CONTENTS
INTRODUCTION ............................................................................. 5
THREATS TO FAMILY WEALTH ..................................................... 7
TITLING PROPERTY .................................................................... 10
Titling Property With Another Person .................................. 10
Uniform Gifts to Minors Act ................................................. 13
Uniform Transfers to Minors Act ......................................... 13
Taxation of Minors .............................................................. 13
THE PROBATE SYSTEM.............................................................. 14
WILLS ........................................................................................... 16
Definition of a Will ............................................................... 16
Who Can Make a Will? ....................................................... 17
Disadvantages of Intestacy ................................................. 18
Duties of an Executor/Personal Representative ................. 20
Sample Will ......................................................................... 21
Types of Trusts ................................................................... 28
Testamentary Trust ............................................................. 32
Revocable Living Trust (An Inter Vivos Trust) ..................... 32
Irrevocable Trusts ............................................................... 34
Credit Bypass Trusts ........................................................... 35
Remainder Trusts ............................................................... 36
Life Insurance Trusts .......................................................... 37
Corporate or Individual Trustee .......................................... 38
TRANSFER TAXATION ................................................................. 39
Estate Tax ........................................................................... 39
State Death Taxes............................................................... 40
Marital Deduction ................................................................ 43
Maximizing the Unified Credit ............................................. 44
Tax Basis of Property Acquired from Another ..................... 46
ESTATE PLANNING FOR 401(K), 403(B)IRA & OTHER
RETIREMENT PLANS .................................................................. 48
IRA ..................................................................................... 48
Estate Planning
2
THE DURABLE POWER OF ATTORNEY ..................................... 50
Disabilities .......................................................................... 50
Uses of the Durable Power of Attorney ............................... 51
Custody and Management of the Person ........................... 52
Health Care Decision Making ............................................. 53
Choosing an Agent ............................................................. 54
Compensating the Agent .................................................... 54
LIFE INSURANCE ......................................................................... 55
Term Insurance ................................................................... 55
Whole Life ........................................................................... 56
Universal Life ...................................................................... 57
Variable Life ........................................................................ 58
Life Insurance Checklist ..................................................... 59
TYPES OF LIFE INSURANCE POLICIES: ADDITIONAL
INFORMATION ............................................................................. 61
Decreasing Term................................................................. 61
Annual Renewable Term ..................................................... 61
Whole Life ........................................................................... 61
Universal Life ...................................................................... 62
Variable Life and Variable Universal Life ............................ 62
Single Premium Whole Life ................................................ 62
TERM LIFE INSURANCE ............................................................. 63
What is Term Life Insurance? ............................................. 63
When is Term Life Insurance Useful? ................................. 63
The Language of Term Life Insurance ................................ 64
Family Plans ....................................................................... 65
Sample Illustrations ............................................................ 65
WHOLE LIFE POLICIES ............................................................... 68
Sample Illustrations ............................................................ 69
UNIVERSAL LIFE INSURANCE ................................................... 72
Major Benefits ..................................................................... 72
Sample Illustration .............................................................. 73
VARIABLE LIFE INSURANCE ...................................................... 76
Major Benefits ..................................................................... 76
VARIABLE UNIVERSAL LIFE INSURANCE ................................. 78
Sample Illustrations ............................................................ 79
ESTATE PLAN CHECKLIST ......................................................... 84
Estate Planning
3
Disclaimer
This publication is designed to provide accurate and authoritative information in
regard to the subject matter covered. It is provided with the understanding that
the author is not engaged in rendering legal, accounting, investment or other
professional advice. If legal or other expert assistance is required, the services
of a competent professional person should be sought.
No part of this publication may be reproduced, stored in a retrieval system, or
transmitted, in any form or by any means, electronic, mechanical, photocopying,
recording, or otherwise, without the prior written consent of the copyright holder.
Limited license for reproduction for personal use by the employee is granted.
All rights reserved, © LJPR,LLC, 2009.
Estate Planning
4
INTRODUCTION
One major facet of our financial plan is the protection of our assets
for our families. Estate Planning focuses on the major threats to
family assets:
• The costs and delay of Probate;
Estate Planning
• The burden of estate and inheritance taxes;
• The cost of disability; and
• The problem of control.
Each of these issues is very critical to family estate planning.
Probate avoidance is crucial in families where the assets are in
multiple states or where the costs of probate (typically costing from
4% to 7%) will eat away at the estate. Probate can be avoided.
Taxes can be reduced or avoided, as well, with ample forward
planning. In 2009, the first $3.5 million of your estate is exempt from
tax. Assets in excess of this amount are taxed at 45%. The Federal
Estate tax is scheduled to be repealed (for one year) in 2010.
Congress will be addressing where this tax goes in 2011 (and later).
President-Elect Obama has proposed that the estate tax exemption
remain at $3.5 million with the top estate tax rate of 45%. On estates
under $7 million in 2009, married people can generally avoid federal
estate taxes completely, with proper planning.
The problem of disability is addressed through Durable Powers of
Attorney and Living Wills. Another important document is the
Medical Durable Power of Attorney with Patient Advocate
Designations.
Estate Planning
5
The last part of estate planning - control - deals with how to protect
your family from the money. Think about this: if you and your spouse
died in a car wreck, with all of your insurance coverage, saving plan
balances, company benefits and all other assets, how much would you
be worth? Could your children handle that much? We will talk about
common ways to protect the kids from the money and the money
from the kids.
Estate planning documents are cumbersome and complex. Yet the
proper documents are critical if you are going to be successful in
avoiding the threats to your wealth. We’ve included in the text a
sample of a will. Please note: it is for reference use only; consult
your own attorney for wills, trusts and other legal documents.
Retirement planning and estate planning are topics that most of us
tend to put off until it’s too late. The key to an effective financial
plan is to plan ahead.
Remember: Don’t plan to fail by failing to plan!
Estate Planning
6
THREATS TO FAMILY WEALTH
Upon death, assets owned by the decedent become the decedent’s
estate. This estate will be defined under different interpretations for
state and federal laws. For example, property held in Joint Tenancy
with Rights of Survivorship (JTWROS) is excluded from most
states’ probate process, yet is included in the gross estate for
federal estate tax purposes. How an asset is titled will influence the
amount of estate shrinkage.
Estate shrinkage takes many forms, but generally fits into two
categories: Probate Costs and Taxes.
Probate – Probate costs include administration charges,
accounting and attorney fees, appraisals and court costs. Probate
costs directly relate to the size and complexity of the estate.
Taxes - Taxes fall into two categories: inheritance taxes, which
are imposed by the state on the heir, and estate taxes, which are
imposed on the total estate. The federal government imposes an
estate tax. Each state has its own taxation scheme; some states do
not impose death taxes at all.
Included Assets - Assets owned at death fall into one of three
categories:
•
Jointly Held Property - This is property co-owned by two or
more persons with Rights of Survivorship.
•
Contractual Property - This is property which has passed
by virtue of a written agreement or contract (e.g., life
insurance payable to a named beneficiary).
•
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7
All Other Property - An inclusive category of any property
titled to the decedent.
How an asset is included in the estate depends on whether we are
analyzing probate or federal estate taxes.
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Estate Planning
9
TITLING PROPERTY
There are two basic ways of titling property: individually or with
another person(s).
Individual title of property gives the owner total control. You can
“estate plan away” your property, but upon your death, for estate tax
purposes, it can still be included in your estate and taxed
accordingly.
Titling Property with Another Person
•
Joint Ownership occurs when two or more people own
property together. When one dies, title of the property
passes to the other(s) immediately. This avoids probate on
the first owner’s death, and is indicated by the letters
JTWROS (Joint Tenancy With Rights Of Survivorship).
Generally, 50% of jointly held property between a husband
and wife is included in the estate of the first to die. However,
between non-spouses, all of the joint property is included in
the taxable estate of the first to die unless the survivor can
prove contribution toward the purchase.
•
Tenancy in Common occurs when two or more people own
property together, but each has control over his/her portion.
There is no survivorship provision, which means you have
total lifetime and testamentary control over your portion and
can “estate plan away” your portion. Upon death, the value
of your portion is included in your estate, for both tax and
probate purposes. Your share of the Tenancy in Common
property is passed to your heirs according to the provisions
of your will.
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10
•
Tenancy by the Entireties is a special situation for a
husband and wife, which is very similar to JTWROS. In
Tenancy by the Entireties, both spouses own 100% of their
property. Upon the first spouse’s death, the other owns
100% of the property. If real estate is titled to spouses, it is
in Tenancy by the Entireties, and the home is not included in
the probate process. Tenancy by the Entireties is treated like
joint property for Federal Estate tax purposes.
•
Community Property laws say that property acquired after
marriage (with exceptions) by either spouse is community
property (or owned by both spouses). Nine states (Arizona,
California, Idaho, Louisiana, Nevada, New Mexico, Texas,
Washington and Wisconsin) are community property states.
Residents in Community Property states have special estate
planning needs and opportunities that should be addressed
by a qualified attorney.
People who have lived in a Community Property state and moved
to one of the common law states should mention that fact to their
attorneys as well, because community property will often retain its
characteristics even after moving to a common law state. Special
planning may be required.
Estate Planning
11
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12
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Uniform Gifts to Minors Act (UGMA)
•
Property is transferred to the child “in the name of the
adult” as the Custodian of a minor.
•
When the minors reach majority (age 18 in most states), they
have full rights to the property.
•
If the minor dies, the property goes to the estate of the minor.
Uniform Transfers to Minors Act (UTMA)
•
Same as UGMA, but allows a wider range of property to be
titled to the minor.
•
The minor acquires full rights to the assets at age 21 under
most states’ UTMA provisions.
Taxation of Minors
•
Favorable Income Tax Treatment But not as favaroble as before. The “Kiddie Tax” includes
children under 19 and dependent full-time students under age
24.
For those minors:
- The first $950 of unearned income from the account is
income tax free.
- Unearned income over $950 is taxed to the child at the
child’s rate.
- Unearned income over $1,900 is taxed to the child at
the parent’s top marginal rate or the child’s rate,
whichever is greater.
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13
•
After attaining age 19 (or 24 for full-time students), all income
is taxed to the child whether earned or unearned.
THE PROBATE SYSTEM
In general, every estate must be probated, with or without a will. A
will does not avoid probate.
When you die, the following assets, titled in your name alone or as
a tenant in common, are included in your probate estate:
•
Personal Property, which is property you own that is not land
or buildings and includes your clothes, jewelry, furniture, etc.
•
Real Property, which is land and buildings you own
•
Business Interests, if you have your own business
•
Any assets held in your name alone, or payable to your
estate
From the total amount of these assets, the following expenses are
paid:
•
Death/Estate Taxes
•
Accounting Fees
•
Appraiser’s Fees
•
Probate Costs, including bonds
•
Attorney Fees
•
Executor’s Commissions
Any remaining funds are paid to your designated heirs. If there was
a valid will prepared, the assets will be distributed according to the
terms of your will. If you don’t have a will, the state laws of intestate
succession will determine the distribution of the remaining funds.
Estate Planning
14
Proper estate planning techniques can limit the amount of taxes and
administrative fees that are paid by the estate.
Certain assets are excluded from the probate process, such as
jointly held property and contractual property, which includes
property that has been transferred to someone else as a
beneficiary (e.g. life insurance). Life insurance beneficiary
designations and joint tenancies will override a will.
Estate Planning
15
WILLS
The tendency of so many individuals to delay planning for their
demise, by not preparing their wills, accounts for an amazingly large
sacrifice of property and loss of benefits to their heirs and
dependents.
It is extremely important that an individual have some form of will
to help in the transition and disposition of his assets upon death.
WILL
When most individuals are asked if they have prepared a will or
have done any estate planning, in 80% to 90% of the cases, the
answer is no. The next question is: why haven’t they planned? In
most cases individuals do not want to think about death or dying.
