. The partners and Mrs. Clark could then have exchanged the life insurance benefit for the company stock. Split-dollar life insurance is another benefit you can offer your employees while investing in your company. Here, the business purchases a life insurance contract on the life of an employee and shares the cost. If the employee dies, your business receives an amount equal to the premiums paid, and the employee's beneficiary receives the remaining death benefit. If the policy is surrendered for any other reason, your business receives the cash value. Deferred compensation that supplements a retirement plan is another option you might consider. Your company would buy a life insurance policy on the life of a key employee. The business is the owner and beneficiary. If the employee dies, the business receives the death benefit tax free. From the benefit proceeds, your business pays an annual sum to the employee's survivors for a specified period. Providing group life insurance as an employee benefit can also help your business by attracting and retaining employees. Group insurance is less expensive to purchase than individual insurance. Also, no medical exam may be required, depending on the size of your company. Here, the premiums are tax deductible to your business, and the benefits are paid directly to your employee's beneficiary.

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