Ken Himmler.com

You’ve worked hard over the years to accumulate wealth, and you probably find it comforting to know that after your death the assets you leave behind will continue to be a source of support for your family, friends, and the causes that are important to you.  But to ensure that your legacy reaches your heirs as you intend, you must make the proper arrangements now.  There are four basic ways to leave a legacy: (1) by will, (2) by trust, (3) by beneficiary designation, and (4) by joint ownership arrangements.

• Property will pass according to a beneficiary designation even if you name a different beneficiary for the same property in your will
• Property owned jointly with rights of survivorship passes directly to the joint owner
• Property in a trust passes according to the terms of the trust
• Your surviving spouse has a right to a statutory share (e.g., 50%) of your property, regardless of what you leave him or her in your will
• Minor children have certain inheritance rights
• State law may limit your ability to leave property to charity

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

• The grantor (also called a settler or trustor): The person(s) who creates and funds the trust
• The beneficiary: The person(s) who receives benefits from the trust, such as income or the right to use a home, and has what is called equitable title to trust property
• The trustee: The person(s) who holds legal title to trust property, administers the trust, and has a duty to act in the best interest of the beneficiary

• Avoids probate: Unlike property that passes to heirs by your will, property that passes by a living trust is not subject to probate, avoiding the delay of property transfers to your heirs and keeping matters private
• Maintains control: You can change the beneficiary, the trustee, any of the trust terms, move property in or out of the trust, or even end the trust and get your property back at any time
• Protects against incapacity: If because of an illness or injury you can no longer handle your financial affairs, a successor trustee can step in and manage the trust property for you while you get better.  In the absence of a living trust or other arrangement, your family may have to ask the court to appoint a guardian to manage your property

Tis the season for giving and charitable giving can play an important role in many estate plans.  Philanthropy cannot only give you great personal satisfaction, it can also give you a current income tax deduction, let you avoid capital gains tax, and reduce the amount of taxes your estate may owe when you die.

 What is minimizing estate taxes?

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

What are estate taxes?

Estate taxes are actually transfer taxes. Transfer taxes are imposed when you give your property to someone else. This can be done during life (this kind of transfer is called a gift) or at death (this kind of transfer is called a bequest or legacy if you leave a will, and intestate succession if you don’t leave a will). There are five transfer taxes that may affect your estate: (1) state gift tax, (2) state death taxes, (3) state generation-skipping transfer tax (GSTT), (4) the federal gift and estate tax, and (5) the federal GSTT.

State gift tax
Currently, Connecticut, Louisiana, North Carolina, Tennessee, and Puerto Rico impose a gift tax. A gift is a transfer of property you (the donor) make during your lifetime. The person or organization you give to is called the donee. When you make a gift, it is in exchange for nothing or in exchange for property of lesser value (in other words, it is not a bona fide sale). Generally, gifts must be reported, and gift tax paid in the year following the year in which the gift is made (e.g., gift tax on a gift made in 2009 would be due in 2010). If your state imposes a gift tax and you intend to make lifetime gifts, you should contact your state’s department of revenue to find out what gifts need to be reported, how to compute the gift tax, and when and how to file a gift tax return.

State death taxes
State death taxes are imposed on property distributed after your death. You should be especially aware of state death taxes because they may affect even the smallest estates. There are three types of state death taxes: inheritance tax, estate tax, and credit estate tax (commonly referred to as a sponge tax or pickup tax). Every state imposes at least one type.

State generation-skipping transfer tax (GSTT)
Currently, some states impose a GSTT. The GSTT is imposed on property transferred to a family member who is two or more generations below you (e.g., a grandchild or great-nephew). You can contact your state’s department of revenue to find out what transfers may be subject to state GSTT, and when and how to file a return.

Federal gift and estate tax
Generally speaking, the federal gift and estate tax is imposed on property transferred to others either while you are living or at the time of your death. Unlike the individual states which impose at least one type of death tax, and some of which impose a separate gift tax, the federal tax system is unified. In other words, the IRS adds lifetime and deathtime transfers and treats them the same. This is how the unified tax system works:
Before 1976, the federal tax system worked much like that of the states. Gifts made during life (taxable gifts) were reported, and any gift tax owed was paid on an annual basis. After death, estate tax was imposed only on property owned at death (gross taxable estate). Since 1976, generally, taxable gifts are still reported, and any gift tax owed is paid annually (generally, you must file a gift tax return and pay gift tax due, if any, by April 15 of the year following the year in which you make a taxable gift). But upon death, all taxable gifts are added to your gross taxable estate for estate tax calculation purposes, even though a gift tax return may already be filed and gift tax paid (gift tax paid is deducted from the estate tax owed). The IRS unified the gift tax and estate tax systems so that: (1) you can’t avoid estate tax by giving your wealth away before you die, and (2) you pay tax on the cumulative amount of wealth you give away (this pushes your estate into a higher tax bracket).

