1. Sentinel Solutions
530 Fifth Avenue
11th Floor
New York, NY 10036
212-536-6150
cschneider@sentinelsolutions.com
www.sentinelsolutions.com
Basic Estate Planning
December 03, 2012
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2. Estate Planning--An Introduction
By definition, estate planning is a process Unmarried couples
designed to help you manage and preserve
your assets while you are alive, and to You've committed to a life partner but aren't
conserve and control their distribution after legally married. For you, a will is essential if
your death according to your goals and you want your property to pass to your partner
objectives. But what estate planning means to at your death. Without a will, state law directs
you specifically depends on who you are. Your that only your closest relatives will inherit your
age, health, wealth, lifestyle, life stage, goals, property, and your partner may get nothing. If
and many other factors determine your you share certain property, such as a house or
particular estate planning needs. For example, car, you might consider owning the property
By definition, estate you may have a small estate and may be as joint tenants with rights of survivorship.
planning is a process concerned only that certain people receive That way, when one of you dies, the jointly
designed to help you particular things. A simple will is probably all held property will pass to the surviving partner
manage and preserve your you'll need. Or, you may have a large estate, automatically.
assets while you are alive, and minimizing any potential estate tax impact
and to conserve and control is your foremost goal. Here, you'll need to use
their distribution after your more sophisticated techniques in your estate
Married couples
death according to your
goals and objectives.
plan, such as a trust.
For many years, married couples had to do
To help you understand what estate planning careful estate planning, such as the creation
means to you, the following sections address of a credit shelter trust, in order to take
some estate planning needs that are common advantage of their combined federal estate tax
among some very broad groups of individuals. exclusions. A new law passed in 2010 allows
Think of these suggestions as simply a point the executor of a deceased spouse's estate to
in the right direction, and then seek transfer any unused estate tax exclusion
professional advice to implement the right plan amount to the surviving spouse without such
for you. planning. This provision is effective for estates
of decedents dying after December 31, 2010
and before January 1, 2013.
Over 18
You may be inclined to rely on these
Since incapacity can strike anyone at anytime, portability rules for estate tax avoidance, using
all adults over 18 should consider having: outright bequests to your spouse instead of
traditional trust planning. However, portability
• A durable power of attorney: This should not be relied upon solely for utilization
document lets you name someone to of the first to die's estate tax exemption, and a
manage your property for you in case you credit shelter trust created at the first spouse's
become incapacitated and cannot do so. death may still be advantageous for several
• An advanced medical directive: The three reasons:
main types of advanced medical directives
are (1) a living will, (2) a durable power of • Portability may be lost if the surviving
attorney for health care (also known as a spouse remarries and is later widowed
health-care proxy), and (3) a Do Not again
Resuscitate order. Be aware that not all • The trust can protect any appreciation of
states allow each kind of medical directive, assets from estate tax at the second
so make sure you execute one that will be spouse's death
effective for you.
• The trust can provide protection of assets
from the reach of the surviving spouse's
Young and single creditors
If you're young and single, you may not need • Portability does not apply to the
much estate planning. But if you have some generation-skipping transfer (GST) tax, so
material possessions, you should at least write the trust may be needed to fully leverage
a will. If you don't, the wealth you leave behind the GST exemptions of both spouses
if you die will likely go to your parents, and • Portability will expire in 2013 unless
that might not be what you would want. A will Congress enacts further legislation
lets you leave your possessions to anyone Married couples where one spouse is not a
you choose (e.g., your significant other, U.S. citizen have special planning concerns.
siblings, other relatives, or favorite charity). The marital deduction is not allowed if the
recipient spouse is a non-citizen spouse (but a
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3. $139,000 annual exclusion, for 2012, is Wealthy and worried
allowed). If certain requirements are met,
however, a transfer to a qualified domestic Depending on the size of your estate, you may
trust (QDOT) will qualify for the marital need to be concerned about estate taxes.
deduction.
For 2012, $5,120,000 is effectively exempt
Married with children from the federal gift and estate tax. Estates
over that amount may be subject to the tax at
If you're married and have children, you and a top rate of 35 percent.
your spouse should each have your own will.
