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3001 United Founders Blvd. Oklahoma City, OK 73112 (405) 842-3443 • (800) 725-4530 Investment Advisory Services offered through Investment Advisory Representatives of Retirement Investment Advisors, Inc., a Registered Investment Advisor.

Financial Briefs

JUNE 2011

Estate Tax Exclusion Poses Opportunities and Challenges


he new federal tax law ushered in the highest estate- and lifetime gift-tax exemptions in U.S. tax law history: $5 million for individuals and $10 million for married couples. While this may appear to have taken off the pressure for careful estate planning — only 1% of U.S. estates are estimated to be larger than $5 million — the higher limits pose both opportunities and challenges for high-net-worth families. Given the new law, here are some estate planning considerations married couples should address: Change charitable donations? — The single most obvious benefit of the higher estate tax exemption is that if planned properly, a couple can now leave substantially more — $10 million instead of $2 million — to heirs and relatives. This is most significant to those whose primary reason for charitable giving is to reduce taxes. Given the new law, reviewing your purposes and strategy should be your first priority. Accelerate and increase gifting? — For couples who have exhausted the previous unified gift-tax exemption of $2 million, the $10 million limit represents an unprecedented opportunity to move assets out of their estates without taxation. Keep in mind, however, that the annual limit on tax-free gifts is only

$13,000 in 2011, $26,000 if a couple splits their gift. Since the new tax law expires in 2013 and it’s uncertain what future exemption limits will be, it may be a good idea to take full advantage of the higher limits over the next two years. Targeting appreciating assets — like stocks and real estate — should be the first priority. Even if

Congress reduces the exemptions after 2012, once those assets are out of your estate, any appreciation on those assets is also out of your estate. Trust or will? — The higher limit may mean you can avoid establishing trusts to remove funds from your taxable estate. One Continued on page 2

Life Insurance: A Key Component of Estate Plans


ecause of its flexibility, tax advantages, and potential to leverage your assets, life insurance can be an important estate planning tool. The usefulness of life insurance in almost any estate plan of any magnitude makes it one of the most universally applied tools. There are three major reasons: 1. Creating an immediate estate. For the price of a premium, even someone with no savings — like a newlywed or young parent — can quickly create a sizable estate with the potential to provide for the needs of dependent survivors. Of course, premiums vary according to type of policy and the amount of coverage purchased, so needs and affordability are issues every applicant for life insurance must

contend with. But one of the great advantages of a life insurance policy is that most of the benefits paid out by the policy can be received tax free. 2. Providing liquid proceeds for final expenses. Unlike wills, cash distributions from life insurance policies normally aren’t required to pass through probate. As a result, beneficiaries can have more timely access to pay for such final expenses as unpaid bills, funeral expenses, and taxes. 3. Keeping post-tax asset values intact. Even with the recent increase in the U.S. estate and gifttax exemption to $5 million for individuals and $10 million for married couples, some estates will Continued on page 3

Copyright © Integrated Concepts 2011. Some articles in this newsletter were prepared by Integrated Concepts, a separate, nonaffiliated business entity. This newsletter intends to offer factual and up-to-date information on the subjects discussed, but should not be regarded as a complete analysis of these subjects. The appropriate professional advisers should be consulted before implementing any options presented. No party assumes liability for any loss or damage resulting from errors or omissions or reliance on or use of this material.



Estate Tax Exclusion Continued from page 1

disadvantage of testamentary transfers to beneficiaries is you lose control over how and when the funds are distributed. Wills must still pass through probate, which means there is the potential for considerable delay before your heirs gain access to the assets they may need to pay taxes or other bills. Wills also distribute assets without limitations as to the purposes they can be used for or when, such as reaching the age of majority or annual distribution amounts. Only trusts can establish these directions. Understanding the new portability provision — One new feature of the tax law concerns “portability” of the estate tax exemption between spouses. Under this provision, any credit that has been unused by a deceased spouse can be transferred to the estate of the surviving spouse. For example, if a spouse’s estate has used only $2 million of the $5 million exemption, the remaining $3 million can be applied to the surviving spouse’s estate, raising its exemption to $8 million. But there are two important caveats: 1) It’s not automatic. Even if an estate won’t owe a penny in federal estate taxes, it must file a tax return to establish the transferred credit. 2) Portability does not apply to generationskipping trusts whose beneficiaries are grandchildren and greatgrandchildren. If the surviving spouse is predeceased by more than one spouse, the additional exclusion amount carried over to the surviving spouse is limited to the lesser of $5 million or the unused exclusion of the last deceased spouse. Avoiding unintended disinheritance — Because estate laws are constantly changing, when it comes to dividing assets among different heirs, many wills and trusts rely on a “formula clause” that doesn’t specify dollar amounts or percentages. For example, a document may simply say that children of the deceased are to receive the maximum

