Estate Planning
Some Common Estate Planning Questions
- What is Estate Planning?
Estate planning is building a comprehensive plan with a will or a trust for the disposition of your assets at your death but should also include protections for your surviving spouse, your children or other family members important to you. A good plan also provides for your incapacity by appointing an “agent” to serve for you. This planning allows for business succession if you are a small business owner and assistance and guidance for maintaining your wealth for generations.
- What is “My Estate”?
Your "estate" is, quite simply, all the property you own. Real estate, personal property, cash, stocks, bonds, mutual funds, retirement accounts, and even life insurance death benefits are considered a part of your estate. The size and nature of your estate will often dictate what type of planning is right for you. The "size" of your estate is also important from a tax perspective. For 2009, your estate could be subject to estate taxes if the total value of all of your assets (including life insurance death benefits) is $3.5 million or greater.
The "nature" of the assets comprising your estate is important to consider. This is because different types of assets will transfer on death in different ways. Some of your assets may pass by "beneficiary designation." In other words, certain types of accounts enable you to state who will receive the proceeds at your death. Typically, these would include assets like: life insurance death benefits; retirement accounts; and annuities. You may also hold certain assets jointly with another individual, with "rights of survivorship." In these cases, the jointly held assets would pass to the remaining joint owner of the asset. The most common example would be real estate held by spouses as "joint tenants." Finally, many of your assets may be held in your name individually, without beneficiary designations. If so, these assets will need to go through a process called "probate" in order to pass to the next generation.
- Is a Joint Account with my child a good idea?
In limited circumstances, joint tenancy accounts can provide a solution to an immediate problem. The most obvious example of a proper use of joint tenancy is when an aging parent jointly owns a bank account with a child. But if there are several children there could be adverse tax consequences if the child on the account tries to equalize the estate with his or her siblings. Some of the more common problems that arise when you own property/accounts as joint tenants with another individual are: (1) you lose some control over your property; (2) you subject your property to the creditors of the other joint tenant; (3) you may create unintentional gift tax problems; and (4) you could increase your exposure to unnecessary capital gain and estate tax liability.
Some of the other more common problems that arise when you own property/accounts as joint tenants with another individual are:
(1) you could lose some control over your property if the other joint tenant uses the money
(2) you subject your property to the creditors of the other joint tenant
(3) you may create unintentional gift tax problems; and
(4) you could increase your exposure to unnecessary capital gain and estate tax liability.
- What is a Will?
A Will is a dispositive instrument. It is formally called a “Last Will and Testament” written by a testator (the person creating the Will, our client). It remains revocable during the testator’s lifetime but allows the testator to protect his or her spouse, life partner or grandchildren and children’s estates from divorce, creditors and other challenges, make charitable gifts and allows the testator to have some input into how and when problem or “special needs” descendants can access the inheritances. It also allows the planner to assist the client to avoid the estate tax, if applicable to the client’s estate.
- What is a Revocable Living Trust, and is it right for me?
Many clients will choose a Revocable Living Trust ("Revocable Trust") instead of a Will as the foundation of their estate plans. Properly drafted, a Revocable Trust offers complete asset control to clients during their lifetime; allows an estate to pass uninterupted by creditor claims, disgruntled heirs and other potential issues a Will faces, avoids multiple probates if the client has several residences or inherited property in another state or states; provides for incapacity during their lifetime and after death; and on death allows them to pass their assets to their loved ones without the costs, delays, and publicity associated with probate.
- What are Estate Taxes, and Can I Avoid Paying Them?
The "estate tax" is a tax on the transfer of wealth at your death. While many of us spend countless hours each year working with tax advisors to reduce our annual income taxes, few of us pay any attention whatsoever to our potential estate tax exposure. This is odd in light of the fact that the top federal estate tax rate for 2009 was 45%! Although by an odd quirk int eh Bush tax cuts, there is no estate tax in 2010, Congress maintains that IF they make a change this year it will be retroactive to January 1, 2010, but if Congress continues to do nothing the estate tax exemption returns to $1,000,000 and the tax ont he balance will be 55% (2011)!
Each individual taxpaying Texan is entitled at death to transfer, free of estate tax, assets up to the "estate tax exempt amount." In this hypothetical we will use the 2009 exemption - $3.5 million. Once the threshold estate tax exempt levels are met, the estate tax will be imposed. The tax rate for 2009 is 45%! Any assets over the exempt amont will be taxed at this rate - unless the taxpayer has engaged in "tax-wise" estate tax planning.
Many people labor under the misconception that their estate is not "big enough" to consider estate tax planning. Most often, these people have forgotten just how much wealth will transfer at death. Often they fail to realize that life insurance and retirement plans will also be considered for purposes of the estate tax.
Consider the following hypothetical case:
Personal Residence: $750,000
Retirement Accounts: $1,200,000
Stocks/Mutual Funds: $770,000
Bank Accounts: $350,000
Life Insurance: $2,000,000
Personal Property: $180,000
Total “Estate”: $5,250,000
If this individual died in 2009 he or she would be subject to federal estate taxes at death in the amount of $345,200.00! Even if this wealth was "split" between a husband and wife, estate taxes would be due at the death of the surviving spouse without proper planning.
There are many effective ways of reducing your estate tax liability. They vary in complexity and require advice from qualified legal and tax counsel. Below are some options that might have relevance in your particular situation:
- Create a plan that protects both spouse's applicable estate tax exemptions;
- Establish a lifetime gifting program;
- Consider charitable gifting trusts;
- Remove life insurance from your taxable estate by creating a special life insurance trust, yet still available to your family;
- Remove the value of your home from your taxable estate by creating a qualified personal residence trust;
- Form a family holding company to own certain assets and use the company as a gifting vehicle.
- Can I protect my children's inheritance from "creditors and predators"?
Yes, with proper planning. Instead of leaving your assets equally to your children, why not leave it to your children in "Dynasty Trusts" – lifetime irrevocable inheritance trusts. These trusts can be created by you and controlled by you (to a degree) and naming your child as a trustee and beneficiary when you die. These trusts, if properly drafted, can protect your child's inheritance from their spouse in the event of divorce; protect your child's inheritance from their creditors in the event of a financial hardship; and upon your child's death, the unused assets can be protected for their children.bDuring your children's lifetimes, they have significant access to the income and the principal of their trusts, but, properly managed, neither their creditors or the predators will have access.
- How often should I review my Estate Plan?
The only constant in life is change. So as your assets and family matures, your estate plan may need to adjust to those changed circumstances. It is important to maintain your estate plan to ensure it is keeping up with the changes going on in your life and the complex changing laws and tax consequences. These are just a major life events that would necessitate a plan review:
- Birth or death of a family member or potential beneficiary;
- Divorce - whether it's yours or someone identified in your estate plan;
- Change in your distribution plan; or your named agents;
- Change in your financial circumstances;
- Change in your property ownership;
- A desire to change one of your named "fiduciaries" or alternate fiduciaries (e.g., personal representative, successor trustee, financial power of attorney; health care agent, etc. in your legal documents.
You should initiate a review under any of these circumstances. And even if none of these circumstances have changed, it is a good idea to review your plan with your estate planning attorney every 2-5 years. We offer many of our clients a "legacy plan" which offers complimentary reviews, trustee succession training for our clients and their family memebers and, in some cases, complimentary updates of their planning.