The underlying notion is that, “the neighbor will die, my brother-inlaw will die, or the postman will die, but I’ll never die, and since I’m
not going to die, there is no need to plan.”
Although there are numerous and diverse reasons for this failure,
one of the main reasons is lack of knowledge in the area of
intestacy, or dying without a will.
Most people realize that if they die without a will, their property will
be distributed to their family. On the other side of the coin, though,
they fail to realize that the distribution may not be in accordance
with their wishes or the family’s needs at the time of death.
Definition of a Will
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16
A will may be defined as “a legally enforceable declaration of a
person’s instructions as to matters to be attended to after death,
and is inoperative until such time.” It would not be accurate to say
that a sill’s sole purpose is the disposition of property. A major
purpose of a will may be to name an executor or to name a
guardian for minor children.
A will usually involves the declaration of only one person, the
testator, and it does not become operative until the testator’s
death.
When we speak of wills, we usually refer to an “ordinary” will, which
is written and signed by the testator in the presence of the required
number of witnesses.
Some states recognize nuncupative (oral) and holographic
(handwritten) wills. Even in the states that do recognize them, a
strict interpretation applies .
Who Can Make a Will?
Any individual who owns property can dispose of it by will if he/she
meets the proper age and legal capacity requirements.
States differ in the minimum age required for making a will. Some
states have minimum age requirements for males versus females,
or minimum requirements for disposing of personal property or real
property.
An individual is regarded as having legal capacity to make a will in
most cases if he/she meets the following requirements:
•
Understands the fact that he/she is making a will
•
Remembers the property which he/she undertakes to
dispose
•
Remembers the people that have natural claims upon him or
her, and
•
Comprehends the manner in which the will is going to
distribute his/her property.
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17
Legal capacity is not required on the date of death, but on the date the
will was made.
Disadvantages of Intestacy
Dying without a valid will results in an arbitrary state-imposed
formula for distribution. With the proper planning, an individual can
perform a truly worthwhile service to dependents and other heirs by
avoiding intestate succession. Listed below are some of the
disadvantages of dying without a will:
State Law: In the absence of a will, state law specifies to whom
and in what fashion property is to be distributed. Not only is it
costly, but also the family usually suffers unnecessary economic
hardships.
Spouse’s Share: Depending upon the individual state law and the
family members who survive, a spouse may receive an entirely
inadequate amount of benefits to provide for his/her future security.
The surviving spouse may have to rely on dependents in order to
survive, or may be forced to drastically reduce the accustomed
standard of living.
Property: Since intestacy requires outright distribution of property,
the value of a specific asset may be endangered. For example, if a
business interest is involved, intestacy may prompt the sale or
liquidation of the business just to meet specific needs.
Forgotten Persons: Individuals whom the intestate decedent
might have wished to receive certain benefits may be excluded,
such as a step-child, son-in-law, faithful employee or a relative in
need.
Estate Planning
18
Outright Distribution to Children: Usually children will receive their
property interests outright. Age, needs, and competency levels may
be ignored. When a minor is involved, a guardian must be appointed
and the child’s share becomes subject to the supervision and rules of
the local court. Once the child becomes of legal age, the
guardianship ends and the property is turned over to the child. This
happens regardless of the child’s experience or degree of judgement
in financial matters.
Tax Disadvantages: In some states, intestacy may result in higher
taxes being paid. Also under intestacy, a fixed percentage of the
property passes to the surviving spouse, and this percentage may
be inadequate.
Administrator: Through a will, an individual can designate an
executor or personal representative of his choice to handle his
estate. In the absence of a will, the law appoints an administrator.
Usually this burden will fall upon a spouse or some relative or
individual who is completely unqualified for such an undertaking.
Also, an administrator’s power and authority in settling the estate is
limited by state law. For this reason, the newly appointed
administrator may be hindered or delayed in taking steps to
maintain the value of certain assets which should be disposed of. If
proper planning is done, the necessary powers can be authorized
by a simple provision in the will.
Estate Planning
19
Duties of an Executor/Personal
Representative
Consider this list of duties when making your selection of an
executor.
1.
Protect assets before and during probate.
2.
Gather information.
3.
Probate the estate planning will and/or testamentary trust.
4.
Advertise the granting of letters of authority.
5.
File claims for life insurance, pension and profit sharing, and
Social Security benefits.
6.
Inventory and gather assets.
7.
Obtain values at the date of the death on all assets.
8.
File for fiduciary relationship.
9.
Open bank accounts for the estate.
10.
Pay all debts of the estate.
11.
Obtain all tax returns filed (income and gift).
12.
Decide whether any assets should be sold.
13.
Schedule cash needs of the estate.
14.
Obtain appraisals on real and personal property.
15.
Review unpaid medical bills.
16.
Obtain a list of the decedent’s debts.
17.
File final individual income tax returns.
18.
Decide on deducting administrative expenses on the income
or estate tax return.
19.
File U.S. estate tax return or consider extension.
20.
Review the possibility of special valuation on farm and
business real estate.
Estate Planning
20
21.
Consider the QTIP election.
22.
File for a tax ID number for estate income tax returns.
23.
File fiduciary income tax return after choosing year end.
24.
Consider potential for a stock redemption.
25.
Allow for safeguarding of any assets distributed to minors.
26.
Prepare a statement regarding distributions of assets.
Sample Will
On the following pages is a sample Last Will and Testament for
review purposes only. This will is a sample; please consult your
attorney for application to your personal situation.
LAST WILL AND TESTAMENT OF
GUY ZERR
I, Guy Zerr, a resident of and domiciled in the City of Gotham, County of
Kent, and State of Confusion, do hereby make, publish and declare this to
be my Last Will and Testament, hereby revoking all prior Wills and
Codicils made by me.
I am married; my spouse’s name is Fay Zerr. I have two children,
Lou Zerr and Martha Zerr.
ITEM I
DEBTS
I direct that all my just debts and the expenses incident to my last illness
and death be paid as soon after my death as can be done conveniently.
With respect to any debt which is then not fully due and payable (unless
otherwise herein specifically provided), my Personal Representative shall
have discretion to pay the entire amount due or only those installments as
from time to time become due and payable during the administration of my
estate. If at the time of my death any of the real property herein devised is
subject to a mortgage, I direct that the devisee taking such mortgaged
property shall take it subject to such mortgage and that the devisee shall
not be entitled to have the obligation secured thereby paid out of my
general estate.
ITEM II
TAXES
I direct that all estate, inheritance, succession, death or similar taxes
(except generation skipping transfer taxes) imposed or assessed upon
property passing under this my Last Will (which term wherever used
herein shall include any Codicil hereto) be paid out of my residuary estate,
if any. The taxes passing on property passing otherwise than under this
Will and, if I have no residuary estate, the taxes on property passing under
this Will shall be paid out of the principal of any trust created by me as
therein provided. My Personal Representative shall not seek recovery
from or apportionment between or among any recipient, beneficiary,
transferee or owner of any such property or interests in property included
in my estate for such tax purposes.
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21
ITEM III
SPECIFIC BEQUESTS
I give and bequeath all of my personal and household effects of every kind
including, but not limited to, furniture, appliances, furnishings, pictures,
silverware, china, glass, books, jewelry, wearing apparel, coin collection,
tools, boats, automobiles, and other vehicles, and all policies of fire,
burglary, property damage, and other insurance on or in connection with
the use of this property, to my wife, Fay Zerr, if she shall survive me. If my
said wife shall not survive me, I give and bequeath all of said property to
my children and their issue, per stirpes, in approximately equal shares,
less any advances evidenced by me. I direct that my Personal
Representative permit each of said beneficiaries to choose the items that
he or she desires. In the event of conflict with regard to choice, I direct
that my Personal Representative determine who shall receive such
disputed items.
I may leave a list that specifies gifts of tangible personal property. I
request that my Personal Representative and my beneficiaries abide by
any memorandum by me directing the disposition of this property or any
part thereof. This request is precatory and not mandatory; nevertheless, I
hope those entitled to my estate will respect it.
If any beneficiary hereunder is a minor or under a legal disability,
the property may be distributed to the minor, to the minor’s legal guardian,
or to some other person who has the care or control of such minor. The
receipt of the person to whom any property is distributed shall be a
complete discharge of my Personal Representative from further
responsibility for such property. The person to whom any property is
distributed for the benefit of a minor shall decide from time to time whether
the property shall be retained for eventual distribution to the minor or
whether some or all of it shall be sold and the proceeds of the sale held for
the minor. Such person’s decision in this regard shall be conclusive on all
concerned.
ITEM IV
RESIDUE
I give, devise and bequeath all the rest residue and remainder of my
property of every kind and description (including lapsed legacies and
devises), wherever situated and whether acquired before or after the
execution of this Will, to my wife, Fay Zerr, if she shall survive me. If Fay
Zerr shall not survive me, I give and bequeath all of said property to my
children and their issue, per stirpes, in approximately equal shares, less
any advances evidenced by me.
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22
ITEM V
PERSONAL REPRESENTATIVE AND NAMED SUCCESSORS
I hereby nominate, constitute and appoint Fay Zerr as Personal
Representative of this my Last Will and Testament. If for any reason Fay
Zerr is unable or unwilling to serve or continue to serve, then I hereby
nominate, constitute and appoint Ray Zerr as First Successor Personal
Representative. If for any reason Ray Zerr is unable or unwilling to serve
or continue to serve, then I hereby nominate, constitute and appoint, T.
Zerr as Second Successor Personal Representative. Any and all
Personal Representatives serving under this Will shall serve without bond.
If any successor Personal Representative is so appointed, he or she shall
have and exercise all of the rights and powers herein conferred upon my
Personal Representative first named as fully as if he or she had been
originally designated.
ITEM VI
ALTERNATE CORPORATE SUCCESSOR
Except as otherwise provided herein, if the Successor Personal
Representative as herein defined should fail to qualify as Successor
Personal Representative hereunder, or for any reason should cease to act
in such capacity, the Successor Personal Representative shall be a bank
or trust company qualified to do business in the State of my domicile at the
time of my death, which Successor Personal Representative shall be
designated in a written instrument filed with the court having jurisdiction
over probate of my estate and signed by the court having jurisdiction over
the estate.
ITEM VII
DEFINITION OF PERSONAL REPRESENTATIVE
Whenever the word “Personal Representative” or any modifying or
substituted pronoun is used in this my Will, such words and respective
pronouns shall be held and taken to include both the singular and the
plural, the masculine, feminine and neuter gender , and shall apply equally
to the Personal Representative named herein and to any successor
Personal Representative acting hereunder, and such successor Personal
Representative shall possess all the rights, powers and duties, authority
and responsibility conferred upon the Personal Representative originally
named herein.
ITEM VIII
COMPENSATION OF PERSONAL REPRESENTATIVE
My individual Personal Representative is entitled to reimbursement for outof-pocket expenses and may receive reasonable compensation for
services. If my corporate Personal Representative shall serve, it shall
receive for its services an amount which shall be determined by its
Standard Fee Schedule in effect and applicable at the time of the
performance of such services. If no such schedule shall be in effect at
that time, it shall be entitled to an amount which shall be determined by the
Standard Fee Schedule in effect for Southeastern Michigan area banks
applicable at the time of the performance of services.