It’s Time to Revisit Your Estate Plan


state plans should be reviewed periodically to ensure that their objectives are still being met. And now, with major changes in the tax code that affect estates, it’s important that you revisit your estate plan as soon as you can. In general, here are guidelines as to why and when you should take another probing look into how you can best pass your assets to your beneficiaries and charities of your choice. Tax laws change — The last three years have been among the most volatile in terms of the federal tax code’s effects on estates. New federal laws reestablished estate taxation after a year of zero taxation, introduced new features that affect married couples, and changed the gift-tax exemption limits. Without reviewing and redesigning your estate plan in view of these changes, it’s almost certain that should you or your spouse die this year, there will be some unplanned consequences and missed opportunities. And none of this even takes into account any new or proposed changes in any state inheritance tax you may be subject to. Asset values change — Even more dramatic than the state of the U.S. tax code, asset values have undergone their most dizzying changes since World War II. Real estate prices are off as much as 50% to 60% from their peaks in 2006 (Source: Realty Times, 2011).

amount allowed to pass to them free of federal taxes, with the remainder going to the surviving spouse. For an estate that is $5 million or less, this means the spouse is effectively disinherited. Adding further clarification in such cases is vital to ensuring that an intended beneficiary isn’t left penniless. Lower state thresholds — Be aware that more than a dozen states also levy inheritance taxes, and the

Meanwhile, the Dow Jones Industrial Average and the Standard & Poor’s 500 indexes have fluctuated significantly over the past few years, and individual stocks and bonds have been even more volatile. As a result, the total value of assets in estates and funded trusts may have shrunk or expanded significantly and may now be way out of tune with the new unified credit exemptions. Life changes — Are you and your spouse earning the same amount of money and in the same health as you were the last time your estate plan was finalized? Are you still married to the same person? Do you still have the same number of children and heirs? Such changes happen as often as several times a year. If you have a backlog of changes not yet reflected in your plan, there’s no good reason to wait any longer. Causes change — If charitable giving is part of your plan, there are several reasons it may need to be updated. The causes you want to support may have changed, new charities may have arisen that interest you, or the financial state of the charities you support may have become more dire or more flush. Despite the fact that an estate plan deals with your passing, to be consistent with your wishes and concerns, the best guideline is to consider it a living document that needs periodic reassessment. Please call if you would like to discuss this in more detail. zxxxx threshold of taxability may be considerably lower than the federal level. Estate planning is an important part of your overall financial plan, no matter how large your net worth. To review your current estate plan in light of the new tax laws, please call. zxxx



Life Insurance Continued from page 1

still be large enough to be subject to taxes. In a properly structured estate, the tax-free death benefit of a life insurance policy can be used to offset the taxes beneficiaries must pay, essentially allowing them to receive the benefit of the full value of the your assets. Planning Considerations There are a host of issues to decide upon when considering the role that life insurance can play in your estate plan. First among them is determining the coverage amount and type of policy, which — even for a young family or one with fairly simple estate planning issues — can be quite complicated. But there are many other decisions to make, including: • Who owns the policy? The policy’s owner does not have to be the person who pays the premium. Who it is, however, can have important ramifications for the tax treatment of death benefits. For example, the death benefits from a policy owned by a business controlled by the person insured may be subject to estate taxes. On the other hand, ownership by the surviving spouse can merely delay estate taxes until the death benefits pass to the couple’s children. • Who are the beneficiaries? Is it the surviving spouse, the children, other relatives, a business or business partners, or a legal entity, like a trust? Again, the wrong choices can confound the purposes for which you buy the policy in the first place. • Should a trust be involved? To avoid the pitfalls of ownership by the wrong person or entity, you can create an Irrevocable Life Insurance Trust, or ILIT, as both the owner and the beneficiary. In this case, death benefits are generally distributed tax free. To ensure that is the outcome, the trust must be properly structured — a trustee, a settlor, and beneficiaries must all be properly named, FR2011-0223-0003