The federal generation-skipping transfer tax (GSTT)
Like the state-imposed GSTT, the federal GSTT is a tax imposed on property you transfer to a family member who is two or more generations below you (e.g., a grandchild or great-nephew). The IRS wants to levy a tax on property as it is passed from generation to generation at each and every level. The purpose of the GSTT is to keep families from avoiding estate tax by skipping an intermediate generation. A flat tax rate equal to the highest estate tax rate is imposed on every generation-skipping transfer you make over a certain lifetime amount ($3.5 million in 2009).
Tip: The GSTT rate is the same as the maximum estate tax rate, and the GSTT exemption is the same amount as the estate tax applicable exclusion amount.
You can minimize estate taxes by: (1) taking advantage of certain allowable tax exclusions, deductions, and credits, (2) using an estate freeze technique, or (3) employing post-mortem planning.

Exclusions, deductions, and credits
Under the federal tax system, individuals are generally allowed to make gifts of up to $13,000 (2009 figure, up from $12,000 in 2008) per donee each year gift tax free under the annual gift tax exclusion.
In addition, individuals are allowed to exempt a certain amount of property from the gift and estate tax.
Further, transfers of property between U.S. citizen spouses are fully deductible, as are transfers of property to qualified charitable organizations.
There are many exclusions, deductions, and credits that if effectively used can minimize estate taxes. You need to understand what these exclusions, deductions, and credits are, and how they work in order to take full advantage of them.
Tip: States also have their own exclusions, deductions, and credits, although they may not be the same as the federal system.

Estate freeze
An estate freeze is any planning device that allows you to freeze the present value of your estate and shift any future growth (or potential growth) to your successors.
Example(s): You give land valued at $100,000 to your children. Twenty-five years later, you die. The land is valued at $500,000 on the date of your death, but only $100,000 is included in your taxable estate because the value of the land froze on the date you gave it to your children.
There are many ways you can freeze the value of property. Estate freezing techniques range from relatively simple (e.g., installment sale or private annuity) to the more complex (e.g., gift- or sale-leaseback). You need to know what these techniques are and how they are used in order to know which, if any, is best for you.
Tip: This generally works for state taxes also.

Post-mortem planning
There are many post-mortem (i.e., "after death") techniques that can help keep the value of your property as low as possible in order to minimize federal estate taxes. There are 10 post-mortem techniques in particular that you should know about. Even though these techniques are implemented after your death, you should understand each of them now because if you believe your estate might benefit from them, there may be things you need to do now to ensure that your estate will qualify for these elections after your death.

An executor is a personal representative who acts for you after your death. You nominate or designate an executor in your will to settle your estate. The person chosen will act in your place to make decisions you would have made if you were still alive. The probate court has final approval, but the court will generally confirm your nomination unless there are compelling reasons not to. An executor’s responsibilities typically last from nine months to three years (although, an estate may remain open for several years because of will contests or tax problems). The functions of an executor are varied, but generally your executor:

• Locates and probates your will
• Inventories, collects, and sells (if necessary) your assets
• Pays legitimate creditor claims
• Pays any taxes owed by your estate
• Distributes any remaining assets to your beneficiaries

Tip: Your executor is entitled to a fee from your estate for services rendered. The fee can be waived (usually, a close family member will waive the fee).

  
What are the duties of an executor?

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

How do you select an executor?

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

• Ability to serve
• Willingness to serve
• Competency
• Trustworthiness
• Appreciation of your family’s needs
• Knowledge and experience

Individual versus professional

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

Technical Note: In general, state laws require that the person who manages your affairs be an adult U.S. citizen. Additionally, your executor cannot be a convicted felon. State laws may also give special powers to your executor, or spell out what your executor can or cannot do. You can also use your will to grant your executor any special powers needed to carry out the instructions in your will.

What if you don’t leave a will?

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

There are five estate planning documents you may need, regardless of your age, health, or wealth:

1. Durable power of attorney
2. Advanced medical directives
3. Will
4. Letter of instruction
5. Living trust

1. You can name the person (executor) who will manage and settle your estate. If you do not name someone, the court will appoint an administrator, who might not be someone you would choose.
2. You can name a legal guardian for minor children or dependents with special needs. If you don’t appoint a guardian, the state will appoint one for you.

Finally, avoiding probate may be desirable if you’re concerned about privacy. Probated documents (e.g., will, inventory) become a matter of public record.

Each time one taxpayer transfers wealth to another, the transfer is potentially subject to federal transfer tax, in the form of gift or estate tax. The federal transfer tax system is designed to impose a tax on each and every generation (e.g., father to son, son to grandson, etc.).

The transfer tax system accounts for the fact that a transfer might “skip” a generation by passing from parent to grandchild, for example. This is accomplished by imposing an additional tax whenever transfers of wealth are made to persons who are more than one generation below the taxpayer (e.g., father to grandson). This additional tax is called the generation-skipping transfer tax (GSTT). GSTT is imposed at the highest estate tax rate in effect at the time of the transfer (45% in 2008).