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23
ITEM IX
POWERS OF PERSONAL REPRESENTATIVE
I expressly authorize and empower my Personal Representative, in the
Personal Representative’s absolute discretion with respect to any
property, real or personal, at any time held under any provision of this Will
and without authorization by any court and in addition to any other rights,
powers, authority and privileges granted by any other provision of this Will
or by statute or general rules of law:
(1)
RETAIN ASSETS. To retain property owned by me pending
distribution or liquidation including property in which the Personal
Representative is personally interested or that is otherwise improper for
trust investment;
Estate Planning
24
(2)
INVEST ASSETS. To invest and reinvest my estate in accordance
with the Personal Representative’s judgment unrestricted by any present
or future statute or rule of law regulating investments by fiduciaries and to
retain any asset of my estate in the form in which it is received or acquired
without regard to the proportion that one asset or class of assets may
bear to the entire trust estate; and without limiting the generality of the
foregoing, to invest in and hold non-income producing assets and deal in
options; provided that with respect to any assets which are intended to
qualify for a marital or charitable deduction, the income beneficiary may
require the reinvestment of non-income producing assets into income
producing assets;
(3)
SELL ASSETS. To sell or dispose of or grant options, convey,
hypothecate, mortgage, encumber, lease or exchange for any other
property upon such terms and conditions as the Personal Representative
shall deem proper, any and all property of whatsoever character and
wheresoever situated forming a part of my estate, and to exercise any
option that may be part of my estate;
(4)
MAKE REPAIRS. To make an ordinary or extraordinary repair or
alteration in a building or other structure, demolish an improvement, or
raze an existing or erect a new party wall or building;
(5)
MANAGE REAL PROPERTY. To subdivide, develop, or dedicate
land to public use, make or obtain the vacation of a plat or adjust a
boundary, adjust a difference in valuation on exchange or partition by
giving or receiving consideration, or dedicate an easement to public use
without consideration;
(6)
ENTER INTO LEASE. To enter into a lease as lessor or lessee
for any purpose, with or without an option to purchase or renew, for a term
within or extending beyond the period of administration;
(7)
BORROW MONEY. To borrow money upon terms acceptable to
my Personal Representative and to pledge any property as security
therefore and to renew any indebtedness incurred by me or by my
Personal Representative;
(8)
SETTLE LEGAL CLAIMS. To adjust, arbitrate, compromise, sue
on, defend, abandon or otherwise deal with and settle any and all claims in
favor of or against my estate as my Personal Representative shall deem
proper;
(9)
ALLOCATE DISBURSEMENTS. To allocate in such manner as
my Personal Representative may consider advisable all receipts and
disbursements between income and principal regardless of any contrary
statute or rule of law;
(10)
VOTE STOCKS. To vote any and all stocks in person or by proxy
and to cause any securities to be registered in the name of my Personal
Representative or in the name of my Personal Representative’s nominee
or nominees;
(11)
CLAIM TAX DEDUCTIONS. To claim expenses as either income
or estate tax deductions, where it is permitted by law, in my Personal
Representative’s sole judgment and discretion, believes to be in the best
interest of my estate and of the beneficiaries thereof and if my Personal
Representative deems it advisable to do so, to make such compensating
adjustment between income and principal as my Personal Representative
shall deem proper. In so doing, my Personal Representative shall not be
accountable or responsible to any person interested in my estate for the
Estate Planning
25
manner in which my Personal Representative either may exercise any
such election or may make any decision with respect to a compensating
adjustment between income and principal and all such elections and
decisions shall be binding and conclusive upon all persons in my estate;
(12)
DISTRIBUTE ASSETS. To distribute my estate in kind or in cash,
or partly in kind and partly in cash, and, in my Personal Representative’s
discretion, to allocate particular assets or portions thereof or undivided
interests therein to any one or more of the beneficiaries hereunder taking
into account the income tax bases of such assets as my Personal
Representative shall deem to be for the best interests of the beneficiaries
of my estate. For the purpose of any such distribution, my Personal
Representative may select such securities or other property as he or she
may deem suitable and may place such valuation upon such securities or
other property as he or she may determine. The decision of my Personal
Representative shall be final and binding upon all parties interested in my
estate;
(13)
ENVIRONMENTAL STATUTE. To utilize assets of my estate to
comply with any environmental statute or regulation applicable to any
asset of my estate;
(14)
ABANDON ASSETS. To abandon property when, in the opinion of
my Personal Representative, it is valueless, or is so encumbered or in
such a condition as to be of no benefit to the estate;
(15)
INSURE ASSETS. To insure the estate property against damage,
loss, and liability and insure the Personal Representative against liability
as to third persons;
(16)
ELECT MARITAL DEDUCTION. Where permitted by law, to
elect to take a marital deduction with respect to all or any part of any
property which constitutes part of my estate for federal estate tax
purposes. My Personal Representative shall have sole judgment and
discretion in making any such election or decision not to so elect based
upon what he or she determines to be in the best overall interest of the
beneficiaries of my taxable estate. My Personal Representative shall not
be liable to any particular beneficiary for such good faith act;
(17)
GENERATION SKIPPING TAX. To allocate or assign any
generation skipping tax exemption or credit to any property which is part of
my taxable estate among such property in my Personal Representative’s
discretion deems to be in the best interest of the beneficiaries of my
taxable estate and my Personal Representative shall not be liable to any
person who may later bear the economic burden of any generation
skipping tax for a good faith exercise of this discretion. This exemption
from liability shall also apply to any person advising my Personal
Representative;
(18)
DELEGATION. To appoint and compensate from my estate
agents to act in my Personal Representative’s behalf and generally to do
any act or thing and execute all instruments necessary, incidental or
convenient to the proper administration of my estate;
(19)
EMPLOY PROFESSIONALS. To employ, and pay reasonable
compensation for reasonably necessary services performed by, a person,
including, but not limited to, an auditor, investment advisor, or agent, even
if the person is associated with the Personal Representative, to advise or
assist the Personal Representative in the performance of administrative
duties; act on such a person’s recommendations without independent
investigation; and instead of acting personally, employ one or more agents
to perform an act of administration, whether or not discretionary;
(20)
EMPLOY ATTORNEY. To employ an attorney to perform
necessary legal services or to advise or assist the Personal
Representative in the performance of the Personal Representative’s
administrative duties, even if the attorney is associated with the Personal
Representative, and act without independent investigation upon the
attorney’s recommendation. An attorney employed under this subdivision
shall receive reasonable compensation for his or her employment;
(21)
CONTINUE BUSINESS. To continue a business or venture in
which I was engaged at the time of death as a sole proprietor or a general
partner, including continuation as a general partner by a personal
representative that is a corporation;
(22)
USE OF DISCRETION. Except to the extent inconsistent with the
above, to exercise any and all powers granted to any fiduciary under the
Estates and Protected Individuals Code. Anything herein to the contrary,
no beneficiary Personal Representative may hold or exercise any power
or discretion the hold or exercise of which would cause any portion of my
estate or the income generated thereby to be taxable to such person for
estate, gift or income tax purposes (except my spouse with respect to
property that is intended to qualify for the marital deduction).
ITEM X
INDEPENDENT PROBATE ADMINISTRATION
I direct that my estate not be subject to supervised court administration,
and I therefore direct that such intent be followed by Section 700, et seq.
of the Estates and Protected Individuals Code, being Public Act 386 of
Michigan, 1998, as may be amended from time to time or any successor
statute.
ITEM XI
DISCRETIONARY ALLOCATION
My Personal Representative shall have absolute discretion, but shall not
be required, to make adjustments in the rights of any beneficiaries, or
among the principal and income accounts to compensate for the
consequences of any tax decision or election, or of any investment or
administrative decision, that my Personal Representative believes has
had the effect, directly or indirectly, of preferring one beneficiary or group
of beneficiaries over others. In determining the federal estate and income
tax liabilities of my estate, my Personal Representative shall have
discretion to select the valuation date and to determine whether any or all
of the allowable administration expenses in my estate shall be used as
federal estate tax deductions or as federal income tax deductions.
ITEM XII
DEFINITION OF CHILDREN
Estate Planning
26
For purposes of this my Will, “children” means the lawful blood
descendants in the first degree of the parent designated; and “issue” and
descendants” mean the lawful blood descendants in any degree of the
ancestor designated. For purposes of this Will, if a person has been
legally adopted, that person shall be considered a child of such adopting
parent and such adopted child and his issue shall be considered as issue
of the adopting parent or parents and of anyone who is by blood or
adoption an ancestor of the adopting parent or either of the adopting
parents.
The terms “child,” “children,” “issue,” “descendant “ and
“descendants” or those terms preceded by the terms “living” or “then
living” shall include lawful blood descendant in the first degree of the
parent designated even though such descendant is born after the death of
such parent.
ITEM XIII
SIMULTANEOUS DEATH
If my spouse and I should die under such circumstances as would render
it doubtful whether my spouse or I died first, then it shall be conclusively
presumed for the purposes of this my Will that I predeceased my spouse.
If any other beneficiary and I should die under such circumstances as
would render it doubtful whether the beneficiary or I died first, then it shall
be conclusively presumed for the purposes of this my Will that said
beneficiary predeceased me.
ITEM XIV
WILLS NOT MUTUAL
Although my spouse and I are executing similar wills, we do not intend the
wills to be construed as mutual, reciprocal or dependent on the other, and
either of us shall be free to execute a will or codicil with different
distribution of assets.
ITEM XV
CHOICE OF LAW
This Will is to be interpreted and construed under the laws of the State of
Michigan.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my
seal this the ____ day of ____________, 2009.
________________________________
Guy Zerr, Testator
The foregoing Will consisting of 10 typewritten pages, was this the ____
day of ____________, 2009, signed, sealed, published and declared by
the said Testator as and for his Last Will and Testament in our presence,
and we, at the Testator’s request and in his presence, and in the presence
of each other, have hereunto subscribed our names as witnesses on the
above date.
_________________________________of____________________________________
_________________________________of____________________________________
Estate Planning
27
Types of Trusts
TRUST
A trust is an independent legal entity established to hold assets for a
specific purpose. Trusts can be very complex in nature, or quite
simple. A very common type of trust is a Revocable Living Trust, in
which the person creating the trust keeps all of the powers, including
the power to take money out of the trust, or amend the trust. In
general, a trust created during the life of the person who creates the
trust (called the Settlor or Grantor) that has assets titled to the trust at
the time of death will avoid probate. This is because the trust owns
the property, and not the deceased grantor.
The diagram below illustrates the basic principle of trusts:
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To Trustee:
“Hold my money, and invest and protect it for my children. While they
are under age 35, use the income to care for them. Give them 1/3 of
the total balance at age 25, ½ of the remainder at age 30, and the rest
at age 35.”
•
A grantor creates a trust with a Trust Agreement. Most of the
time, the grantor funds the trust with assets like cash, securities
or real estate. For income tax purposes, IRAs, 403(b) or
401(k) plans are not usually used to fund a trust.
Estate Planning
28
However, the retirement plan assets may be payable to the trust at the
death of the grantor.
•
The grantor usually serves as the trustee while he or she is
alive, and then names a successor trustee to act on the
grantor’s death. The trustee holds assets for the beneficiaries.
•
Upon some event ( usually, attaining a specific age ), the
trustee pays funds to the beneficiaries. The grantor may put
restrictions on the money. Typical restrictions include:
Estate Planning
29
-
A sprinkling clause giving money to the beneficiaries
at a series of ages, like 25/30/35, or sprinkling money
for education, care and maintenance;
-
An issue clause that provides that if a married child
dies before distribution, the funds allocable to that child
will be paid only to the grandchildren (or greatgrandchildren), and not the spouse of that deceased
child.
In general, trusts have the following advantages:
•
Secrecy
Living Trusts are generally not subject to open court hearings or
probate court control, so their contents and provisions are private.
•
Protection
Trusts can be constructed with a spendthrift clause, which prohibits
the beneficiaries from borrowing against or using the money in the
trust until actual distribution. A spendthrift clause also protects the
trust from most beneficiary-creditor relationships.
•
Speed
Trusts are very rapid in the distribution of assets, as compared to a
probated estate. Trusts can, however, delay the payment and
reduction of debts when compared to a probated estate.
