To get your estate planning documents prepared, you'll need a good estate planning attorney. Having a well thought out and properly documented estate plan is like having a parachute – it better work the first time or else. There is no estate planning version 2.0. Either version 1.0 works or it doesn't. It's simple…get it right the first time. OK, you can have lots of versions while you are alive; it's only the last version that matters.
It's a shame when someone who has worked hard and saved their whole life dies without a will. Unfortunately, this happens frequently. It's estimated that only one-half of Americans have a will.
Periodically I'll have to remind a new client that everyone has a will. It just might not be the one you want.
So, if you don't have a will, don't worry. It's already taken care of. Most states have intestacy laws, which dictate how assets will be divided when someone dies without a will. Is that what you'd want-the state telling your estate how to divide your assets? Do you want your heirs duking it out at the local probate court? I didn't think so. In one case, I was appointed by a local probate court to prepare probate accountings for a conservatorship. A gentleman in his 80's with a net-worth over two and a half million dollars was unable to manage his affairs. He didn't have a wife or any children, but he did have two sisters. When he died, the estate taxes were eight hundred thousand dollars, almost a third of his estate. He didn't have a will. Over two and a half million dollars of net-worth and no will. Naturally, the sisters couldn't agree on how to distribute the assets and there were lots of lawyers, CPA's, and probate court meetings to decide how to divide the estate. This takes time, costs money, and causes more than hard feelings. One of the sisters called me and claimed she was entitled to all of his assets because "that's what he wanted." She then proceeded to tell me that she found a book, How to Avoid Probate, in his house. Imagine that-he was smart enough to accumulate two and a half million dollars of net-worth, buy a book on how to avoid probate, but didn't leave a will. Apparently he didn't have anyone pack his parachute.
Skip the U-Haul
Ask an estate planning attorney why some people start but don't finish their estate plan, and they'll just shake their head. Some people think they are going to live forever. Then the same attorney that sent their client three letters last year reminding them to make an appointment to finish their estate plan gets a panic call. This client is going on vacation next week and will be flying to a tropical island. Naturally, they need to get their estate planning documents done before they go away. There's nothing like the thought of getting on an airplane to help you focus on your estate plan.
The emotional aspects of estate planning can't be overlooked. What's the big deal? Just about everything. You can hire a great financial advisor, attorney, CPA, insurance agent, trust officer, and any other professional needed to put your plan together. Hopefully, your team works together to accomplish all of your goals and objectives. Passing assets to the next generation and your favorite charities should be the easy part. What's the hard part? It's probably passing down your values to your children and grandchildren. Do your heirs understand the difference between equal and fair? Frequently, they aren't the same. Your son gets a larger portion of the estate than his sister. How does she feel about this? Does she understand why? Do your children know why you are donating to a particular charity? Remember, you can't take it with you. Ain't that the truth? Ever see a hearse pulling a U-Haul?
Money doesn't come with an owner's manual. Having a lot of money can bring with it other issues. Our capitalistic society tends to reward hardworking people and entrepreneurs. However, there can be some costs associated with all of this hard work.
Frequently, your economic success may come at the expense of your family, personal, or community activity time. This can cause a host of other issues. Maybe you feel a need to give your children everything you didn't have when you were a child. Perhaps you want to make it up to your children for not being around so much because you're always working.
You may feel guilty and want to give your children more, more, and more. Be careful – give too much and they may become spoiled.
Hopefully, you've done a great job during the accumulation phase and now are in the distribution phase. For the twenty and thirty-something's, pretend the remote is on fast-forward. Now what? Well, as I've said before, keep things simple. Unfortunately, estate taxes aren't simple. You don't need to become an estate planning expert. You can hire a competent estate planning attorney. You should, however, have an understating of estate taxes and know what strategies are available.
OK, what's simple about estate planning? Start with your money. What can you do with your money? Well, you can spend it. Gosh knows I have plenty of help with this. If spending money is a problem, please give me a call. I can send over a couple of my helpers. Second, you can save your money. Third, you can give it away to relatives, friends, or charity. And last, you can die with your money. This is pretty simple, spend it, save it, give it away, or die with it. So, what do you want to do? Well at some level, whether you have as much help as I do or not, you'll be spending some money. Just don't spend too much – you may not reach some of your goals and have to work "forever."
But, you should spend some money. And you'll need to do it while you're still healthy. Don't wait for next year – do it now. There may not be a next year.
Federal estate taxes may be due if the net taxable estate is greater than the exclusion amount below:
Year Amount
2008 $2,000,000
2009 $3,500,000
2010 Repealed
2011 $1,000,000
If you want to reduce your estate or just help out some family or friends, one simple and easy way is to make gifts. Individuals can make gifts up to $12,000 a year to as many people as they would like without having to file a gift tax return or pay any gift taxes. Married couples can give away $12,000 each or $24,000. This annual exclusion is adjusted for inflation and will increase over time. This exclusion is only available for gifts of so-called present interests. It is not available with gifts of future interests. What's the difference? Present interest gifts go to the recipient immediately, future interest gifts don't. An example of a present interest gift would be cash or securities. The recipient gets the asset immediately. An example of a future interest gift is a gift of real estate, but with the donor retaining life use. This means the donor can continue to occupy this property during their lifetime. The recipient doesn't get the gift until the donor passes away. Keep in mind the donor doesn't get an income tax deduction for these gifts. They do, however, remove these assets from their taxable estate.
In addition to the annual gift tax exclusion of $12,000 per year, you can also pay for certain qualified medical and educational expenses. Qualifying expenses for higher education are defined as payments made directly to the educational organization for tuition. Room and board, books, and fees are not eligible for this exclusion. The key to obtaining this exclusion is to have the donor (parent or grandparent) make the checks payable directly to the educational institution or the medical provider. Only payments that are paid directly will qualify. Payments to your children to "reimburse" them for these expenses do not qualify. These payments are considered gifts and subject to the rules accordingly. This exclusion allows people to reduce their estates beyond the annual exclusion and eliminates filing gift tax returns and paying gift taxes. This is a particularly effective strategy for people with taxable estates that want to help out their children and grandchildren.
If you would like help managing these risks give us a call at (860) 646-2465 or e-mail: TomS@Borgidacpas.com
Tom Scanlon has over thirty years experience in public accounting with an extensive background in the areas of financial, tax, and estate planning. He prides himself on providing in-depth and customized solutions to privately held businesses and their owners. He is a Certified Public Accountant and Certified Financial Planner®. Tom is a frequent speaker for area organizations and has recently been quoted on CNBC, Fox 61 News and AARP's blog. Tom also has been a guest columnist for numerous publications including The Wall Street Journal, Barron's, Money Magazine, The Hartford Courant, The Hartford Business Journal, and The New Haven Register. He is a member of the American Institute of Certified Public Accountants, the Connecticut Society of Certified Public Accountants, and the Financial Planning Association. Active in the community, Tom supports a variety of not-for-profit organizations.
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