estate planning basics an overview of the estate planning process plc.1991 (11.09)

Estate Planning BasicsAn Overview of the Estate Planning Process

PLC.1991 (11.09)

The tax treatment of life insurance is subject to change. Neither Protective Life nor its representatives offer legal or tax advice. Please consult with your legal or tax advisor regarding your individual situation before making any tax-related decisions.

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A word about this presentation.

• This presentation contains statements regarding the tax treatment of certain financial assets and transactions. These statements represent only our current understanding of the law in general and are not to be relied upon by Purchasers. Income, estate, gift, and generation skipping tax rules are subject to change at any time. Neither Protective Life nor its representatives offer legal or tax advice. Purchasers should consult with their legal or tax adviser regarding their individual situations before making any tax-related decisions.

• Following the workshop, sales representatives will be on site to discuss specific products and services you might consider in planning for your future.

• Variable products are issued by Protective Life Insurance Company (PLICO), and securities are offered by Investment Distributors, Inc. (IDI). Both PLICO and IDI are located at 2801 Highway 280 South, Birmingham, AL 35223 (Attn: LAD 3-1) and are subsidiaries of Protective Life Corporation. Protective Life Corporation is a separate company and is not responsible for the financial condition or contractual obligations of PLICO or IDI.


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Estate Tax Uncertainties

There are four areas of uncertainty about Federal estate taxes:•Currently (2010) the Federal Estate Tax is zero

•In 2011, the Federal Estate Tax will return with $1 million exemption amount and top tax rates approaching 55% (and 60% for very large estates)

•Congress might consider new tax laws that will change the exemption amount, the tax rates, and other features of the estate tax law

•We don’t know if or when Congress will act

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What Is an Estate Plan?

• An estate plan is a map

• This map reflects the way you want your personal and financial affairs to be handled in case of incapacity or death


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Who Needs an Estate Plan?

Chances are, you do:

• Not just for the wealthy

• Without an estate plan, you can’t control what happens to your property if you die or become incapacitated

• An estate plan makes your wishes clear, and helps avoid family disputes

• Proper estate planning can preserve assets andprovide for loved ones

Especially needed if:

• Your spouse isn’t comfortable with financial matters

• You have minor children

• Your net worth exceeds federal estate tax exemption ($1 million after 2010*)

• You own property in more than one state

• Financial privacy is a concern

• You own a business

*Based on current law. The $1 million figure may change if Congress passes new tax legislation during 2010 or later.


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Basic Estate Planning Concepts

Estate Planning

Planning for Incapacity

Planning for Death

Property Management

Health Care

Life Insurance

Wills and Probate

Tax Basics

Lifetime Gifting

Trusts


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Planning for Incapacity

• Incapacity is an important consideration in estate planning

• Without a plan for possible incapacity, a court would have to appoint a guardian

• Lack of planning increases the burden on a guardian

• A guardian’s decisions might not be what the incapacitated person would want


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Planning for Incapacity – Health-Care Directives*

Living WillDurable Power of

Attorney for Health Care(Health-Care Proxy)

Do Not Resuscitate (DNR) Order

Lets you designate an agent to makedecisions on your

behalf

Puts your instructions

in writing

Directs thatresuscitative measures be

withheld orwithdrawn

*Health-care directive requirements vary by state.


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Planning for Incapacity – Property Management Tools

Joint OwnershipDurable Power ofAttorney (DPOA)

Living Trust

Lets you designate an agent to makedecisions on your

behalf

Joint owner has the same access

to property as you do

Lets a successortrustee take overmanagement oftrust property


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What Happens If You Die Without an Estate Plan?

• Some property passes automatically to a joint owner or to a designated beneficiary (e.g., IRAs, retirement plans, life insurance, trusts)

• All other property generally passes according to state intestacy laws


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What Happens If You Die Without an Estate Plan – Intestacy

• Intestacy laws vary from state to state

• Typical pattern of distribution divides property between surviving spouse and children

• Your actual wishes are irrelevant

• Many potential problems

Husband / Father

Wife Child

½ ¼¼

Child

A typical intestate distribution pattern looks like this:


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Wills & Probate

• A will is the cornerstone of an estate plan

• Directs how your property will be distributed

• Names executor and guardian for minor children

• Can accomplish other estate planning goals (e.g., help reduce taxes)

• Written, signed by you, and witnessed


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Wills & Probate – The Probate Process

• Most wills must be probated

• Will is filed with probate court

• Executor collects assets, pays debts, files tax returns, and distributes property to heirs

• Typically, process lasts several months to a year


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Wills & Probate – Pros & Cons

Pros

• Time and costs are typically modest

• Court supervision

• Offers some possible protection against creditors

Cons

• Can be time consuming for complex estates

• Title transfer delays

• Fees

• Ancillary probate

• Public record


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Wills & Probate – Avoiding Probate

Can you avoid probate?Yes, an estate plan can be designed to

control which assets pass through probate, or to avoid probate altogether.

• Own property jointly with rights of survivorship

• Complete beneficiary designation forms for property such as IRAs, retirement plans, and life insurance

• Use trusts

• Make lifetime gifts


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Tax Basics

Transfer taxes include:

• Federal gift tax - lifetime gifts

• Federal estate tax - property transferred at death

• Federal generation-skipping transfer taxes (GSTT) - transfers to individuals more than one generation below you


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Tax Basics – Federal Gift Tax

• Gift tax applies to lifetime transfers

• Certain gifts are excluded - $13,000 annual gift tax exclusion in 2010*

• $1 million dollar gift tax exemption in 2010*

You(Donor)

Person Receiving

Gift (Donee)

Lifetime Transfer

Gift tax may apply

*The National Underwriter Company, “Tax Facts 2010”

The donor files the return and pays the gift tax.