•
Control
Trusts can provide a very wide range of restrictions on property. As
noted above, the grantor can sprinkle property, leave all or a portion
of property to a charity, or set ages at which beneficiaries can
receive property.
On the flip side of the coin:
•
Cost
Trusts are considerably more expensive to establish than a will, and
usually require extensive re-titling of property. The grantor needs to
evaluate the importance of the trust to the family estate plan.
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30
The following flowchart gives a cursory explanation of different
types of trusts.
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There are basically two main types of trusts used in estate planning.
These trusts are known as a Testamentary Trust and an Inter Vivos
Trust (or Living Trust).
Estate Planning
31
Testamentary Trust
TESTAMENTARY
TRUST
The Testamentary tTrust is brought into existence by the direction of
a will and only exists through a valid will. Considering a
simultaneous death situation for the parents of several minor
children, it may be to their benefit to execute a valid will along with
a testamentary trust. In this situation the parents would be the
grantors, and the children would be the beneficiaries. The
parents would have to name a trustee who would monitor and
administer the trust. The trustee may be a private person or an
institutional trustee such as a bank or trust company. The trustee
would receive the financial proceeds of the trust to invest for the
beneficiaries, as well as specific instructions for administration.
It is important to note that testamentary trusts are not private
documents; they are open to the public scrutiny after death. Assets
passing through a Testamentary Trust are subject to the probate
process.
Revocable Living Trust
(An Inter Vivos Trust)
REVOCABLE LIVING
TRUST
A Revocable Living Trust is created when one person (the
GRANTOR) transfers to another person or corporation (the
TRUSTEE) a property interest to be held for the benefit of others
(the BENEFICIARIES). The most common estate planning
arrangement is a Self-Trusteed Revocable Living Trust, in which
one person, during life, is the:
•
Grantor
•
Initial Trustee
•
Beneficiary
The successor trustee takes over the administration of the trust at the
death, disability or resignation of the initial trustee.
Estate Planning
32
If the trust is created during the grantor’s lifetime, rather than in his
Will, it is an inter vivos or living trust. When the grantor retains the
right to dissolve the trust arrangement it is a revocable living trust.
•
Advantages
1. Assets are under the detailed control of the trustee, subject
to the instructions of the grantor.
2. Assets in the trust are not subject to probate
administration. This saves executor and attorney fees. It
also grants more privacy, as to who gets the estate, when
they get it, and how much they get.
3. Professional Management is available if the trustor
(grantor) becomes incompetent, disabled, or wants to be free
from worries of trust management.
4. Should the trustor die, the successor trustee can step in
and manage the assets without delay or “red tape.”
5. Annual court accountings, with accompanying legal fees,
are not required, although some states do not require
annual accountings for Testamentary Trusts either.
6. The trustee can collect life insurance proceeds
immediately after the trustor dies and can use the proceeds
to care for family members without any need for court
approval.
7. A successor trustee can be in another state without
complications.
Estate Planning
8. Assets in the trust are insulated from the beneficiaries’
creditors (spendthrift clause).
33
•
Disadvantages
1. Creditors may not be cut off as quickly as they are in
probated estates, i.e., four months.
2. A little more effort is required to transfer assets into the
trust, and records should be kept on later transactions by the
trustee.
3. The attorney usually charges a higher fee to establish a
living trust, as opposed to a testamentary trust.
4. Administration and tax considerations are complex and more
costly than outright distributions from an estate.
Irrevocable Trusts
An irrevocable trust cannot be revoked or amended by the
grantor; otherwise, it will be included as an asset of his or her
estate.
IRREVOCABLE
TRUST
Funded Irrevocable Trusts have income-producing assets
transferred into them which may: (1) pay income to beneficiaries,
(2) accumulate income or (3) pay premiums on a life insurance
policy from the income earned.
Unfunded Irrevocable Trusts usually own just an insurance
policy and the grantor makes annual gifts to the trust with which
the trustee can pay the premiums.
Estate Planning
34
•
Features
1. The trust is Irrevocable. That means that the grantor
cannot get anything out once it is put into the trust.
2. The Annual Gift Tax Exclusion May Be Lost.
Contributions to the trust are “future interests” instead of
“present interests.” Future interests typically do not qualify
for the $13,000 annual gift tax exclusion. Special features
are required to get the annual gift exclusion.
3. Irrevocable Trusts are complex, and costly to establish
and maintain.
4. Irrevocable Trusts are generally not included in the
Federal Taxable Estate. See the Estate Tax diagram on
page 43.
Credit Bypass Trusts
CREDIT BYPASS
TRUST
A commonly used trust, usually contained within a Revocable Living
Trust, is a Credit Bypass Trust. Under Federal Estate tax law, each
citizen is allowed to pass at death, a certain amount of assets (for
2009 $3,500,000)* without incurring estate liability. This amount is
determined by an Applicable Exclusion Amount for assets passing to
non-spousal beneficiaries.
*
Estate Planning
35
See chart on page 41 for changes instituted by the Economic
Growth and Tax Relief Reconciliation Act of 2001.
The exclusion means that each person can bequeath up to
$3,500,000 without Federal estate tax. For a couple who dies in
2009 with an estate of $7,000,000, a credit bypass trust can save up
to $900,000 in Federal Estate taxes. Die in 2010 and you win the
LOTTO... there is no Federal Estate Tax. However, this freedom from
Federal Estate Tax is temporary and, unless Congress intervenes, the
exclusion goes back to $1,000,000 in 2011. The expectation is that
congress will make the $3,500,000 exemption amount permanent.
How a credit bypass works is as follows:
•
When the grantor dies, up to $3,500,000 is passed to the
bypass trust.
•
The grantor’s spouse takes trust income, and possibly
principal (if needed) for life.
•
On the spouse’s death, the trustee distributes the trust to the
ultimate beneficiaries, usually the children.
Credit bypass trusts are very useful in estates larger than $3,500,000.
Although many families consider their wealth very modest, remember
that the federal taxable estate includes most life insurance, pensions,
401(k) and 403(b) plans, IRAs and joint property.
Remainder Trusts
REMAINDER
TRUST
Estate Planning
36
Another useful type of trust, particularly when the taxable estate is
larger than $3,500,000 for a single person or $7,000,000 for a
married couple, is one of the many forms of remainder trusts. A
remainder trust splits property ownership into two components, a
life estate (or ‘term estate’ for a period of years), and a remainder
interest after the life or term estate is over. These types of trusts
generally provide the grantor with the advantage of income or use
of the property, coupled with either a current income tax deduction
(in the case of charitable remainder trusts), or avoidance of probate
and appreciation on the property (in the case of a grantor reserved
income trust).
Life Insurance Trusts
LIFE INSURANCE
TRUST
In 2009 federal law imposes the federal estate tax on estates with
taxable assets larger than $3,500,000. Included specifically in the
calculation of gross estate is any life insurance death benefit on a
policy owned by the deceased. Ownership has many tests, but
generally includes any insurance policy in which the decedent had
any Incidents of Ownership. If the decedent owned the policy, or
had any of the rights to the policy (like the right to change the
beneficiary or borrow against the policy), the face amount would be
included in the estate. An Irrevocable Life Insurance Trust excludes
insurance policy proceeds from the taxable estate of the insured
party.
In an Irrevocable Life Insurance Trust:
•
The Grantor creates a trust, which is irrevocable (cannot be
changed);
•
The trustee purchases an insurance policy on the grantor’s
life. There are also polices called last-to-die (survivorship
life) policies that insure the grantor and the spouse;
•
Upon the grantor’s death, the life insurance proceeds are
paid (income tax free and estate tax free) to the trust;
•
The trust is then administered for the beneficiaries. The
trustee may lend assets to, or purchase assets from, the
estate to provide liquidity for estate taxes.
Irrevocable life insurance trusts are generally used in estates larger
than $3,500,000 for a single person and $7,000,000 for a married
couple. The trust must be irrevocable, and there are costs of
administration. Grantors frequently use permanent forms of
insurance (e.g. Universal or Whole Life) to assure funding.
Estate Planning
37
Corporate or Individual Trustee
•
Advantages
The Corporate Trustee
1. doesn’t die or become disabled.
2. is financially accountable for its mistakes.
3. can be impartial to the children.
4. has investment expertise, and tax and accounting abilities.
5. will refuse loans to “hard-up friends” of the trustee.
6. keeps current with the constant changes in the law.
The Individual Trustee
1. might not charge a fee.
2. may have a more personal interest.
3. may possess special investment expertise.
Some people prefer the use of an individual and a corporate
trustee, as co-trustees, to obtain the advantages of each.
Estate Planning
38
TRANSFER TAXATION
Our federal government imposes three forms of transfer tax:
•
Estate tax
•
Gift tax
•
Generation skipping transfer tax.
Recent tax law changes have dramatically reduced the impact of
these transfer taxes, at least through the year 2010. The estate
and generation skipping transfer taxes are reduced and ultimately
eliminated after 2009. The gift tax remains, but was changed in
2003 so that each person has a lifetime gift tax exclusion of
$1,000,000. Again, refer to the tax table on page 41 for the
scheduled reductions.
Estate Tax
The gross estate includes property the decedent owned at death. It
also includes life insurance proceeds of policies owned by the
decedent. Jointly held property between a husband and wife would
also be included in the gross estate (usually at 50% of the value).
All property included in the gross estate is valued as of the date of
death. Deductions from the gross estate in arriving at the taxable
estate include funeral and administration expenses, certain taxes,
debts of the decedent, casualty losses incurred during the
administration of the estate, transfers to charitable organizations
and the marital deduction. The marital deduction is for the amount
passing to the surviving spouse. Under current law the amount of
marital deduction is unlimited.
Estate Planning
39
Once the taxable estate has been determined, certain taxable gifts
are to be added to it. The appropriate tax rate schedule is then
applied. Various credits should be subtracted to determine what, if
any, tax is due. The Economic Growth and Tax Relief
Reconciliation Act of 2001 has greatly increased the amounts that
taxpayers can leave to non-spousal beneficiaries estate tax free.
You can reduce your estate by gifting up to $13,000 a year per
person. Amounts gifted in excess of the $13,000 will be taxable once
the total lifetime gifts exceed the exclusion amount. This is figured
cumulatively over your lifetime. You and your spouse can each gift
$13,000 per child (or other donee) for a total of $26,000 per year.
This gift-splitting is done by filing a gift tax return. You can give more
than the annual amount of $13,000 or $26,000 and not be concerned
unless you are worth in excess of $3,500,000. If you are worth in
excess of $3,500,000, a living trust is strongly suggested.
State Death Taxes
A death tax is a tax on the right to transfer property or to receive
property upon the death of the owner. If the death tax is imposed
on the right to pass property at death, it is classified as an estate
tax. If it is a tax on the right to receive property from a decedent, it
is termed an inheritance tax. The federal government imposes
only an estate tax. State governments may levy inheritance taxes,
estate taxes or both. The State of Michigan no longer levies an
inheritance or estate tax; however, it does have a “generationskipping” tax that applies in specific situations. An estate tax
specialist should be consulted if you have a larger estate and are
giving significant assets to grandchildren (or later generations).
State death taxes are imposed on either the heir or the estate.
Characteristically, an inheritance tax places the heirs into classes
based on their proximal relationship to the decedent. The closer
the relationship, the lower the rates imposed and the greater the
exemption allowed.
Estate Planning
40
Transfer Tax Exemptions and Rates
Year
Estate and
GST Tax
Exemption
Gift Tax
Exemption
Highest Estate,
GST, and Gift
Tax Rates
2002
$1 Million*
$1 Million
50%
2003
$1 Million*
$1 Million
49%
2004
$1.5 Million
$1 Million
48%
2005
$1.5 Million
$1 Million
47%
2006
$2 Million
$1 Million
46%
2007
$2 Million
$1 Million
45%
2008
$2 Million
$1 Million
45%
2009
$3.5 Million
$1 Million
45%
2010
N/A
$1 Million
35% (gift tax only)
* GST tax exemption, adjusted annually, is $1,120,000 in 2002. In 2004 and
later years, the GST tax exemption will be equal to the estate tax exemption.
