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Estate Planning & Living Trusts

  1. Introduction/Welcome
  2. What is an estate?
  3. Why do estate planning?
  4. Who needs estate planning?
  5. Elvis Presley
  6. Groucho Marx
  7. When should you plan?
  8. Common estate plans
  9. Plan #1: Will
  10. What is probate?
  11. Probate illustration
  12. Probate is big business
  13. Probate takes time
  14. Probate is public
  15. Probate process has control
  16. Wills and incapacity
  17. Minor children or grandchildren
  18. Plan #2: Doing Nothing
  19. Plan #3: Joint Ownership
  20. Joint ownership and probate example
  21. Joint ownership and disinheriting example
  22. Joint ownership summary
  23. Plan #4: Giving Away Assets
  24. Stepped-up basis example
  25. Stepped-up basis example (cont.)
  26. Change in This Law for 2010
  27. Plan #5: Beneficiary Transfers
  28. Keeping control with a revocable living trust
  29. Living trust vs. will
  30. Funding Your Living Trust
  31. Property titled in living trust avoids probate
  32. You keep control
  33. Your living trust team (A)
  34. Your living trust team (B)
  35. Benefits of corporate trustee
  36. You control inheritance
  37. You control inheritance (cont.)
  38. Living trust summary
  39. For medical decisions
  40. Follow our Five-Step Action Plan
  41. Conclusion

1. Introduction/Welcome

Welcome to our presentation entitled "Understanding Estate Planning and Living Trusts." We're delighted you could join us.

It will only take about 30 minutes to go through this on-line presentation. We hope you enjoy it and find it useful to you and your family.

Now let's get started.

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2. What is an estate?

First, what is an estate?

Your estate is simply everything you own -- your home, other real estate, bank accounts, investments, retirement benefits from your employer, IRAs, your insurance policies, collectibles, and personal belongings.

When you start adding it up -- especially when you add in the death benefits from your insurance policies -- you may find, like most people do, that you actually own a lot more than you think.

Now, why do people do estate planning?

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3. Why do estate planning?

Most people do estate planning because they want to control who will receive their assets after they die, and they want this to happen with the least amount going to legal fees and taxes.

But estate planning is not just about what happens after you die. A good estate plan will also protect you at incapacity. It will let you -- not the courts -- keep control of your assets and control of decisions about your medical care when you can no longer handle your own affairs.

So, who needs to do estate planning?

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4. Who needs estate planning?

Everyone.

Certainly, the older you get, the more you start thinking about how to transfer your assets to your grown children or other loved ones.

But families with young children need to do estate planning. So do people who have children from previous marriages.

Single adults -- young or old -- need to plan as well.

Estate planning is not just for "wealthy" people -- whatever that word means. Good estate planning is important for everyone.

Let's look at a couple of examples of people you might recognize and see how they planned their estates.

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5. Elvis Presley

When Elvis Presley died, his estate was valued at more than $10 million. But by the time his debts and taxes were paid, less than $1 million went to his heirs.

Elvis had a will. But because of poor planning, more than half of his estate went to federal and state governments, legal and executor fees, probate and other "administrative" costs.

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6. Groucho Marx

Groucho Marx had a will, too. But he didn't plan for incapacity. The end of his life became a public circus. The court declared him incompetent, and his companion and family members battled for control over his care-and his money.

Elvis and Groucho had something in common. They had wills, but they both could have done better jobs of planning their estates. After this presentation, you'll know how to do that.

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7. When should you plan?

The best time to plan your estate is now, while you can -- before you need it. Because with estate planning, there is no second chance.

None of us likes to think about our own mortality or the possibility of becoming incapacitated. And that's exactly why so many families are caught off guard and unprepared when incapacity or death strikes.

So, how do you plan your estate?

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8. Common estate plans

There are really only these six basic ways to plan your estate:

  1. Having a will
  2. Doing nothing
  3. Using joint ownership
  4. Making gifts
  5. Using beneficiary transfers, and
  6. Having a living trust.

Let's take a look at each one and see how much control they will give you.

