Practicing Significance

Glorifying God by fulfilling your own unique purposes through the never-ending

action of acquiring, using, and sharing diverse resources.

 

                         

 

 

          

 

Estate Planning

 

 

“Facts do not cease to exist because they are ignored.”    Aldous Huxley

 

“Frustration is not having anyone to blame but yourself.”   Unknown

 

“No amount of evidence can convince you of a truth you do not want.”    Unknown

 

“Reward always awaits perseverance.”    Tom Clark       

 

“How much did he leave?”  “All of it.”   Old quip

 

 

Introduction

 

Estate planning is a topic that many people avoid because they are busy, it is unpleasant, or it means admitting that they will die one day. As proof, in 2004, only about 47% of adults have wills. Yet taking the time to do proper estate planning can give you the ability to quickly practice significance.  It is in this area that most of us should immediately take many actions.  Estate planning is complex and tedious, requires the services of an estate attorney, and may also require the services of your financial planner and/or accountant.  It may be expensive, yet the money that can be saved on estate taxes and probate can pay for the planning many times over.  Importantly, once it is done, you can probably forget about it, except for updating every few years, and move on to other critical and significant issues.

 

 

Stewardship

 

One aspect of stewardship should greatly affect your thoughts on Estate Planning and Planning for the Inevitable: God chose you to be the trusted steward of all your diverse mental, physical, and financial resources. During your life, you are to increase, use, and share these resources. Upon your death, the mental resources you haven’t shared will disappear, as will many of your physical resources. Upon your death, the remaining physical resources and all of your financial resources will be turned over to new stewards. As an important act of being a good steward, you should be very careful about choosing your successor stewards. I envision a scene when God says, “You were a good and faithful servant while alive, but what were you thinking when you carelessly turned over my resources to your wasteful child? Why didn’t you teach your spouse so they could have continued to grow? Why did you let the government confiscate them through taxes you could have avoided?”

 

God entrusted you as a steward with all you have. At your death, you will be transferring the responsibilities and rewards of stewardship to other parties. Your last act of stewardship is to do this well!

 

The following lesson deals mostly with financial issues, but for many people the most critical issue of estate planning is what will happen to their minor children if they die or are incapacitated.  Again, the avoidance of estate planning will only cause problems for your children. 

 

Another important aspect of stewardship is passing non-financial wealth to your heirs. It is important to educate them about your family history, religious beliefs, business knowledge, and relationships. This type of wealth transfer is more valuable than money.

 

 

You Have an Estate Plan

 

Just so you know, you already have an estate plan designated by your state of residence and the federal government.  This plan gets implemented on your behalf if you do not have a valid will in place at the time of your death.  Appendix 1 shows an example of a small portion of an estate plan the state government has for you if you happen to be an Oklahoma resident.  As you can imagine, the government’s plan is complex and hard to understand, and will not be anything you would like.  However, it will cause your estate to be settled and will place any minor children under some sort of guardianship as determined by an over-worked and under-informed judge.  Over half of the people in the United States do not have a will and will have their estates settled and distributed by the state and federal governments.

 

 

Estate Planning Basics

 

A good estate planning lawyer will often start the estate planning process with the questions, “How much do you want to leave your children? Other relatives? Friends?  Your church or favorite charity? The government?”  For many people, this allocation could be unpleasant, yet that is all the more reason to work it out now.  This is the crucial starting point, and deserves a lot of discussion with your spouse and trusted advisors.

 

Many wealthy people assume that they will leave everything to their children, yet upon serious reflection find this is not what they really want to do.  This serious reflection usually considers what is good for the children and what the estate taxes will be.  In a totally unscientific survey, I asked many wealthy people, “If you had a billion dollars, how much would you leave to each of your children?”  Invariably the numbers ranged from nothing to $5 million each.  Yet, when following up the question with another question, “If you died today, how much would they get?” I usually found out their children would get much more than the first answer. Whether you leave them $1 or $100 million, what a shame if your legacy hurts your children instead of helping them.

 

In addition to allocating your estate upon death, there is another primary financial reason to do estate planning.  That reason is…asset protection while you are alive.  In this era of zealous lawyers, unpredictable juries, and unreliable insurance policies it is very advisable to protect assets through an integrated estate plan.  The time to do this is prior to being sued.  There are many possible methods available for asset protection including:  trusts, a family limited partnership, transferring some assets to a spouse, using limited liability companies, funding college accounts, using offshore trusts, and even planning in advance to take advantage of bankruptcy exemptions.