Steps in the calculation of the Federal Estate Tax
1.
2.
3.
4.
5.
6.
7.
Estate Planning
41
Find the total gross estate.
Subtract marital and charitable deductions.
Determine amount of taxable estate.
Calculate tentative tax.
Subtract unified credit ($1,455,800 in 2009).
Subtract other available credits.
Pay net federal estate tax within 9 months of death.
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Estate Planning
42
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Marital Deduction
The Federal Estate Tax allows an unlimited deduction for transfers
to the spouse. These transfers may take several forms:
•
Outright distribution (“I hereby bequeath all my assets to
my spouse ...”)
•
Joint property
•
Beneficiary designation on life insurance, a pension or
other qualified plans.
•
Distributions in trust
•
Marital trust (income plus sprinkling assets for life, with right
to distribute to anyone on spouse’s death).
•
QTIP [Qualified Terminable Interest Property] (Income plus
sprinkling assets for life, with limitation on appointment at
death i.e., “to my husband for his life, he may have income, and
he may leave it to any of our children ...”).
Estate Planning
43
Maximizing the Unified Credit
Since the estate tax law allows an increasing exclusion amount per
estate, it is advantageous to maximize this opportunity in concert
with the marital deduction. The Credit By-Pass Trust, discussed
earlier, is the easiest way to maximize the credit.
For example:
H owns $4,000,000 in his name or jointly with wife. W owns
$2,000,000 in her name or jointly with husband.
Original Will: “I leave everything to W, if she survives me, and
then to my children ...”
H Dies First in 2009
H’s Estate
W’s Estate if W
dies and
Exemption is
still $3.5 M
Estate Planning
44
No Tax (Marital
Deduction)
$4,000,000
$6,000,000
Total Estate
($3,500,000
Exclusion)
$2,500,00
Taxable
$1,005,800
Tax
•
Maximizing Credit
“I leave an amount equal to the applicable exclusion to my Nonmarital trust, the balance to W in trust: W to receive income and
any portion of principal the trustee deems necessary. On W’s
death, W may leave the property to our children.”
H Dies First in 2009
H’s Estate
in 2009
W’s Estate if W
dies and Exemption
is 3.5M
•
$3,500,000
Credit By-Pass
$500,000
Marital
Deduction
$2,500,000 Gross Estate
(W’s $2,000,000 plus
$500,000 from H’s using
Marital Deduction
No Tax
(Exclusion
and Marital
Deduction
No Estat Tax
(Exclusion)
Estate Equalization
Because of the increasing applicable exclusion, a strategy for
married couples with estates over $2,500,000 is to equalize estates.
In the previous example, if H had transferred $1,150,000 to W (with no
tax, because there is an unlimited marital deduction for gift tax also),
and left the property to the nonmarital trust, there would be no tax to
either estate regardless of who died first.
•
Increasing Potential Problem Under
EGTRRA
As previously discussed, for the single year of 2010, there is no
Federal Estate Tax. If a grantor had used the most common trust
language available in recent years, it is entirely possible that the
children or other non-spousal heirs will receive the exclusion amount,
and the surviving spouse will receive a drastically reduced amount,
and possibly nothing at all. The implication: See your attorney!
Estate Planning
45
Tax Basis of Property Acquired From
Another
Property acquired from the estate of the deceased:
•
Inheritance
•
Income tax basis is “stepped-up” to the value at the date of
death ( in some cases, an alternate valuation date six months
after death is used).
For example:
Dad leaves son, in his will or trust, a cottage that Dad bought for
$20,000 that is now worth $200,000. The son’s basis is $200,000,
the date of death value. If the son sells the property, he will recognize
gain or loss from the $200,000 basis.
•
Gift
•
If the gifted property is sold at a gain:
The basis is the same as the donor’s.
•
If the gifted property is sold at a loss:
The basis is the value at the date of the gift.
For example:
Dad gifts son a cottage that Dad bought for $20,000 that is now
worth $200,000. The son’s basis is $20,000. If the son sells the
property for $200,000, he would recognize a taxable gain of
$180,000.
Estate Planning
46
•
Joint Property (Husband and Wife)
•
At the death of a Joint Tenant:
The value of the deceased tenant’s one-half interest “stepsup” to the date of death value. The other half has “carryover” basis.
For example:
Dad puts Mom on as a joint tenant on a cottage that Dad bought for
$20,000, that is now worth $200,000. Dad dies; Mom’s basis is
$110,000: one-half of $20,000 and one-half of $200,000.
Note: Jointly held property between non-spousal parties is fully
included in the estate of the first decedent, except to the extent the
survivor proves contribution toward the acquisition of the asset. As
a result, a full step-up may be available.
Caution: Under EGTRRA, the rules relating to step-up in basis are
scheduled to change in 2010, unless modified by legislation before
then.
Estate Planning
47
ESTATE PLANNING FOR 401(k),
403(b), IRA & OTHER RETIREMENT
PLANS
A highly confusing segment of estate planning relates to the estate
consequences of Qualified Plan balances and IRAs. In general,
qualified plan balances are included in the Federal Gross Estate,
for estate tax purposes. In addition, plan balances are also subject
to income taxes to the recipient. Large accumulations can have a
combined estate/income tax rate of up to 80%!
IRA
For individual retirement accounts, the following general rules apply.
Be sure to consult a qualified tax advisor regarding your own
situation:
•
Income Tax on Death of IRA Owner
•
Spouse as beneficiary: spouse may roll IRA into her own
IRA and treat as her own IRA;
•
Non-spouse individual beneficiary: beneficiary may either
elect to take a distribution over his life expectancy, or
withdraw all funds within a five-year period;
•
Non-spouse non-individual (i.e. Revocable Trust):
beneficiary may be allowed to withdraw funds over his life
expectancy if certain rules are followed; otherwise,
withdrawals must be made and income tax must be paid
within a five year period.
Estate Planning
48
The recipient of an IRA payout must include the distribution in taxable
income (to the extent the distribution represents taxable income).
As these rules are extremely complex, you are encouraged to
consult with a specialist if you have unusual planning
circumstances. Rules are different depending on whether
mandatory minimum distributions have already begun at age 70 ½.
Remember that the Roth IRA does not require distributions at age
70 ½, and that all proceeds would be free of income tax if held for
five years at the time of death. The value of the Roth IRA is,
nonetheless, included in the estate for estate tax purposes.
Estate Planning
49
THE DURABLE POWER OF
ATTORNEY
The Durable Power of Attorney is the popular name for a special
legal relationship that allows a person to act legally on another’s
behalf, despite the subsequent disability of the person granting the
relationship (called the principal). A Durable Power of Attorney is
different from a Power of Attorney in that a regular Power of
Attorney becomes inoperative upon the disability of the principal.
The principal is the person granting the Durable Power of Attorney
and the agent is the person given the responsibility of carrying out
that power.
Disabilities
Disabilities can be divided into physical disabilities and mental
disabilities. Either form of disability can severely affect the
management of assets during a lifetime. It can involve not only the
problems related to the physical disabilities, but also a loss of the
legal right to make a contract and gifts, and the ability to make a
valid will. The potential problems that disabilities can cause are
often ignored when discussing estate planning. This is probably
due to the fact that death is certain and disability is uncertain.
•
Cost of Disability
The expense, delay and humiliation of a guardianship proceeding
should be avoided if possible. A properly drafted Durable Power of
Attorney can be used to avoid this expense.
Estate Planning
50
Uses of the Durable Power of Attorney
The many uses of the durable power include such items as property
management, custody and management of the person (principal),
health care decisions and estate planning. One of the main uses of
the Durable Power of Attorney is delegating (to an agent) the
management and control of property of the principal during mental
or physical incapacity. The authorities transferred to the agent
usually include the ability:
1. To make deposits and withdrawals from bank accounts, sell,
lease, borrow, invest, etc.
2. To have access to principal’s safe deposit box.
3. To sign tax returns on behalf of the principal and represent or
obtain representation of the principal at a tax audit.
4. To deal with retirement plans (contribute, rollover, borrow,
etc.).
5. To fund a previously created living trust or create different
forms of property ownership.
6. To deal with life insurance on the principal, including such
actions as increasing coverage; to use policy dividends for
added insurance; and to borrow against the policy.
7. To reform estate planning documents (other than wills) if they
prove to be defective after incompetency.
8. To nominate a guardian for the principal and a guardian for
the principal’s minor children.
Estate Planning
51
You should be aware of two different forms of the Durable Power of
Attorney. The General Durable Power of Attorney is quite broad,
and is intended to be effective before and during the principal’s
incapacity. A “Springing” Durable Power of Attorney is designed
to go into effect only in the event of the incapacity of the principal.
(A third form, known as a Limited Power of Attorney, is useful for a
specific purpose such as an isolated real estate transaction, but is
not intended for use in the context of an incapacity or disability).
Custody and Management of The
Person
When mental incompetency arises, attention is normally directed
toward the legal problems of asset management, but equal and
sometimes greater problems relating to the physical care of the
person are also presented. The Durable Power of Attorney can
contain provisions relating to the care, custody and control of the
incompetent. The following powers should be considered for
inclusion in a Durable Power of Attorney:
1. Establishment of residence (e.g. nursing home).
2. Arrangement of transportation and travel.
3. Arrangement of recreation.
4. Purchase, storage, repair and disposition of clothing,
consumables, household goods, furnishings and personal
effects.
5. Arrangement of advance funeral and burial arrangements
and for anatomical gifts.
6. Arrangement of care and/or disposition of pets.
Estate Planning
52
7. Employment, compensation and discharge of domestics,
companions and other non-medical personnel.
8. Arrangement of spiritual or religious needs.
9. Provision of companionship.
10. Nomination of guardians for principal’s minor children.
Note: The Supreme Court decision in CRUZAN makes health care
decision making very convoluted. Your Durable Power or Living
Will should be carefully reviewed.
Health Care Decision Making
One of the most controversial sections of a Durable Power of
Attorney is that on health care decisions. The Model Health Care
Act of 1982 provides that adults or certain minors may appoint
another to be the appointer’s health care representative in matters
affecting health care. In providing for the health care of the
principal, one or more of the specific authorizations listed below
should be considered:
1. To employ and discharge health care personnel.
2. To give or withhold consent to medical treatment.
3. To give or withhold consent to psychiatric care.
4. To authorize relief from pain.
5. To grant releases to medical personnel and others.
Estate Planning
53
Choosing an Agent
The task of selecting an appropriate person or persons to serve as
agent under a Durable Power of Attorney can be difficult. The
person chosen can be the principal’s child, spouse, family doctor,
relative, minister, principal’s business associate, the principal’s
lawyer, or if there are no suitable persons able or willing to serve, a
final alternative is a bank or corporate fiduciary. It should be noted
that if a spouse is chosen, the agreement becomes void or another
agent is automatically installed upon death or divorce from the
spouse. Several agents can be chosen, usually as alternates if the
first agent named is unwilling or unable to serve.
Compensating the Agent
If a close family member is chosen as agent, there is usually no
financial compensation. Other than that, compensation may be set
up on a fee basis or as a percentage of the assets under the
agent’s control.