For you, wills are vital because you can name Similarly, there is another tax, called the
a guardian for your minor children in case both generation-skipping transfer (GST) tax, that is
of you die simultaneously. If you fail to name a imposed on transfers of wealth that are made
guardian in your will, a court may appoint to grandchildren (and lower generations). For
someone you might not have chosen. 2012, the GST tax exemption is $5,120,000
Furthermore, without a will, some states and the top tax rate is 35 percent.
dictate that at your death some of your
property goes to your children and not to your Whether your estate will be subject to state
spouse. If minor children inherit directly, the death taxes depends on the size of your
surviving parent will need court permission to estate and the tax laws in effect in the state in
manage the money for them. You may also which you are domiciled.
want to consult an attorney about establishing
a trust to manage your children's assets. The exemption amounts mentioned above are
set to expire after 2012. Unless Congress
You may also need life insurance. Your enacts further legislation, in 2013, the gift and
surviving spouse may not be able to support estate tax exemption will revert to $1 million
the family on his or her own and may need to and the GST exemption will revert to $1
replace your earnings to maintain the family. million adjusted for inflation. Thus, if you have
an estate valued in excess of $1 million, you
Comfortable and looking might want to consider some tax planning
now.
forward to retirement
You've accumulated some wealth and you're Elderly or ill
thinking about retirement. Here's where estate
planning overlaps with retirement planning. It's If you're elderly or ill, you'll want to write a will
just as important to plan to care for yourself or update your existing one, consider a
during your retirement as it is to plan to revocable living trust, and make sure you have
provide for your beneficiaries after your death. a durable power of attorney and a health-care
You should keep in mind that even though directive. Talk with your family about your
Social Security may be around when you wishes, and make sure they have copies of
retire, those benefits alone may not provide your important papers or know where to locate
enough income for your retirement years. them.
Consider saving some of your accumulated
wealth using other retirement and deferred
vehicles, such as an individual retirement
account (IRA).
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4. Steps to Estate Planning Success
Estate Planning Pyramid
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5. Advantages of Trusts
Why you might consider intermediate beneficiaries (e.g., children,
elderly parents) before final property
discussing trusts with your distribution.
attorney • Trusts can ensure that assets go to your
intended beneficiaries. For example, if you
• Trusts may be used to minimize estate have children from a prior marriage you
taxes for married individuals with can make sure that they, as well as a
substantial assets. current spouse, are provided for.
• Trusts provide management assistance for • Trusts can minimize income taxes by
your heirs.* allowing the shifting of income among
What is a trust? • Contingent trusts for minors (which take beneficiaries.
A trust is a legal entity that is effect in the event that both parents die)
created for the purpose of
• Properly structured irrevocable life
may be used to avoid the costs of having a insurance trusts can provide liquidity for
transferring property to a court-appointed guardian to manage your
trustee for the benefit of a third estate settlement needs while removing the
children's assets. policy proceeds from estate taxation at the
person (beneficiary). The
trustee manages the property • Properly funded trusts avoid many of the death of the insured.
for the beneficiary according to administrative costs of probate (e.g.,
the terms specified in the trust
*This is particularly important for minors and
attorney fees, document filing fees).
incapacitated adults who may need support,
• Generally, revocable living trusts will keep maintenance, and/or education over a long
the distribution of your estate private. period of time, or for adults who have difficulty
• Trusts can be used to dispense income to managing money.
Conducting a Periodic Review of Your Estate Plan
With your estate plan successfully amount, whichever is smaller) should review
implemented, one final but critical step your plan annually or at certain life events that
remains: carrying out a periodic review and are suggested in the following paragraphs.
update. Not a year goes by without significant changes
in the tax laws. You need to stay on top of
Imagine this: since you implemented your these to get the best results.
estate plan five years ago, you got divorced
and remarried, sold your house and bought a Every five years for small estates
boat to live on, sold your legal practice and
With your estate plan invested the money that provides you with Those of you with smaller estates (under the
successfully implemented, enough income so you no longer have to applicable exclusion amount) need only
one final but critical step work, and reconciled with your estranged review every five years or following changes in
remains: carrying out a
periodic review and update.