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9. Plan #1: Will

We'll start with a will.

You probably already know that, in a will, you name whom you want to handle your final affairs and whom you want to receive your assets after you die.

But did you know that your will only controls the assets that are titled in your name? Your will does not control assets that are titled in joint ownership and go to your spouse or another joint owner when you die. And it doesn't control assets with beneficiary designations, like your IRA, retirement benefits or life insurance policies.

So, to begin with, your will does not give you control over all of your assets.

What about the assets your will does control? After you die, these assets will have to go through a court-controlled process called "probate."

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10. What is probate?

Probate is the legal process through which the court makes sure that, after you die, your will is valid, your debts are paid and your assets are distributed according to your will.

Probate is the ONLY legal way to change the title on an asset when the person listed as the owner cannot sign his or her name.

Now, of course, if you're not alive anymore, you can't sign your name. And your family and friends can't just sign FOR you.

Only the court can change titles after someone dies.

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11. Probate illustration

As this illustration shows, any assets that are titled in your name must go through probate so the titles can be changed.

Now, of course, this process isn't free. Let's take a look at how much it costs.

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12. Probate is big business

AARP-The American Association of Retired Persons-did a survey of probate fees a few years ago.

AARP found that, nationwide, attorney fees alone could be as much as $1.5 billion a year, and that hundreds of millions more go to bonding companies, appraisers and the probate courts themselves.

Probate costs vary in each state, but they are usually estimated at 3-8% of an estate's value. If you own property in other states, your family could face multiple probates, each one according to the laws -- and costs -- in that state.

(If you want to estimate your probate costs, visit our Probate & Estate Tax Calculator on-line at our Learning Center.)

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13. Probate takes time

Probate also takes time.

In that same survey, AARP found that, even for modest estates, it takes one to two years, and often longer, to completely get through the probate process. If you're lucky, the probate on your estate may be completed in as few as nine months. But on average, it takes over a year.

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14. Probate is public

Probate is also a public process. Any "interested party" can see what you owned and who you owed. In fact, the process "invites" disgruntled heirs to contest your will.

It can also expose your family to unscrupulous solicitors who use probate files as a source for new business.

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15. Probate process has control

The bottom line is that the probate process -- not your family -- has control over how your will is interpreted, how much probate will cost, how long it will take and what information is made public.

There's another problem with a will.

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16. Wills and incapacity

A will is no help if you become incapacitated -- because a will only goes into effect AFTER you die. Remember what happened to Groucho?

If you can't conduct business due to mental or physical incapacity (for example, from Alzheimer's disease, stroke or heart attack) only a court appointee can sign for you -- even if you have a will.

Having the court involved can be expensive and time consuming. It's a public process. And it doesn't replace probate when you die.

There is a document called a "durable power of attorney" that can allow someone to handle your financial affairs if you become incapacitated. However, some financial institutions won't accept ANY power of attorney. Others will only accept one if it is on their own form. The reason is that they do not want the liability that could result from handing over your assets to someone else.

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17. Minor children or grandchildren

If you have minor children or grandchildren and you have a simple will (which many people have), it may not give you the control you want.

That's because the court (not the guardian you name in your will) will control the child's inheritance until the child reaches legal age. At that time, the child will receive the full inheritance.

This is not what most parents and grandparents would want. Most would prefer that the court not have control over the child's inheritance, and that the child inherit at a later age. But with a simple will, you have no choice.

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18. Plan #2: Doing Nothing

Common estate plan #2 is "doing nothing."

If you have no estate plan -- not even a will -- when you die, your assets will be distributed according to your state's probate laws. And if you become incapacitated before you die, the court will probably take control of your assets.

This is probably the worst situation because you will have NO control.

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19. Plan #3: Joint Ownership

Estate plan #3 is joint ownership. It is one of the most common "plans" used by families. In fact, if you are married, you and your spouse probably own most of your assets jointly.

The type of joint ownership most people use is called "joint tenants with right of survivorship." It means that when one owner dies, the surviving joint owner has full ownership of the asset.