Estate Planning
54
LIFE INSURANCE
Term Insurance
•
General Characteristics
—
—
—
—
—
—
—
•
Types of Term Insurance
—
—
—
—
—
•
—
—
55
Annual renewable term
Decreasing term
Level term
Step rate
Modified Term
Most Common Uses
—
—
Estate Planning
Low initial premium
Coverage for a term
Pure life insurance
No savings element
No cash value as an asset
No loan provision
Large amount of coverage can be secured at young
age with minimal outlay
Temporary protection for specific time period
For young individuals when large amounts of
coverage are needed for a minimal outlay
When individuals want pure life insurance and want to
invest in their own type of cash accumulation account
Guaranteed future insurability
Whole Life
•
General Characteristics
—
—
—
—
—
—
—
—
—
—
•
Types of Whole Life
—
—
—
—
•
—
56
Traditional
Interest sensitive
Vanishing premium
Graded premium
Most Common Uses
—
Estate Planning
Higher initial premium compared to term insurance at
same age
Permanent coverage
Loan provisions
Level premium outlay
Dividend options if it is “participating”
Non-forfeiture options
Tax deferred growth
Guaranteed cash values
Very conservative return on investment
Premiums are fixed
Used when overall insurance needs will continue for
many years
May be most economical way to purchase insurance
for permanent needs
Universal Life
•
General Characteristics
—
—
—
—
—
—
—
—
—
—
—
—
•
Types of Universal Life
—
—
•
—
57
Level death benefit
Increasing death benefit
Most Common Uses
—
Estate Planning
Referred to as flexible premium adjustable life
Premiums are flexible and may be varied
Tax deferred growth
Death benefit is flexible
Minimum premiums are usually less than whole life
but greater than term insurance
Combines term insurance with an accumulation
account
Excess money in accumulation account earns current
interest rates
Premiums are not fixed
Can add additional amounts of money at-will up to
federal guidelines
Current interest rates are not guaranteed
Administrative charges and fees affect yield
Fluctuations in interest rates may affect yields and
premiums
When an individual’s or company’s needs are
constantly changing
When an individual needs flexibility
Variable Life
•
General Characteristics
—
—
—
—
—
—
—
—
—
—
—
—
—
•
Types of Variable Life
—
—
•
58
Ongoing premium
Vanishing premium
Most Common Uses
—
—
Estate Planning
Usually higher initial premium as compared to
traditional whole life at same age
Individual has choice of investing premiums in stock,
bond or money market portfolios
Permanent coverage
Loan provisions
Level premium outlay
Dividend options
Increasing death benefit potential
Non-forfeiture options
Tax deferred growth
No guaranteed cash values
Increasing cash value potential
Investor is assuming all risk as to future cash value
and death benefits because they are based on
portfolio performance
Usually guaranteed death benefits
Same as whole life
Used when individual desires investment flexibility in
cash value
Life Insurance Checklist
First, establish the need! Next, review what type policy you want to
buy and in what amount. Lastly, use the following tips below to help
you shop around.
1. Review the company’s A.M. BEST’S rating. Look for a
rating of “A” or better. A. M. Best rates insurance companies
on a number of criteria. Ask the agent for a copy of Best’s
Review on the specific company you are considering.
2. Look at the cost per thousand dollars of coverage. This is
the easiest way to compare prices.
3. Look at the investment results of the company. Although
historical performance offers no guarantees, it does give
some indication of return.
4. Do the policies have guaranteed minimum interest rates?
5. Is the loan rate in the policy fixed or variable? This is
important only if you will be using the loan provision.
6. Compare “Current” and “Guaranteed” columns on the
sales proposal. The “Current” column cannot be guaranteed
but the “Guaranteed” column is.
7. Check the dividend provision. Some policies are
participating and pay dividends while others do not. In
addition, watch out when comparing cash value
accumulation because the dividend is not guaranteed .
8. Find out what the cash surrender value is. Also, check to
Estate Planning
see if it is accessible, guaranteed or reduced by charges,
when cashing it in.
59
9. Look into possible volume discounts. Most companies
charge less per thousand dollars of insurance as the amount
of the policy increases.
10. Read the fine print and footnotes. It may contain exclusions
to the policy.
11. Run the proposal to age 95 for comparison.
12. Review all pages of the proposal. If it reads page 1 of 4
then make sure you cover all four pages. If there is
something you don’t understand, ask questions!
&RVWRI/LIH,QVXUDQFH
1213(50$1(17
3(50$1(17 <281*
Estate Planning
60
$JH
35(0,806)251213(50$1(17 ,1685$1&(,1&5($6((9(5<<($5
35(0,806)253(50$1(17 ,1685$1&(67$</(9(/
5(7,5(0(17
TYPES OF LIFE INSURANCE
POLICIES:
ADDITIONAL INFORMATION
In choosing the type of life insurance policy you purchase,
consideration must be given to the need which is being filled; e.g.,
funding retirement needs, creation of an estate, payment of estate
settlement costs (federal and state death taxes, last illness and
burial costs, probate fees, etc.), income for a surviving spouse or
children, business buy-out, key-man coverage, etc.
Decreasing Term
Level Premium, Decreasing Coverage, No Cash Value: suitable for
financial obligations which reduce with time; e.g., mortgages or
other amortized loans.
Annual Renewable Term
Increasing Premium, Level Coverage, No Cash Value: suitable for
financial obligations which remain constant for a short or
intermediate period; e.g., income during a minor’s dependency.
Whole Life
Level Premium, Level Coverage, Cash Values: Cash value typically
increases based on insurance company’s general asset account
portfolio performance. Suitable for long-term obligations; e.g.,
surviving spouse lifetime income needs, estate liquidity, death
taxes, funding retirement needs, etc.
Estate Planning
61
Universal Life
Level Or Adjustable Premium and Coverage, Cash Values: Cash
values increase based on the performance of certain assets held in
the company’s general account. Suitable for long-term obligations
or sinking-fund needs: estate growth, estate liquidity, death taxes,
funding retirement needs, etc.
Variable Life and Variable Universal Life
Level/Adjustable Premium, Level Coverage, Cash Value: Suitable
for long-term obligations and those who are more active investors
and for estate growth and death tax liquidity.
Single Premium Whole Life
Entire Premium is Paid at Purchase, Cash Values, Level Coverage:
Provides protection, as well as being an asset accumulation
vehicle.
Note: Withdrawals and loans may be available from permanent
policies. There are different income tax consequences if they are
“modified endowment contracts,” namely income taxable until all of
the policy earnings have been taxed. There is also a 10% penalty
tax if the owner is under age 59 ½, unless payments are due to
disability or are annuity type payments.
Estate Planning
62
TERM LIFE INSURANCE
What Is Term Life Insurance?
Term life insurance, as the name suggests, provides life insurance
only for a limited period of time, or “term.” Other types of policies,
such as whole life, universal life or variable life, are considered to
be “permanent insurance” and are designed to provide protection
for the entire life of the insured. Additionally, term insurance
provides only “pure” insurance protection and does not have the
cash value feature typically found in most permanent life insurance
policies.
Term insurance might be compared to an automobile insurance
policy. While the auto policy is in force, the insured enjoys the
protection against loss from an auto accident. If no accident
happens, no benefits are paid under the policy. At the end of the
period covered by the policy, there is no refund of the premiums
paid. Term insurance works in much the same way.
When Is Term Life Insurance Useful?
Unlike the typical permanent policy, the cost of term life insurance
increases as the insured becomes older. The cash value feature
usually found in permanent policies provides a build-up within the
policy that allows for a constant, level premium. In later years, the
cost of the typical term life policy will far exceed the cost of the
typical permanent policy.
Estate Planning
63
Term life insurance is thus most useful when an insured is relatively
young and the need is for temporary or short-term coverage.
Young, growing families with limited income and a high insurance
need represent one situation where term life insurance works very
well. Situations where a need will decline over time, such as with a
home mortgage, are also good candidates for term life insurance.
The Language of Term Life Insurance
A. Level Term: The amount of coverage remains “level” for the
life of the policy. Premiums will usually increase as the
insured gets older.
B. Decreasing Term: The death benefit payable decreases
over time. Many decreasing term policies have level
premiums.
C. Convertible Term: A feature that is typically included in a
term policy which allows the insured to “convert” the term life
policy to a permanent policy, usually without having to prove
good health.
D. Renewable Term: This feature allows the policy to be
renewed at the end of the term without the insured having to
show that he or she is still insurable.
E. Primary Insured Rider: Adds term insurance to a
permanent policy. This additional coverage is on the life of
the individual insured under the permanent policy.
F. Other Insured Rider: Adds term insurance to a permanent
policy. The additional coverage is on the life of an individual
not insured under the permanent policy. This other person
could be a spouse, business partner or key employee.
Estate Planning
64
Family Plans
In some cases term life insurance is teamed with permanent
policies to provide the benefits of both types of policies. Two such
combinations are the family income policy and the family
maintenance policy.
•
Family Income Policy
A permanent policy combined with a decreasing term life policy. If
the insured dies while the policy is in force, benefits are typically
paid for a specific term, such as 5, 10 or 20 years, measured from
the date the policy is issued.
•
Family Maintenance Policy
Also a permanent policy, combined with a decreasing term policy. If
the insured dies while the policy is in force, the insurer will pay
income for a stated number of years, as measured from the date
the insured dies.
Sample Illustrations
On the following pages are sample Term Insurance illustrations,
showing Annually Renewable Term as well as Ten Year Level Term.
You may notice that the Annually Renewable Term Premium is
lower initially than the Ten Year Term, but ultimately is more
expensive. Therefore, be careful in determining how long you may
need the coverage.
Estate Planning
65
Sample Life Insurance Illustration
Term Life Insurance
Male Age 45
Face Amount: $100,000
Annually Renew able Term
Annual Premiums
Year
Age
Select Non-Smoker
Non-Smoker
Smoker
1
45
$114
$173
$268
2
46
123
179
285
3
47
142
206
339
4
48
181
256
438
5
49
219
303
530
6
50
268
348
617
7
51
321
397
717
8
52
385
454
80 1
9
53
463
583
891
10
54
508
680
976
11
55
982
982
1,855
12
56
1,076
1,076
2,033
13
57
1,176
1,176
2,217
14
58
1,283
1,283
2,415
15
59
1,405
1,405
2,661
16
60
1,539
1,539
3,136
17
61
1,690
1,690
3,385
18
62
1,863
1,863
3,630
19
63
2,058
2,058
3,852
20
64
2,268
2,268
4,110
Estate Planning
66
Sample Life Insurance Illustration
Term Life Insurance
Male Age 45
Face Amount: $100,000
Level Term For Ten Years; Annually Renew able Thereafter
Annual Premiums
Year
Age
Select Non-Smoker
Non-Smoker
Smoker
1
45
$179
$265
$521
2
46
179
265
521
3
47
179
265
521
4
48
179
265
521
5
49
179
265
521
6
50
179
265
521
7
51
179
265
521
8
52
179
265
521
9
53
179
265
521
10
54
179
265
521
11
55
982
982
1,855
12
56
1,076
1,076
2,033
13
57
1,176
1,176
2,217
14
58
1,283
1,283
2,415
15
59
1,405
1,405
2,661
16
60
1,539
1,539
3,136
17
61
1,690
1,690
3,385
18
62
1,863
1,863
3,630
19
63
2,058
2,058
3,852
20
64
2,268
2,268
4,110
Estate Planning
67
WHOLE LIFE POLICIES
Whole life insurance, sometimes called “permanent insurance” or
“ordinary life,” is designed to stay in force throughout one’s lifetime.
It is a type of policy well suited to needs that do not diminish over
time, such as paying estate settlement costs like Federal estate
taxes and probate or administration fees.
Generally, the annual premiums (payments) for this type of policy
remain the same throughout the life of the insured. During the early
years of the policy, the premiums are higher than those of a straight
term life policy. As time passes, the level premium, combined with
a build-up of cash values, tends to keep whole life policies in force.
By contrast, the premiums on term life policies typically become
relatively high, and many term policies are allowed to lapse.
