Eileen St. Pierre, Ph.D., CFA, CFP®Personal Finance SpecialistOklahoma State University

ESTATE PLANNING

Estate Planning

• The role of taxes• Wills• Trusts– Revocable living trusts– Irrevocable trusts

• Other ways to leave assets outside of a will• Other legal documents

The Role of Taxes

• Federal Estate Tax0% in 2010Back in 2011, varies from year to yearIf estate > $1 million, see your tax advisorOK has no state estate tax

• GiftsFamily, friends, charitiesSee your tax advisor to see if you need to pay gift tax

or file a gift tax return

Wills

• Must have mental and legal capacity• Free of undue influence, fraud, and duress• Not just a document that lets you state whom you want to get your assets

and property• Name personal representative (executor)• Name guardians for your minor children• Complete Family Inventory Handout

– List of usernames and passwords– Safe deposit box key

• Types of wills• Must go through probate process to be considered legally valid

Probate• Your property is legally transferred to other

parties• Public process that involves– Proving the will is valid– Notifying creditors and potential heirs– Resolving contests to the will

• Time consuming– 6 weeks to many years

• Ancillary Probate– Real property held outside state of residence

Probate Costs

• According to NAFEP, can cost between 4% and 10% of your estate (national)Some fees set by law, others you can negotiate

• Some states eliminate or reduce probate process for small estates“Summary Administration” in Oklahoma:Expedited probate process for estates less than $150,000

• If your probate estate is greater than $150,000, you may want to consider transferring assets out of your estate to make it eligible for Summary Administration.

Trusts

• Legal agreement between the grantor and the trustee for the benefit of a third party, the beneficiary

• Flexible, varied, and complex– Customize to fit your situation

• Cost more than a will– $1600 to $3000, or more if trust is complex

• Assets you want protected must be retitled in the name of the trust

• May still need a “pour-over” will to include any assets or property not included in the trust

Why a Trust?

• High net worth• Sizable amount of your assets is in real estate or a

business• Leave estate to heirs in a way that is not directly

and immediately payable to them upon your death• Support surviving spouse, but also want to make

sure remainder of your estate goes to your chosen heirs after spouse dies.

• Maximize estate-tax exemptions• Provide for a disabled relative

Trust Advantages

• Can put conditions on how and when your assets are distributed after your death

• Reduce estate and gift taxes• Efficient distribution of assets– Avoid the cost, delay and publicity of probate court

• Better protect assets from creditors and lawsuits• Harder to challenge than wills

Revocable vs. Irrevocable Trusts

Revocable Living Trust• “Will Substitute”• Right to change or cancel at any time

before death• Retain control of assets in trust• You are the grantor, trustee (usually),

and beneficiarySince you have “beneficial interest” harder to

shield assets from creditors and lawsuits

• Income appears on your tax returns• Not a tax avoidance technique – assets

included in your taxable estate • At your death, trust has instructions on

how to manage and distribute assets in trust

Irrevocable Trust• Trust cannot be changed until the terms

completed• Legal entity

– Independent trustee (pay management fee about 0.75% to 1.25% of assets managed)

• All property in trust is transferred out of your taxable estate– Reduces estate tax liability– Use to avoid Medicaid spend-down

provisions (5-year “look back”)

• Better protection from creditors and lawsuits

• Trust files its own tax returns– Income does not appear on your tax return

• Lose control over assets in trust

Regardless of the type of trust, make sure your assets have been properly transferred to the trust and retitled!

Life Insurance

• Tax-free to beneficiaries• Uses– Final expenses– Large debts (mortgage)– College funds– Fund a trust

• OCES Fact Sheet T-4156 Life Insurance

Other Ways to Leave Assets Outside of a Will

• Property held in joint tenancy with right of survivorship House, Bank and Investment accountsBefore surviving spouse dies, need to retitle

assets and/or place in a trust to avoid probate• Oklahoma allows TOD deeds for real property.

Other Ways to Leave Assets Outside of a Will

• Name beneficiaries to certain types of accounts Life insuranceAnnuitiesRetirement PlansBrokerage accounts (TOD)Bank accounts (POD)

• Keep beneficiaries up-to-date!!

Other Legal Documents

Advanced Health Care Directive:1. Living Will2. Health Care Proxy3. Organ Donation4. General Provisions

For this document to be valid, must have it completed before disability, incompetence or incapacity.

Wrapping UpDon’t forget the evaluation form!

List of Resources

eXtension.org (2008). Prepare Your Estate Plan lesson at http://www.extension.org/pages/Prepare_Your_Estate_Plan

St. Pierre, E. (2012). Wills and Trusts. Stillwater, Oklahoma: Oklahoma Cooperative Extension

Fact Sheet T-4155. Available at http://pods.dasnr.okstate.edu/docushare/dsweb/Get/Document-7078/T-4155web.pdf

St. Pierre, E. (2011). Life Insurance. Stillwater, Oklahoma: Oklahoma Cooperative Extension Fact Sheet T-4156. Available at http://pods.dasnr.okstate.edu/docushare/dsweb/Get/Document-7781/T-4156web.pdf

Thank You!

QUESTIONS?