Additionally, most of the individual states impose their own transfer taxes. Together, these taxes can take an enormous bite whenever wealth is being handed down, and eventually eat away a family’s fortune. This can be troublesome to individuals with substantial wealth who would prefer to have their legacies benefit their own family members. It’s from these circumstances that the dynasty trust evolved.

A dynasty trust is created to provide for future generations while minimizing overall transfer tax. With a dynasty trust, a taxpayer transfers assets to the trust. This transfer, from the taxpayer (the grantor) to the trust, is potentially subject to transfer tax (although the taxpayer may use his or her exemption amounts to shield the transfer from tax). The trust then provides for future generations for as long as it exists. Although the trust assets effectively move from generation to generation, there are no corresponding transfer tax consequences.

For more information on dynasty trusts and other trusts such as family foundation, you can go to http://kenhimmler.com.

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What is it?

For the most part, annuities will impose various administrative charges and fees. At first, the expense may seem minimal. However, over time, the cumulative effect of the charges and fees can be substantial. These expenses typically arise when dealing with variable annuities. However, fixed annuity contracts may also assess fees in the form of surrender charges.

For more information on fees on variable and fixed annuities such as a guaranteed annuity or equity indexed annuity, you can go to http://kenhimmler.com

Fixed annuities

Fixed annuities usually do not impose express charges and fees (except for surrender charges). Because there are fewer fees involved with fixed annuities, it may seem that it is the cheaper alternative to the variable annuity. However, this may not always be the case, because a fixed annuity will usually contain implicit charges that are reflected in the interest rates in the underlying contract. These implicit charges arise when the insurance company sets the interest rate that it promises to pay at a lower rate than the rate it expects to earn on its investments (sometimes, the difference is called the spread). This spread allows the insurance company to make sure that it will recover its administrative costs.

Variable annuities

Annual maintenance charge

The annual maintenance charges for variable annuities may typically range from $0 to $100. These charges are usually deducted from the various investment accounts in which the annuity holder has placed his or her funds.

Example(s): Mr. Smith purchases a variable annuity from ABC Insurance Company. Mr. Smith has placed 20 percent of his funds in a money market fund and 80 percent of his funds in a growth fund. ABC has an annual maintenance charge of $50. Mr. Smith’s money market fund will be charged 20 percent or $10. Mr. Smith’s growth fund will be charged 80 percent, or $40.

Tip: Some contracts will waive this charge when the annuity’s value exceeds a certain amount (e.g., $25,000).

Investment management fees

Investment management fees pay for an investment management group that advises the insurance company on which investments to buy and sell. Investment management fees for variable annuities may range from .25 percent to .75 percent. While a variable annuity account can be charged a flat percentage rate, some variable annuity contracts will call for each type of fund to incur a different percentage cost.

Example(s): Mr. Smith purchases a variable annuity from ABC Insurance Company. Mr. Smith’s funds are within a money market fund and a growth fund. ABC charges an investment management fee of .35 percent for the money market fund and .60 percent for the growth fund.

Mortality and expense risk charge (M & E charge)

The mortality and expense risk charge (M & E charge) is imposed by insurance companies to protect against risk associated with the annuity contract (e.g., an annuitized contract paying out income longer than mortality tables projected the life expectancy of the annuitant). Generally, the M & E charge ranges between 1 percent and 1.5 percent of the value of the variable annuity account. The M & E charge is deducted proportionately from the variable accounts, similar to the annual maintenance charge (discussed previously).

Transfer fee

Some variable annuities will charge a fee for the transfer of funds between investment accounts. These charges can range anywhere between $0 and $15 per transfer. Some annuity contracts will allow a certain number of transfers per year without charge, assessing a charge for any transfers over the permitted number.

Surrender charge

Most annuity contracts will assess a charge for partial and full surrenders from the contract during a certain time period after the annuity is purchased (usually 5 to 10 years). This charge is often referred to as the surrender charge and can have a wide range that decreases over time. Depending on the annuity contract, the surrender charge percentage will be applied either to the full amount surrendered or the portion of the withdrawal that exceeds the earnings of the contract. Some annuity contracts allow some withdrawals without a surrender charge (e.g., 10 percent of the contract value or the contract earnings). The surrender charge is intended to prevent annuity owners from moving funds in and out of the annuity and allows the insurance company to recoup its losses if the contract does not remain in force for a lengthy time period.

Tip: Some annuity contracts will provide that there will be no surrender charge if the annuity holder dies or becomes disabled.

Tip: Keep in mind that if you surrender your annuity when you are under the age of 59�, you may also be subject to the 10 percent penalty tax that applies to premature withdrawals.

Miscellaneous fees

Variable annuities might also levy charges for administrative expenses, such as record maintenance, accounting, and reporting. In addition, a variable annuity may charge extra for certain guarantees to be written into the annuity contract. Finally, several states levy a state premium tax on annuity premiums. The tax is generally a percentage of the gross premium paid and it is generally deducted prior to the computation of sales charges. Some insurance companies choose to add the cost of the tax into the price of the premium, rather than levy a direct tax.