If the owner of the policy decides to stop paying the premiums, he
or she can terminate the policy and take the built-up cash values,
minus any potential policy surrender charge. Other options include
the purchase of a paid-up policy with a reduced death benefit, or a
term policy with an equal death benefit but for a limited number of
years. The number of years of coverage will depend on the
insured’s age and amount of cash values available.
Historically, whole life insurance has provided a number of useful
tax benefits:
A. There is a tax-deferred build-up of the cash values
attributable to favorable investment experience of the
insurance company.
B. The owner can borrow against the cash values at relatively
low interest rates and without a tax.
Estate Planning
68
C. At time of death, the beneficiary collects the proceeds
generally free of income tax.
D. By transferring ownership of the policy to another, the
proceeds can be exempt from Federal estate taxes.
Although tax reformers have periodically tried to eliminate or reduce
these benefits, for most whole life contracts they have been unable
to do so.
Sample Illustrations
Please refer to the illustration on the following pages showing a
Whole Life Policy for a male non-smoker, age 45. Although the
premiums are substantially higher than term rates, cash values are
accumulating at an increasing rate. Observe that the increase in
cash value from the third to the fourth year is almost as much as
the Annual Premium. Some will call this a “Capital Transfer”. Also
notice that, ignoring the time value of money for the moment, this
policy shows a break-even point at the 11th year ($26,730 in total
premiums vs. $26,964 in cash value). The break-even point also
ignores the cost of insurance. Any legitimate analysis should take
all the variables into account to help you determine whether Whole
Life, or another form of permanent insurance, is appropriate and
more economical long-term than term insurance.
Our advice: be careful, and get an independent, objective
second opinion from a professional.
Estate Planning
69
Sample Life Insurance Illustration
Whole Life Insurance Policy
Non-Smoker Male Age 45
Total Initial Face Amount: $100,000
Total Initial Premium: $2,430.00
Premium Payment Interval: Annual
Ledger Illustration Non-Guaranteed Detail
Non-Guaranteed Values (EOY) @ 6.10%)
Year
Age
(BOY)
Premium
Outlay
(BOY)
Accum
Value
Cash
Surrender
Value
Death
Benefit
1
45
$2,430
$88
$88
$100,000
2
46
2,430
1,244
1,244
100,000
3
47
2,430
2,419
2,419
100,000
4
48
2,430
4,739
4,739
100,000
5
49
2,430
7,276
7,276
100,000
6
50
2,430
9,972
9,972
100,000
7
51
2,430
12,839
12,839
100,000
8
52
2,430
15,895
15,895
100,000
9
53
2,430
19,148
19,148
100,000
10
54
2,430
23,131
23,131
100,000
TOTAL
24,300
11
55
2,430
26,964
26,964
100,000
12
56
2,430
31,050
31,050
100,000
13
57
2,430
35,402
35,402
100,000
14
58
2,430
40,046
40,046
100,000
15
59
2,430
45,009
45,009
100,000
16
60
2,430
50,297
50,297
100,000
17
61
2,430
55,958
55,958
101,456
18
62
2,430
61,960
61,960
109,566
19
63
2,430
68,320
68,320
117,879
20
64
2,430
79,097
79,097
126,440
TOTAL
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70
48,600
BOY:
Beginning of Year
EOY:
End of Year
Sample Life Insurance Illustration
(CONTINUED)
Whole Life Insurance Policy
Non-Smoker Male Age 45
Total Initial Face Amount: $100,000
Total Initial Premium: $2,430.00
Premium Payment Interval: Annual
Ledger Illustration Non-Guaranteed Detail
Non-Guaranteed Values (EOY) @ 6.10% )
Year
Age
(BOY)
Premium
Outlay
(BOY)
Accum
Value
C ash
Surrender
Value
Death
Benefit
21
65
$2,430
$86,871
$86,871
$142,960
22
66
2,430
95,128
95,128
153,024
23
67
2,430
103,891
103,891
163,428
24
68
2,430
113,167
113,167
174,212
25
69
2,430
122,973
122,973
185,316
26
70
2,430
133,325
133,325
196,828
27
71
2,430
144,247
144,247
208,686
28
72
2,430
155,760
155,760
220,965
29
73
2,430
167,910
167,910
233,747
30
74
2,430
180,721
180,721
246,995
TOTAL
31
75
2,430
194,207
194,207
260,917
32
76
2,430
208,397
208,397
275,354
33
77
2,430
223,301
223,301
290,404
34
78
2,430
238,940
238,940
306,071
35
79
2,430
255,332
255,332
322,346
36
80
2,430
272,501
272,501
339,237
37
81
2,430
290,485
290,485
356,795
38
82
2,430
309,321
309,321
375,086
39
83
2,430
329,050
329,050
393,866
40
84
2,430
349,678
349,678
413,843
TOTAL
Estate Planning
71
72,900
97,200
UNIVERSAL LIFE INSURANCE
Universal life insurance contracts differ from traditional whole life
policies by separating the “protection element,” the “expense
element” and the “cash value element.” Dividing the policy into
these three components allows the insurance company to build a
higher degree of flexibility into the contract. This flexibility allows
(within certain guidelines) the policy owner to modify the policy face
amount or premium in response to changing needs and
circumstances.
A monthly charge for both the “protection element” and the
“expense element” is deducted from the policy’s account balance.
The remainder of the premium is allocated to the “cash value
element.” Because of these internal charges against the “cash
value element” of the policy (and unlike traditional whole life
policies), complete disclosure of the charges is provided to
policyholders in the form of an annual statement.
Major Benefits
A. Policyholder has a versatile and flexible tool to
accommodate ever-changing business, financial and family
circumstances.
B. In many situations, the combination of low term insurance
rates, a competitive interest rate on the “cash value
element,” and tax benefits makes the universal life contract a
viable alternative to more conventional investment vehicles.
A policyholder can easily combine the need for life insurance
with long-term investment goals such as college education or
retirement.
Estate Planning
72
C. Future premiums, based on interest rates and past
premiums, may be increased, decreased or even skipped,
without causing the policy to lapse.
D. Unlike other investment vehicles, the cash value within a
universal life contract may be accessed through withdrawals
or partial surrenders, or through no-penalty, non-taxed loan.
Such distributions generally decrease policy cash values and
death benefits. Funds that have been borrowed continue to
earn interest, though usually at a lower rate. The rate
charged to borrow the funds is usually lower than the current
open market rates.
E. The “cash value element” accumulates on a tax-deferred
basis.
F. Withdrawals from the “cash value element” can be income
tax-free if structured properly.
Tax-deferred accumulation and a potentially non-taxable payout
make life insurance a very strong financial tool. Universal life
provides the policy owner with greater flexibility and higher yield
potential than traditional whole life policies.
Sample Illustration
On the following two pages, a Universal Life Policy is depicted. In
this case, we selected a premium outlay substantially less than
required for a Whole Life Policy, but certainly more than the
premium for term insurance. The flexibility inherent in a Universal
Life Policy allows the owner to emphasize or de-emphasize the
cash accumulation aspect of the plan. However, this same
flexibility comes with the risk that a low premium outlay may
ultimately cause the policy to lapse due to under-funding.
Estate Planning
73
Sample Life Insurance Illustration
Flexible Premium Adjustable Life Insurance Policy
(Universal Life)
Non-Smoker Male Age 45
Initial Face Amount: $100,000
Death Benefit Option: Level
Premium Payment Interval: Annual
Ledger Illustration Non-Guaranteed Detail
Non-Guaranteed Values (EOY) @ 5.95% )
Year
Age
(BOY)
Premium
Outlay
(BOY)
Accum
Value
C ash
Surrender
Value
Death
Benefit
1
45
$920
$247
$0
$100,000
2
46
920
636
0
100,000
3
47
920
1,054
454
100,000
4
48
920
1,503
1,203
100,000
5
49
920
1,986
1,986
100,000
6
50
920
2,817
2,817
100,000
7
51
920
3,710
3,710
100,000
8
52
920
4,671
4,671
100,000
9
53
920
5,704
5,704
100,000
10
54
920
6,795
6,795
100,000
TOTAL
11
55
920
7,940
7,940
100,000
12
56
920
9,137
9,137
100,000
13
57
920
10,379
10,379
100,000
14
58
920
11,670
11,670
100,000
15
59
920
13,009
13,009
100,000
16
60
920
14,367
14,367
100,000
17
61
920
15,776
15,776
101,456
18
62
920
17,235
17,235
109,566
19
63
920
18,746
18,746
117,879
20
64
920
20,307
20,307
126,440
TOTAL
Estate Planning
74
9,200
18,400
Sample Life Insurance Illustration
(CONTINUED)
Flexible Premium Adjustable Life Insurance Policy
(Universal Life)
Non-Smoker Male Age 45
Initial Face Amount: $100,000
Death Benefit Option: Level
Premium Payment Interval: Annual
Ledger Illustration Non-Guaranteed Detail
Non-Guaranteed Values (EOY) @ 5.95% )
Year
Age
(BOY)
Premium
Outlay
(BOY)
Accum
Value
C ash
Surrender
Value
Death
Benefit
21
65
$920
$21,917
$21,917
$100,000
22
66
920
23,597
23,597
100,000
23
67
920
25,291
25,291
100,000
24
68
920
27,038
27,038
100,000
25
69
920
28,812
28,812
100,000
26
70
920
30,609
30,609
100,000
27
71
920
32,426
32,426
100,000
28
72
920
34,261
34,261
100,000
29
73
920
36,127
36,127
100,000
30
74
920
38,021
38,021
100,000
TOTAL
31
75
920
39,939
39,939
100,000
32
76
920
41,878
41,878
100,000
33
77
920
43,833
43,833
100,000
34
78
920
45,801
45,801
100,000
35
79
920
47,777
47,777
100,000
36
80
920
49,759
49,759
100,000
37
81
920
51,762
51,762
100,000
38
82
920
53,761
53,761
100,000
39
83
920
55,791
55,791
100,000
40
84
920
57,820
57,820
100,000
TOTAL
Estate Planning
75
27,600
36,800
VARIABLE LIFE INSURANCE
Variable life insurance is similar to whole life in that the premium
payments are level, and there is generally a minimum guaranteed
death benefit. Unlike whole life policies, however, variable life
policies permit the policyholder to allocate a portion of each
premium payment to one or more investment options after a
deduction for expense and mortality charges.
The death benefit and cash value of a variable life policy increase
and decrease based on the performance of the investment options
chosen. The death benefit, however, will not drop below the initial
guaranteed amount, except if policy premiums are not paid or if
loans or other withdrawals are taken from the policy.
Because the investment options available inside a variable life
policy very often involve marketable securities (e.g., stocks, bonds
and money market funds), the Securities and Exchange
Commission requires this type of policy to be accompanied by a
prospectus. An individual considering a variable life policy should
refer to the prospectus for detailed information regarding the policy
being offered.
Major Benefits
A. Allowing the policyholder to select the investment vehicle is a
creative approach to protecting one’s family or business.
B. Policyholder has the advantage of professional management
of the investment account as well as investment
diversification, both of which can reduce risk.
C. Policyholder receives an annual statement disclosing all
fees, charges and credits to the account.
Estate Planning
76
D. Most variable life policies allow the cash values to be reallocated to other investment options several times annually,
usually with specific minimums in any one option. This
feature provides the policyholder with a greater degree of
control over the end result than whole life or universal life.
E. Some variable life contracts provide an exchange option
during the first 12-24 months, allowing the policyholder to
switch to a “fixed” contract such as whole or universal life.
F. Cash values may be accessed through withdrawals or partial
surrenders, or through no-penalty, non-taxed loans. These
loans are generally available at rates below the market rate.
G. Withdrawals up to the basis in the contract, and loans
thereafter, can be income tax-free.