Some people think this will avoid probate and give them the control they want. Let's see. Meet Tom and Ann and their kids.

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20. Joint ownership and probate example

Tom and Ann, like most married couples, own their home as joint tenants with right of survivorship.

Tom dies suddenly in an accident. Immediately upon his death, Ann automatically becomes the sole owner of their home. There is no probate.

But what happens when Ann dies? Is there a probate? Yes. That's the only way to get her name OFF the title and put someone else's on. So, you see, joint ownership doesn't AVOID probate-it just POSTPONES it.

Owning assets jointly can cause other problems, too.

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21. Joint ownership and disinheriting example

What if Ann remarries and puts the house in joint ownership with her new husband, Dan?

If Ann dies first, Dan owns the house. Is Dan under any legal obligation to give anything to Tom's and Ann's kids? No. The house belongs to Dan and he can do anything he wants with it.

Even if Ann had written in her will that she wanted her share of the house to go to her children, it wouldn't have made any difference. Remember, wills don't control assets that transfer automatically to a surviving joint owner.

In this example, using joint ownership caused Tom and Ann to disinherit their children!

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22. Joint ownership summary

The bottom line is that joint ownership can cause a lot of problems:

1. It doesn't avoid probate -- it just postpones it.

2. If you die first, you have no way of controlling what ultimately happens to the asset. You could unintentionally disinherit your own family.

3. If your co-owner becomes incapacitated, you could find yourself with a new co-owner -- the court!

4. Adding a co-owner is easy, but taking his/her name off the title is not. If your co-owner doesn't agree, you could end up in court.

5. You could end up in a lawsuit if your joint owner is sued over an accident that involves the jointly-owned asset.

6. You expose the asset to the other owner's debts -- the property could be seized as settlement.

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23. Plan #4: Giving Away Assets

Giving away assets is another estate "plan" people use.

Parents often give their assets to their children, thinking it will make things easier if they become incapacitated and after they die.

But what happens if you want -- or need -- the asset later? Will your children give it back to you? Maybe, maybe not.

You know the old saying, "Never say never." Here's one time to ignore it. NEVER give away an asset you may need later -- not even to your children!

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24. Stepped-up basis example

Another problem with giving away assets is that you might be giving the recipient a tax problem.

Here's an example. Let's say Bob bought his home back in 1955 for $50,000 and today it's worth $250,000. He gives it to his son Tom, who then sells it for $250,000.

Because Bob transferred title to Tom while he was living, the house keeps Bob's old cost basis of $50,000. Remember, that's what he paid for it.

That means Tom now has a $200,000 gain on the sale. And, under current tax law, he will have to pay $30,000 in capital gains tax.

Let's look at what happens if Bob had left his home to Tom as an inheritance -- either through a will or a trust.

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25. Stepped-up basis example (cont.)

As shown here on the right, Tom sells the house for the same $250,000. But because he received the house as an inheritance after Bob died instead of as a gift while Bob was living, the property receives a new stepped-up basis. The basis is now the value as of the date of Bob's death-$250,000.

So now when Tom sells the house, there is no gain on the sale-and no capital gains tax to pay. By not giving the house to him while he was alive, Bob would save Tom $30,000 in capital gains taxes.

Now, if your estate is larger and you can afford to give away an asset, gifting can be a great way to reduce estate taxes. We'll discuss estate taxes later on.

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26. Recent Change In This Law

There has been a recent change in this law.

Before January 1, 2010, all inherited assets received a full step-up in basis to the current market value as of the owner's death. This saved the beneficiaries thousands of dollars in capital gains tax when the assets were sold.

Beginning January 1, 2010, the amount of assets that can receive a step-up in basis is now limited. Most estates will be able to step up $1.3 million worth of assets. An additional $3 million of assets left directly to a surviving spouse can also be stepped up to full market value.

Assets that do not receive the stepped-up value will be taxed based on the deceased owner's original cost basis...what the owner paid for the asset...or the fair market value, whichever is less.

This is going to be an accounting nightmare for many families: How many of you have the original receipts showing what you paid for all of your assets? Let's hope Congress changes this law very soon!