 

 

Federal Taxes on Estates

  

Federal estate taxes are an easy target for politicians.  They are always in a state of flux.  Appendix 2 shows the current federal tax rates for estates, and many states have additional taxes on top of the federal tax.  A good rule of thumb might be … “If you die with lots, the government will get half”.   So, why would you want to give the government half of your money?  When faced with this fact, most people decide to give “lots” to non-profit organizations, rather than “half of lots” to the government and “half of lots” to their children.   Because the government has gotten so good at taxing, it is virtually impossible for rich people to avoid paying a lot of estate taxes unless they plan early and give away lots (or under the current law if they die in the right year!).  That is the reason why a good estate plan for wealthier individuals includes gifting plans and may include certain insurance strategies.

 

Gifting plans are based upon four general principles:

 

·      The ability to give away $11,000 per year untaxed to as many people as you choose.  Over a period of time, this can cause a significant amount of money to be moved from one person to others.

·      In addition to 1. above, the ability to give away $1,000,000 over your lifetime tax-free.  By doing this soon enough, the growth on that amount will accrue to someone else, instead of being trapped in your estate.

·      One of the estate planning techniques to give money to nonprofit organizations either before or at the time of your death.

·      A life insurance trust along with 1. and 2. above to move death benefits to beneficiaries tax free.    

 

 

State Taxes on Estates

 

As part of the 2001 tax cut, Congress financed federal tax cuts by drastically reducing and eliminating the credit for state taxes paid. Since then, it has become even more important to understand the effect of state taxes. The effect has caused many people to even move – especially when coupled with state income taxes. In addition, about a dozen states still impose “inheritance taxes”. These taxes may even effect “bypass trusts”. Due to some quirky state laws, it is especially important to be careful how you title real estate. As of 2004, about half of the states are tax friendly and are becoming a real draw for retirees.

 

 

Tools and Techniques

 

After you have decided who gets your wealth and when you want them to have it, it will be time to legally cause the transfer to happen. As mentioned earlier, estate planning can be complex.  Appendix 3 shows some of the elements of estate planning, starting with the simpler and more essential items.  Generally, the more you have, the more complex your plan needs to be.  Remember, your gross estate includes the proceeds of life insurance policies that you own, regardless of who the beneficiaries are.  So, without giving legal advice, the following is a bare minimum guideline for estate planning [Note:  the following amounts will be changing frequently in the future due to provisions in the law about applicable exclusion amounts – all the more reason to keep your estate plan flexible and current.  Also, remember that life insurance owned by you will be included in your gross estate regardless of who the beneficiaries are:

 

·      If your gross estate at death would be less than $1,000,000, have at least a will and the medical care documents/directives shown in Appendix 3.  It is often advisable to have a revocable (living) trust, too.

·      If you and your spouse have a gross estate of $1,000,000 together, also have a pour over (bypass) trust.  If the gross estate of you and your spouse would exceed $2,000,000, also start using some or all of the rest of the tools listed in Appendix 3.

·      If your gross estate includes much life insurance, move the ownership of the life insurance to an insurance trust. Although life insurance proceeds are not taxed directly, they are included in the estate of the owner and so may be indirectly taxed.

 

 

Miscellaneous Estate Planning Tips

 

·      Make it easy on your spouse or executor.  Keep an easily found updated list of bank accounts, stock accounts, credit cards, computer passwords, insurance policies, real estate, etc.  It would be nice to even leave a long letter to your spouse or executor giving detailed thoughts and wishes on how you would like things to happen.  Even though the instructions wouldn’t be mandatory, they might be taken into account when decisions are made.

·      Under new rules that went into effect in 2003, if you name an agent other than a spouse to take care of medical decisions on your behalf, you have to have specific language in your health-care proxy to ensure they can have access to your medical records.

·      If you remarry, make sure that you have a new will and other necessary estate planning documents.

·      If you move to a new state, you will likely want to have your estate planning documents and titles to all significant properties reviewed, especially if you move from or to one of the nine community property states like Texas, California, or Arizona.

·      The value of your estate may increase or decrease in the future.  Consider the effects of specific dollar bequests vs. percentage bequests.

·      Review the beneficiaries and contingent beneficiaries on IRA, 401-K, etc. accounts to take advantage of tax deferral possibilities. Remember, beneficiary designations override the terms of a will.

·      If possible, give your executor as much flexibility as you can to take advantage of tax law changes.  Remember, the tax laws change often and an inflexible will may cause unneeded tax consequences.

