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Tax & Estate Plans FAQ

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Tax & Estate Plans FAQ

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What is Estate Planning?

Estate planning is a process involving the counsel of professional advisors who are familiar with your goals and concerns, your assets and how they are owned, and your family structure. It can involve the services of a variety of professionals, including your lawyer, accountant, financial planner, life insurance advisor, banker and broker.

Estate planning covers the transfer of property at death as well as a variety of other personal matters and may or may not involve tax planning. The core document most often associated with this process is your will.

What is the main objective to Estate Planning?

Estate Planning has five primary objectives:

1) Minimize taxes. Without proper tax planning, your beneficiaries can end up paying more in estate tax and income tax.

2) Avoid Probate. A court supervised probate proceeding can result in the payment of needless attorney's fees, executor fees and court costs and substantially delay the distribution of your assets.

3) Direct the disposition of your property. Through a trust, you can designate who is to receive your property and how. With young or challenged beneficiaries, it is often necessary to direct that property be held in trust with supporting distributions for life or until the beneficiary is of sufficient age such as 25 or 30.

4) Nominate guardians for minor children. A guardian should be nominated under your Will to ensure that your minor children will be cared for by the person you choose.

5) Plan for your potential incapacity. Through a Power of Attorney for property and a Health Care Directive, you can designate the person(s) you want to take care of you physically, make your health decisions and manage your property during life, should you be unable to do so.

What documents are typically done for an estate plan?

1) Will,which directs where your assets are to be distributed upon death (However, it cannot control IRAs, 401ks, Life Insurance proceeds or assets in a Trust);
2) Trust, which can be either a Living Trust, which is revocable and created during life, or Testamentary Trust which is created by your will and takes effect upon death;
3) Community Property Agreement,allows a married couple to confirm which property is community property or / or separate property;
4) Advanced Health Care Directive and Power of Attorney for Health Care,which allows a person to appoint an agent to make health care decisions and indicate whether they want life sustaining treatment;
5) Durable Power of Attorney for Property Management, which allows an agent to make financial decisions and to manage any property not contained in a Trust; and
6) Life Insurance and possibly a Life Insurance Trust, which can be crucial for smaller and / or illiquid estates where there are depend children and / or spouses.

When should an estate plan be reviewed?

If you already have an estate plan, it should not be considered permanent. Conditions, as well as your desires, may change. Estate plans should be reviewed every 3-5 years and certain important life changes may require immediate review, such as:

Children becoming mature adults (age 25, 30 or 35);
Birth, death, marriage, divorce or disability of you or a beneficiary;
Large increase or decrease in the net worth of you or a beneficiary;
Substantial change in the type of your assets;
Purchase or sale of a business; and
Change of residence to another state.

Estate planning covers the transfer of property at death as well as a variety of other personal matters and may or may not involve tax planning. The core document most often associated with this process is your will.

What is the purpose of a Living Trust and how does it work?

A Living Trust is designed to meet four primary goals: (1) to minimize estate taxes for a married couple, by ensuring that both spouse's applicable exclusion amounts are utilized; (2) to ensure that your beneficiaries receive the property in the manner you desire, i.e. the property can be given outright or apportioned over the years based on need or age; (3) to provide lifetime management of the property, which is especially important should you become unable to manage the property, and (4) to avoid the time and expense of Probate .
In order for a Living Trust to do its job, assets must be transferred to the trustee of the trust. This is known as “funding” the trust, which ensures that the property will be controlled by the trust and no court probate will be required on death.

What is an 'Employee Stock Option - ESO' and how does it work?

An employee stock option (ESO) is a stock option granted to specified employees of a company. ESOs offer the options holder the right to buy a certain amount of company shares at a predetermined price for a specific period of time.

How it works:
Employees typically must wait for a specified vesting period to pass before they can exercise the option and buy the company stock, because the idea behind stock options is to align incentives between the employees and shareholders of a company. Shareholders want to see the stock price increase, so rewarding employees as the stock price goes up over time guarantees that everyone has the same goals in mind.

What is a 'Restricted Stock Unit - RSU'?

Restricted stock units (RSUs) are issued to an employee through a vesting plan and distribution schedule after achieving required performance milestones or upon remaining with their employer for a particular length of time. RSUs give an employee interest in company stock but have no tangible value until vesting is complete. The restricted stock units are assigned a fair market value when they vest. Upon vesting, they are considered income, and a portion of the shares are withheld to pay income taxes. The employee receives the remaining shares and can sell them at their discretion.

What is a 1031 tax free exchange?

A tax-free exchange involves the transfer of property between two parties, where the transaction is exempt from income taxation. This exemption is available for properties that are of the same type, even if they have differing quality levels. The exemption is limited to business and investment properties. A capital gains tax will eventually apply, at the point when the parties sell their properties without intending to reinvest in similar properties. The rules governing tax-free exchanges are stated in Section 1031 of the Internal Revenue Code.

As an example of a tax-free exchange, a tree farmer sells his farm, with the intent of using the proceeds to buy another tree farm. The tree farmer will only be assessed a tax if he later sells his new farm without intending to reinvest the proceeds in yet another tree farm.

What is a Qualified Terminable Interest Property Trust (QTIP)?

A qualified terminable interest property (QTIP) enables the grantor to provide for a surviving spouse, and also to maintain control of how the trust's assets are distributed once the surviving spouse dies. Income, and sometimes principal, generated from the trust is given to the surviving spouse to ensure that the spouse is taken care of for the rest of his or her life.

This type of irrevocable trust is commonly used by individuals who have children from another marriage. QTIPs enable the grantor to look after his current spouse and make sure that the assets from the trust are then passed on to beneficiaries of his choice, such as the children from the grantor's first marriage.

What is fractional ownership?

Fractional ownership is Percentage ownership in an asset. Fractional ownership shares in the asset are sold to individual shareholders who share the benefits of the asset such as usage rights, income sharing, priority access and/or reduced rates. The usage benefits that the fractional owners receive are similar to those of timeshare owners.

What is a homestead exemption?

A homestead exemption protects the value of a home from property taxes and creditors following the death of a homeowner spouse. A homestead exemption can be found in state statutes and constitutional provisions across the U.S. and is an automatic benefit in some states. In states where the homestead protection is not automatic, homeowners must file a claim which must be re-filed when moving primary residences.

The primary features of homestead exemptions are meant to provide both physical and financial shelter for the surviving spouse, with regard to their primary residence. Most homestead exemptions use a monetary value to determine property tax protection, implementing a progressive-style tax to home value in order to assure that homes with lower assessed value benefit the most from the exemption.

What does tenant by entirety mean?

Tenants by entirety (TBE) is a method in some states by which married couples can hold the title to a property. In order for one spouse to modify his or her interest in the property in any way, the consent of both spouses is required by tenants by entirety.

What is equity stripping?

Equity stripping is the process of encumbering an asset with one or more liens as a means of protecting the asset from future creditors.

What is a Qualified Personal Residence Trust?

A Qualified Personal Residence Trust (QPRT) is a way you can give your home away and live in it too. It involves transferring your home to another party (usually children) at a reduced transfer tax cost. The idea is that the value today of the right to receive $100 in 5 years, is less than the value of the right to receive it now. Under a QPRT, your home is transferred to the trust while you retain the right to live in the home for a specified period of time. After that period, you may have the home distributed to your children or to a trust for them. The gift of the home and its value is affected by when your children are entitled to receive the home.

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