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27. Plan #5: Beneficiary Transfers

Estate "plan" #5 is transferring assets through beneficiary designations.

Many assets -- including insurance policies, IRAs, retirement plans and some bank accounts -- let you name a beneficiary. And when you die, these assets will usually be paid directly to the persons you have named as your beneficiaries, without probate -- but not always.

If your beneficiary is incapacitated when you die, the court will probably take control of the funds for that person.

If your beneficiary dies before you, or you both die at the same time, the asset will have to go through probate so it can be distributed with the rest of your estate.

If you list "my estate" as beneficiary, the probate court will have to determine who "my estate" is.

And if you list a minor child or grandchild as a beneficiary, the court will probably get involved to "protect the child's interests," even if the child's parents are living. That's because insurance and financial companies will not knowingly pay large sums of money to a minor.

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28. Keeping control with a revocable living trust

Our last "plan" is a revocable living trust.

It is being used more and more by people of all ages, marital status and wealth -- instead of a will and the other plans you've just seen.

Now we'll look at what a revocable living trust is, how it works and how it lets you keep more control than other plans.

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29. Living trust vs. will

Let's first compare a revocable living trust and a will.

Both are legal documents that have been around for hundreds of years.

In both, you name someone to handle your affairs after you die. In a will, this person is called an executor or an administrator. In a living trust, this person is called a trustee.

And in both, you name whom you want to receive your assets after you die.

But, unlike a will, a living trust avoids probate when you die, can control all of your assets and prevents the court from controlling your assets at incapacity. (This process is sometimes referred to as a "living probate.")

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30. Changing titles

When you set up a living trust, you transfer assets from your name to the name of your trust. For example, from "Bob and Sue Smith, husband and wife" to "Bob and Sue Smith, trustees of the Smith Family Trust dated (insert the date you sign your trust)."

This is called "funding" your living trust.

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31. Property titled in living trust avoids probate

When you change the titles of your assets from your name to your trust, YOU no longer own anything. So, when you die, or if you become incapacitated, there is nothing for the courts to control.

The concept is very simple, but this is what keeps you and your family out of probate.

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32. You keep control

You still have full control of the assets in your trust. As trustee of your trust, you can do anything with your assets that you could do before you put them in your trust.

You can buy and sell assets, change your trust or even cancel it -- that's why it's called a REVOCABLE living trust.

You even file the same tax returns. NOTHING CHANGES -- except the names on the titles.

Plus, your trust contains your written instructions for what you want to happen to your assets if you become incapacitated and when you die.

In fact, you'll actually have MORE control with your assets in a living trust than you do now.

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33. Your living trust team (A)

To understand how a trust works, you need to know these four legal terms.

1. The "grantor" (sometimes called settlor, trustor or creator) creates and controls the trust. You are the grantor of your trust. And only you, as the grantor, can make changes to your trust. That's how you keep control.

2. The "trustee" manages the assets you put into your trust. Most people choose to be their own trustees. If you and your spouse are co-trustees, either of you can act and have instant control -- with no court interference -- if one of you becomes incapacitated or dies. You can also select a corporate trustee to act as your trustee or co-trustee. More about them in a minute.

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34. Your living trust team (B)

3. The "successor trustee" will manage your trust according to your written instructions if the trustee is unable to act. So, if you and your spouse are co-trustees and something happens to both of you, or if you are the only trustee, your handpicked successor trustee will step in.

If you become incapacitated, your successor trustee looks after your care and manages your financial affairs for as long as needed. When you die, your successor trustee pays your debts and distributes your assets. All this is done quickly and privately, according to the instructions in your trust, without court interference.

Most people name an adult child, trusted friend or corporate trustee as their successor trustee.

4. The "beneficiaries" are the people and/or organizations who will receive your assets after you die.

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35. Benefits of corporate trustee

A corporate trustee is a bank or trust company that specializes in managing trusts. Some people select a corporate trustee to act as trustee or successor trustee for them, especially if they don't have the time, ability or desire to manage their own trusts.