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Tax Basics – Federal Estate Tax

• Estate tax applies to transfers made at death

• Property transferred to a spouse or to a charity is generally not subject to tax (fully deductible)

• $1 million estate tax exemption*

Your Estate

Beneficiary

Transfer at Death

Estate tax may apply*Based on current law for persons dying in 2011, unless changed by new rules enacted by Congress during 2010.

The executor files the return and pays the estate tax.


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Tax Basics – Federal GSTT

• The generation - skipping transfer tax (GSTT) may apply to transfers made to someone more than one generation below you

• $1 million GSTT exemption*

You / Your Estate

Child(Donee / Beneficiary)

Transfer During Life or at Death

Grandchild(Skip Donee / Beneficiary)

GSTT may apply*The exemption amount for generation-skipping transfer tax purposes is equivalent to the estate tax exemption amount, i.e., if we return to a $1 million estate tax exemption amount, that same amount will be used for purposes of the generation-skipping transfer tax exemption.


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Tax Basics – Changing Landscape

0%

10%

20%

30%

40%

50%

60%

2004 2005 2006 2007 2008 2009 2010 2011

Highest Gift Tax Rate Highest Estate Tax Rate Highest GSTT Rate

Est

ate

Tax

an

d G

ST

T r

epea

led

Tax Rates


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Tax Basics – Changing Landscape

$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

2005 2006 2007 2008 2009 2010 2011

Gift Tax Exemption Estate Tax Exemption GSTT Exemption

Est

ate

Tax

an

d G

ST

T r

epea

led

Exemption Amounts


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Lifetime Gifting

• Lets you see the recipient enjoying your gift

• Lets you help reduce transfer taxes by taking advantage of the $13,000* annual gift tax exclusion and other tax deductions

• Removes future appreciation of property from your taxable estate

• But, no “step-up” in basis – your basis in the property carries over instead



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Lifetime Gifting – Transfers Excluded from Gift Tax

• If you’re contributing to a Section 529 plan, you can give $65,000 ($130,000 with spouse) gift tax free

• No gift tax on amounts paid directly to a school for an individual’s tuition

• No gift tax on amounts paid directly to a medical care provider for an individual’s medical care

You can give $13,000* each year to as many individuals as you

want federal gift tax free ($26,000* if you and your

spouse make the gift together)



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Trusts

• Versatile estate planning tool

• Can protect against incapacity, avoid probate, helps reduce taxes

• Allows professional management of assets

• Provide safeguards for minor children, elderly parents, other beneficiaries

• Certain trusts can help protect assets from future creditors

• Control over property


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Trusts – What Is a Trust?

• Legal entity that holds property

• Parties to a trust: grantor, trustee, beneficiary

• Living trusts vs. testamentary trusts

• Revocable trusts vs. irrevocable trusts

Grantor

TrustAgreement

BeneficiariesHave rights to trust property

under terms of trust agreement

Trust Property

TrusteeManages trust property according

to trust agreement


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Trusts – Marital and Bypass Trusts

• Used by married couples

• Bypass trust receives maximum amount that can pass free of estate tax under exemption – no estate tax

• Marital trust receives balance of estate – no estate tax (marital deduction)

• Surviving spouse receives income during life, principal passes to beneficiaries at death – estate tax imposed on remaining marital trust assets only, but may be offset by surviving spouse’s exemption

First Spouse to Die

Trust BBypass Trust

(ExemptionAmount)

Trust AMarital Trust(Balance of

Estate)

Beneficiaries (Children)Receive principal upon death

of surviving spouse

Surviving SpouseReceives income from trusts


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Life Insurance

• Can provide instant estate

• Can provide needed estate liquidity

• Life insurance proceeds are included in your estate for federal estate tax purposes unless your estate plan addresses this issue

• Key issue is ownership of policy


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Life Insurance – Irrevocable Life Insurance Trust (ILIT)

Insured InsuranceCompany

Irrevocable Trust

During Your Life

1. You (the insured) create an irrevocable trust and name a trustee and beneficiaries

2. Trustee purchases life insurance policy on your life – policy owned by trust

Beneficiaries

3. You make regular cash gifts to trust

5. Trustee uses cash gifts to pay premiums

4. Beneficiaries technically can withdraw cash gifts during limited window of time


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Life Insurance – Irrevocable Life Insurance Trust (ILIT)

InsuranceCompany

Irrevocable Trust

At Death

1. ILIT receives proceeds of life insurance policy

2. Proceeds not subject to estate tax

3. Proceeds distributed according to terms of trust

Beneficiaries

4. Beneficiaries receivefull proceeds, free of estate tax


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Conclusion

1. Have you implemented a plan for incapacity (health and property)?

2. Do you have a valid will?

3. Is estate tax a planning concern for you?

4. Does your overall estate plan reflect your current wishes and circumstances?

estate planning basics an overview of the estate planning process plc.1991 (11.09)

Documents

tax advice

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tax rates

estate tax law

tax rules

tax adviser

estate tax uncertainties

taxrelated decisions