daughter. This scenario may look more like your life events. Your estate will not be as
fantasy than reality, but imagine how these affected by economic factors and changes in
major changes over a five-year period may the tax laws as a larger estate might be.
affect your estate. And that's without However, your personal situation is bound to
considering changes in tax laws, the stock change, and reviewing every five years will
market, the economic climate, or other bring your plan up to date with your current
external factors. After all, if the only constant situation.
is change, it isn't unreasonable to speculate
that your wishes have changed, the Upon changes in estate valuation
advantages you sought have eroded or
vanished, or even that new opportunities now If the value of your estate has changed more
exist that could offer a better value for your than 20 percent over the last two years, you
estate. A periodic review can give you peace may need to update your estate plan.
of mind.
Upon economic changes
When should you conduct a
You need to review your estate plan if there
review of your estate plan? has been a change in the value of your assets
or your income level or requirements, or if you
Every year for large estates are retiring.
Those of you with large estates (i.e., more
than the federal or your state's exemption
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6. Upon changes in occupation or received a sizable inheritance, bequest, or
employment similar disposition, (2) made or received
substantial gifts, (3) borrowed or lent
If you or your spouse changed jobs, you may substantial amounts of money, (4) purchased,
need to make revisions in your estate plan. leased, or sold material assets or investments,
(5) changed residences, (6) changed
Upon changes in family situations significant property ownership, or (7) become
involved in a lawsuit.
You need to update your plan if: (1) your (or
your children's or grandchildren's) marital Upon changes in insurance coverage
status has changed, (2) a child (or grandchild)
has been born or adopted, (3) your spouse, Making changes in your insurance coverage
child, or grandchild has died, (4) you or a may change your estate planning needs or
close family member has become ill or may make changes necessary. Therefore,
incapacitated, or (5) other individuals (e.g., inform your estate planning advisor if you
your parents) have become dependent on make any change to life insurance, health
you. insurance, disability insurance, medical
insurance, liability insurance, or beneficiary
Upon changes in your closely held designations.
business interest
Upon death of trustee/executor/guardian
A review is in order if you have: (1) formed,
purchased, or sold a closely held business, (2) If a designated trustee, executor, or guardian
reorganized or liquidated a closely held dies or changes his or her mind about serving,
business, (3) instituted a pension plan, (4) you need to revise the parts of your estate
executed a buy-sell agreement, (5) deferred plan affected (e.g., the trust agreement and
compensation, or (6) changed employee your will) to replace that individual.
benefits.
Upon other important changes
Upon changes in the estate plan
None of us has a crystal ball. We can't think of
Of course, if you make a change in part of all the conditions that should prompt us to
your estate plan (e.g., create a trust, execute review and revise our estate plans. Use your
a codicil, etc.), you should review the estate common sense. Have your feelings about
plan as a whole to ensure that it remains charity changed? Has your son finally become
cohesive and effective. financially responsible? Has your spouse's
health been declining? Are your children
Upon major transactions through college now? All you need to do is
give it a little thought from time to time, and
Be sure to check your plan if you have: (1) take action when necessary.
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7. Disclosure Information -- Important -- Please Review
Securities, Investment Advisory Services and Financial Planning Services through qualified Registered
Representatives of
MML Investors Services, LLC., Member SIPC. Supervisory Office: 530 Fifth Ave., 14th Fl. ? New York, NY
10036 ? 212.536.6000
Sentinel Solutions, Inc. is not an affiliate or subsidiary of MML Investors Services, LLC or its affiliated
companies.
Sentinel Solutions
530 Fifth Avenue
11th Floor
Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The New York, NY 10036
information presented here is not specific to any individual's personal circumstances. cschneider@sentinelsolutions.com
212-536-6150
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be
used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should
seek independent advice from a tax professional based on his or her individual circumstances.
These materials are provided for general information and educational purposes based upon publicly
available information from sources believed to be reliable—we cannot assure the accuracy or completeness
of these materials. The information in these materials may change at any time and without notice.
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December 03, 2012
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2012