Tax-deferred accumulation and a potentially non-taxable payout
make life insurance a very strong financial tool. Variable life has
the additional advantage of giving the policyholder a greater degree
of control over the end result than whole life or universal life.
Estate Planning
77
VARIABLE UNIVERSAL LIFE
INSURANCE
This type of policy contains a combination of features found in
“variable life” and in “universal life” policies.
As with universal life contracts, the owner of the policy can, within
certain guidelines, modify the policy death benefit and change the
amount and timing of premium payments to meet varying
circumstances.
The most prominent feature of the variable universal life contract is
the policyholder’s ability to direct where net premiums will be
invested. Once the costs for insurance protection and company
expenses are met, the balance of the premium goes directly into
investment options selected by the policyholder. Typically he or she
can choose among a number of options, such as:
A.
B.
C.
D.
E.
Growth stock accounts
Bond account
Balanced account
Real estate account
Money market accounts
The ultimate value of the account, at either death or retirement, will
depend on the performance of the investment options chosen.
Growth is not guaranteed.
As with other permanent life insurance contracts, the owner can
borrow against the cash values of the policy. The interest rate
charged on borrowed funds is generally lower than open market
rates. There is no requirement for a credit check. Any loans or
withdrawals will reduce the cash value of the policy and the death
benefit.
Estate Planning
78
The Securities and Exchange Commission requires this type of policy
to be accompanied by a prospectus. An individual considering a
variable universal life contract should refer to the prospectus for
detailed information regarding the policy being offered.
Sample Illustrations
Notice in the following illustrations two different sets of numbers,
based on differing outlays and death benefits. Again, be careful.
Know what you are buying, and get an objective second opinion.
Estate Planning
79
Sample Variable Universal Life Insurance
Premiums Allocated to Variable Account
Non-Smoker Male Age 45
Ledger Illustration
Assumes Current Cost of Insurance
Charges
Gross Earnings Rate Assumption of 10.00%
--------------------Projected Values @ 10.00%--------------------
Year
Age
Annual
Premium
Ann'l
INCR in
Accum
Value
1
45
$850
$331
$331
0
$100,000
2
46
850
493
823
0
100,000
3
47
850
430
1,253
287
100,000
4
48
850
439
1,692
726
100,000
5
49
850
450
2,142
1,176
100,000
6
50
850
463
2,606
1,833
100,000
7
51
850
491
3,096
2,517
100,000
8
52
850
521
3,617
3,231
100,000
9
53
850
555
4,172
3,979
100,000
10
54
850
592
4,765
4,765
100,000
--------8,500
--------4,765
TOTAL
80
E nd of
Year
Surrender
Value
E nd of
Year
Death
Benefit
11
55
850
681
5,446
5,446
100,000
12
56
850
735
6,180
6,180
100,000
13
57
850
794
6,975
6,975
100,000
14
58
850
860
7,835
7,835
100,000
15
59
850
933
8,768
8,768
100,000
16
60
850
1,011
9,779
9,779
100,000
17
61
850
1,039
10,818
10,818
100,000
18
62
850
1,066
11,884
11,884
100,000
19
63
850
1,090
12,974
12,974
100,000
20
64
850
1,112
14,086
14,086
100,000
--------17,000
--------14,086
TOTAL
Estate Planning
E nd of
Year
Accum
Value
Sample Variable Universal Life Insurance
(CONTINUED)
Premiums Allocated to Variable Account
Non-Smoker Male Age 45
Ledger Illustration
Assumes Current Cost of Insurance
Charges
Gross Earnings Rate Assumption of 10.00%
--------------------Projected Values @ 10.00%--------------------
End of
Year
Death
Benefit
Age
Annual
Premium
21
65
0
$796
$14,882
$14,882
$100,000
22
66
0
83 4
15,716
15,716
100,000
23
67
0
874
16,590
16,590
100,000
24
68
0
916
17,506
17,506
100,000
25
69
0
960
18,467
18,467
100,000
26
70
0
1,007
19,473
19,473
100,000
27
71
0
1,057
20,530
20,530
100,000
28
72
0
1,111
21,641
21,641
100,000
29
73
0
1,172
22,813
22,813
100,000
30
74
0
1,238
24,051
24,051
100,000
--------17,000
--------24,051
31
75
0
1,311
25,362
25,362
100,000
32
76
0
1,392
26,754
26,754
100,000
33
77
0
1,484
28,239
28,239
100,000
34
78
0
1,591
29,830
29,830
100,000
35
79
0
1,718
31,548
31,548
100,000
36
80
0
1,869
33,417
33,417
100,000
37
81
0
2,056
35,473
35,473
100,000
38
82
0
2,287
37,760
37,760
100,000
39
83
0
2,575
40,335
40,335
100,000
40
84
0
2,934
43,269
43,269
100,000
--------17,000
--------43,269
TOTAL
81
End of
Year
Surrender
Value
Year
TOTAL
Estate Planning
End of
Year
Accum
Value
Ann’l
INCR in
Accum
Value
Sample Variable Universal Life Insurance
Premiums Allocated to Variable Account
Non-Smoker Male Age 45
Ledger Illustration
Assumes Current Cost of Insurance
Charges
Gross Earnings Rate Assumption of 12.00%
--------------------Projected Values @ 12.00%--------------------
Year
Age
Annual
Premium
Ann'l
INCR in
Accum
Value
1
45
$738
$225
$225
0
$100,000
2
46
738
384
609
0
100,000
3
47
738
317
926
0
100,000
4
48
738
322
1,249
282
100,000
5
49
738
329
1,578
611
100,000
6
50
738
338
1,915
1,142
100,000
7
51
738
360
2,276
1,696
100,000
8
52
738
386
2,662
2,275
100,000
9
53
738
415
3,077
2,883
100,000
10
54
738
448
3,524
3,524
100,000
--------7,380
--------3,524
TOTAL
82
E nd of
Year
Surrender
Value
E nd of
Year
Death
Benefit
11
55
738
523
4,047
4,047
100,000
12
56
738
572
4,619
4,619
100,000
13
57
738
627
5,246
5,246
100,000
14
58
738
689
5,935
5,935
100,000
15
59
738
759
6,694
6,694
100,000
16
60
738
834
7,528
7,528
100,000
17
61
738
860
8,388
8,388
100,000
18
62
738
883
9,271
9,271
100,000
19
63
738
905
10,176
10,176
100,000
20
64
738
922
11,098
11,098
100,000
--------14,760
--------11,098
TOTAL
Estate Planning
E nd of
Year
Accum
Value
Sample Variable Universal Life Insurance
(CONTINUED)
Premiums Allocated to Variable Account
Non-Smoker Male Age 45
Ledger Illustration
Assumes Current Cost of Insurance
Charges
Gross Earnings Rate Assumption of 12.00%
--------------------Projected Values @ 12.00%--------------------
Year
Age
Annual
Premium
Ann’l
INCR in
Accum
Value
21
65
0
$710
$11,808
$11,808
$100,000
22
66
0
75 0
12,558
12,558
100,000
23
67
0
792
13,350
13,350
100,000
24
68
0
836
14,186
14,186
100,000
25
69
0
88 2
15,068
15,068
100,000
26
70
0
931
15,999
15,999
100,000
27
71
0
984
16,983
16,983
100,000
28
72
0
1,042
18,024
18,024
100,000
29
73
0
1,106
19,131
19,131
100,000
30
74
0
1,177
20,307
20,307
100,000
--------14,760
--------20,307
TOTAL
83
End of
Year
Surrender
Value
End of
Year
Death
Benefit
31
75
0
1,255
21.562
21,562
100,000
32
76
0
1,341
22,903
22,903
100,000
33
77
0
1,439
24,342
24,342
100,000
34
78
0
1,553
25,896
25,896
100,000
35
79
0
1,688
27,583
27,583
100,000
36
80
0
1,850
29,433
29,433
100,000
37
81
0
2,051
31,484
31,484
100,000
38
82
0
2,301
33,784
33,784
100,000
39
83
0
2,614
36,399
36,399
100,000
40
84
0
3,008
39,407
39,407
100,000
--------14,760
--------39,407
TOTAL
Estate Planning
End of
Year
Accum
Value
ESTATE PLAN CHECKLIST
This checklist serves as reminder of key points to consider as you
review the estate plan for yourself and your spouse.
You
1.
Does the estate plan reflect your current situation and
not contain sections that may be obsolete?
For example, is the estate plan current for:
a. state of residence?
b. tax law changes?
c. executor/personal representative/trustee suitability?
d. birth or death of heir?
e. divorce, separation, illness or incapacity of an heir?
f. fi nancial circumstances?
g. specific benefits?
Estate Planning
84
2.
Does the estate plan take advantage of the unlimited
marital deduction to the extent effective and
practical?
3.
Does the estate plan provide for a QTIP Trust as a
post-mortem planning device? (If the
executor/personal representative makes the QTIP
election, the trust property is eligible for the marital
deduction, even though the remainder of the trust
passes to someone other than the surviving spouse.)
4.
Does the estate plan provide for a Nonmarital Trust?
5.
Does the estate plan identify the sources from which
debts of decedent, funeral expenses, and estate
administrative costs will be paid? (Normally, these
are paid from the residuary estate.)
6.
Does the estate plan identify the sources from which
taxes will be paid? (Normally, these are paid from
the residuary estate.)
7.
Are there bequests to charity, either outright or in
trust, to obtain the benefit of the charitable
deduction?
8.
Does the estate plan call for the disposition of a
closely-held business according to the client's
wishes?
S p o u se
You
9.
If a noncorporate personal representative/trustee is
named, is there a provision for a co-personal
representative/trustee? (If not, are there reasons why
naming a co-fiduciary might be appropriate?)
10.
Do any potential conflicts of interest exist between the
named fiduciary and the beneficiaries under the
estate plan?
11.
Is the individual or institution named as fiduciary
competent to carry out the duties of administering an
estate or trust?
12.
Does the estate plan name an alternate or successor
fiduciary?
13.
Has the executor's/personal representative's bond
requirement been waived in the Will?
14.
Are specific powers granted to the fiduciary?
Some of these pow ers may be to:
a. retain or sell property.
b. invest trust and estate assets.
c. exercise stock options.
d. manage real estate.
e. allocate receipts and disbursements to income and
principal.
f. make loans and borrow funds.
g. settle claims.
h. make decisions relating to the decedent's business,
partnership interest, or stock.
i. distribute property in kind.
j. perform other appropriate duties.
Estate Planning
85
15.
Does the estate plan provide for disposition of
property if an heir predeceases you? (Survivorship
Clause)
16.
Is there a common disaster provision, one that
indicates which spouse is deemed to have survived
the other in the event of simultaneous deaths? (The
Uniform Simultaneous Death Act, effective in most
states, makes the presumption that the transferor
spouse was the survivor, causing loss of the marital
deduction in some cases. A common disaster
provision can overcome this presumption.)
S p o u se
You
17. Does the estate plan state who will receive property
if the beneficiary disclaims it? (Disclaimers are an
effective postmortem planning device. They allow
property to be disclaimed and passed to a second
beneficiary, normally a younger person. The transfer
is treated as if the decedent had left the property to
the second beneficiary.)
18. Is the ownership of the assets complementary to the
provisions of the estate plan, i.e., some assets may
pass outside the estate plan by contract or by type of
ownership?
19. Is the custody of minors satisfactorily addressed?
20. Does the estate plan specify that any minor
beneficiary's share of the estate plan be held until he
or she reaches a more mature age?
21. Does the estate plan provide for a guardianship or
trust to protect the inheritance of disabled or
incompetent beneficiaries?
22. Does the estate plan provide for any transfers that
will be subject to the generation skipping transfer
tax?
23. Are any witnesses listed as beneficiary under the
Will?
Estate Planning
86
S p o u se