Estate Planning for Unmarried Couples


consider a durable power of athile estate planning can be torney to allow someone to complex for married couples, take over your financial matters it is even more complex for unmarif you become disabled or inried couples. Basically, this is due to competent and a health care the fact that unmarried couples do proxy to give someone the not benefit from two provisions that power to make health care deapply to married couples: cisions when you are unable to. • The unlimited marital deduction allows married couples to be- • Review beneficiary designations. Assets with named benqueath as much of their estate as eficiaries, such as life insurance they want to their spouse with policies, individual retirement no estate tax consequences. Unaccounts, and pension plans, married couples can only shelter will automatically go to the up to the estate tax exclusion named beneficiary. Make sure amount from estate taxes. While your beneficiary designations that amount is currently very reflect your wishes. large, $5,000,000, that exclusion amount is only valid for the next • Make sure assets are properly titled. Owning an asset as joint two years. No one knows what tenants with rights of survivorthe exclusion amount will be ship means the asset will autoafter that. matically go to the co-owner • Even if proper estate planning after your death. documents aren’t in place, such as a will or trust, spouses still in- • Take a look at life insurance amounts. If you are leaving a herit at least a portion of each large estate to a significant other’s estate. Unmarried couother, that person may have to ples, on the other hand, must pay significant estate taxes, make special provisions to ensince the unlimited marital desure they inherit any assets from duction does not apply. Thus, each other. you may want to review life inTo protect each other’s interests, surance amounts and adjust unmarried couples should properly them upward to help deal with plan their estate. Consider these estate taxes. If properly structips: tured, the proceeds will be re• Prepare a will. At a minimum, ceived free of income and unmarried couples need wills to outline who should receive their estate taxes. zxxx estate. You may also want to

and their roles regarding payment of estate taxes must be carefully defined. • How should your policy be coordinated with other trusts? If your estate issues are more complicated than average, you may find your plan involves other trusts, like a qualified personal residence trust (QPRT), which involves the ownership of your dwelling by your beneficiaries, or a Qualified Terminal Interest Property Trust (QTIP), which is typically used when one spouse

wants to ensure the distribution of assets after the remaining spouse’s death. Each of these trusts can benefit from the way you structure the life insurance component of your plan, so coordination with your policies can be advantageous. What role should life insurance play in your estate plan? Only a thorough analysis can provide the answer that’s right for you. Please call if you’d like to discuss this in more detail. zxxx

4 18-Month Summary of Dow Jones Industrial Average, 3-Month T-Bill & 20-Year Treasury Bond Yield December 2009 to May 2011

Business Data

# — 3rd, 4th, 1st quarter @ — Feb, Mar, Apr Sources: Barron’s, Wall Street Journal Past performance is not a guarantee of future results.


3-Month & 20-Year Treasury

12 10

Dow Jones Industrial Average

13000 12000 11000 10000


9000 6

20-Year Treasury Bond

4 2

8000 7000 6000 5000

3-Month T-Bill


Dow Jones Industrial Average

Month-end Mar-11 Apr-11 May-11 Dec-10 May-10 3.25 3.25 3.25 3.25 3.25 0.10 0.07 0.06 0.18 0.17 3.29 3.41 3.15 3.37 3.33 4.18 4.23 3.99 4.23 4.04 3.85 3.71 3.55 3.89 4.28 +2.60 +3.10 +1.80 +3.10 +3.70 Month-end % Change Mar-11 Apr-11 May-11 YTD 12 Mon Indicator Dow Jones Industrials 12319.73 12810.54 12569.79 8.6% 24.0% Standard & Poor’s 500 1325.83 1363.61 1345.20 7.0% 23.5% Nasdaq Composite 2781.07 2873.54 2835.30 6.9% 25.6% Gold 1439.00 1537.27 1536.50 9.3% 27.2% Unemployment rate@ 8.90 8.80 9.00 -8.2% -9.1% Consumer price index@ 221.30 223.50 224.90 2.8% 3.2% Index of leading ind.@ 113.60 114.30 114.00 2.4% 4.1% Indicator Prime rate 3-month T-bill yield 10-year T-note yield 20-year T-bond yield Dow Jones Corp. GDP (adj. annual rate)#

4000 3000

D J F M AM J J A S O N D J F M AM 2010 2011

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