Corporate trustees are experienced investment managers. They are government regulated, reliable and objective. They receive special training, and have a full network of resources available -- including reports, analysts and researchers -- to help them evaluate various markets and make decisions. As a result, they are often able to achieve better performance than an individual who usually has less experience, time and resources.

Corporate trustees do charge a fee for their services, but only when they begin to act as trustee.

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36. You control inheritance

One of the most powerful benefits of a trust is, unlike a will, a trust doesn't have to die with you. Assets can stay in your trust, managed by the trustee you select, until your beneficiaries reach the age(s) you want them to inherit.

Does this remind you of anyone in your family? If so, you may prefer to give children or grandchildren their inheritances in installments, so they have more than one opportunity to use the money wisely.

Or if you are concerned about the spending habits of one of your beneficiaries, you could provide periodic income and keep the rest in the trust.

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37. You control inheritance (cont.)

You can provide for a loved one with special needs without disturbing valuable government benefits. You can safeguard a minor child's inheritance. You could also supplement the income of a child who wants to be a teacher or do other low-paying-but very important-community service work.

Even if you feel that your beneficiary would handle the inheritance well, you may want to keep the assets in the trust to protect them from creditors, current spouses, ex-spouses, potential lawsuits and future death taxes. Your trustee can make distributions to the beneficiary as needed, but the assets that remain in the trust would be protected from these creditors and predators and, if invested well, could even help provide for future generations.

Most people like to leave their children or grandchildren with enough so they can do anything they want, but not so much that they do nothing. With a trust, you can do this and more. No other estate plan gives you this much flexibility and control.

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38. Living trust summary

As you have seen, a living trust gives you far more control than any other estate plan. For example, a living trust can:

  1. Avoid probate at death;
  2. Prevent court control of assets at incapacity;
  3. Provide maximum privacy;
  4. Allow quick distribution of assets to beneficiaries; or
  5. Let you keep assets in the trust (where they are protected from the courts, creditors and irresponsible spending) until you want your beneficiaries to inherit;
  6. Prevent unintentional disinheriting; and
  7. Reduce or eliminate estate taxes. In 2010, there is currently no federal estate tax. But Congress may reinstate it. If Congress does nothing, it will be back in 2011. Also, some states have their own death or inheritance tax that can be reduced or eliminated with proper planning.

Now, as good as a living trust is, remember that it can only control your assets. At the beginning of this presentation, we explained that a good estate plan will let you keep control over your financial and medical decisions. Let's look at two documents that pertain to medical decisions, and see how much control they each give you.

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39. For medical decisions

The first is a living will. Although the name is similar to a living trust, it does something very different.

A living will lets your physician know the kind of life support treatment you would want in case of a terminal illness or injury. It is very limited - it only applies to life support in terminal situations. And in some states, your physician is under no legal obligation to follow it. So, a living will doesn't give you a lot of control.

An "advance directive for health care" is better. It lets you give legal authority to another person (like your spouse or adult child) in advance to make any health care decision for you - including the use of life support - if you become unable to make them yourself. This document is much broader than a living will, and it can be legally enforced.

If you want an estate plan that will give you all this control - both financially and medically - here's what you need to do.

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40. Follow our Five-Step Action Plan

Follow our Five-Step Action Plan:

1. Write down your objectives. Whom do you want to receive your assets after you die - and when? Whom do you want to manage your financial affairs - and make medical decisions - for you when you can't?

2. Inventory your assets and debts. Find out how much you own.

3. Select a professional to help: someone with whom you will be comfortable sharing this information, who can answer your questions and who will be there when you need him or her.

4. Have the legal documents prepared.

5. Change titles to your living trust. Remember, a living trust can only control the assets you put into it.

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41. Conclusion

If you set up a living trust, you'll be able to relax with your family and friends, knowing your good planning will have a happy ending. And that will give you the biggest benefit of all...peace of mind.

Thank you for visiting our on-line presentation. We hope you've enjoyed it, and that you now understand the importance of estate planning to save you and your family time, anxiety and money.

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