·      As part of the estate planning process, you should review how you hold title to property. Choosing whether sole owner, joint tenancy (with right of survivorship, in common, or by entirety), or a partnership may have enormous consequences. Have your estate planning attorney review the title to all accounts and assets to avoid tax traps.

·      State taxes on estates vary from zero to more than 15%. Wealthy individuals should regularly review the affect of their state of residence on estate taxes.

 

 

Conclusion

 

Practicing significance includes taking care of all of the resources and relationships which have been entrusted to you.  One of the best ways to do that is to do proper estate planning.  By not doing so, you may deprive your loved ones and/or your favorite non-profit organizations of financial resources that you will needlessly give to the federal and state governments.  I urge you to take the time to do your estate plan immediately.

 

 

Additional Resources

 

Clifford, Denis & Jordan, Cora

Plan Your Estate

Platt, Harvey

Your Living Trust & Estate Plan

PriceWaterhouse-Coopers

Guide to Charitable Giving

Burkett, Larry and Blue, Ron

Wealth to Last

Maple, Stephen

The Complete Idiot’s Guide to Wills and Estates

 

 

 

   DISCLAIMER:  The content presented herein is presented as general information and is not intended to be a comprehensive overview of all of your financial options.  Nor is it meant to imply any endorsement of any type of financial plan, product or service.  Investing and spending money is a complicated and serious process that is constantly affected by conditions in the marketplace and changes in tax law and government policies.  There is no guarantee that an investment product bought today will perform the same from year to year.  You should research your choices as thoroughly as possible and, when in doubt, consult a trusted professional advisor.

 


 

APPENDIX 1 – YOUR INTESTATE ESTATE PLAN

 

 

If there is no valid will in place at the time of death, the deceased has died “intestate”.  Every state has laws on the distribution of property and care of dependents where there is no valid will.  Property will be distributed and dependents placed into custody by the laws of the state of residence, not by what the deceased may have wanted or promised.  (Real estate will be settled by the laws of the state in which it is located.)  You probably will not like the outcome of an intestate estate plan!

 

Example:  If you are an Oklahoma resident and die intestate with a wife and no children:  All property acquired during marriage by joint industry and one-third of balance to spouse.  Balance to parents equally or to survivor per stirpes; if none, one-half to maternal grandparents or to the survivor or to their issue per stirpes and one-half to paternal grandparents of the survivor or to their issue per stirpes; and, if none, to next of kin. 

 

The above is fairly unintelligible, but it represents that whatever is going to happen is not likely what the deceased would have wanted done with the estate – custody laws might even be worse.  If you look at the laws of your state, you will likely rush to a lawyer to make sure you have a valid will in place.  In fact, if you look at the legal fees likely to be involved, you would rush at blinding speed.

 

APPENDIX 2 – DO YOU UNDERSTAND ESTATE TAXES ENOUGH?

 

The question isn’t whether you completely understand estate taxes.  It is likely that estate taxes in America will be a tremendously hot potato for the foreseeable future.  It is likely that the laws will continue to change dramatically from time to time.  It is my guess that estate taxes in ten or twenty or thirty years may be totally different than those of today.  Nobody really knows the important fact – what will estate taxes be when they die?

 

However, with a lot of preparation, you can understand enough about estate taxes to make reasonable provision for your estate.  A decent enough assumption is to use the rules for 2003, and bet that the politicians will eventually make it this bad or worse.  You can clearly see that the larger the estate, the more critical it is to do significant estate planning.  To the extent that you can lawfully avoid estate taxes, and choose not to, you are wasting your money and depriving those you would have chosen to receive that money.

 

In a simplified summary, the following taxes are due at the federal level.  Many states have significant taxes in addition to this.

 

Deductions from the Gross Estate:

Transfers to your spouse

Donations to qualified charities

Costs of settling the estate

The remainder of lifetime gift

 (currently $1 million)

 

 

Federal taxes owed on the Net Taxable Estate if die in 2003:

 

Net Taxable Estate

Federal Tax Owed

Average Tax Rate

$10,000

$1,800

18.0%

$40,000

$8,200

20.5%

$80,000

$18,200

22.8%

$100,000

$23,800

23.8%

$250,000

$70,800

28.3%

$500,000

$155,800

31.2%

$1,000,000

$345,800

34.6%

$2,000,000

$780,800

39.0%

$5,000,000

$2,275,800

45.5%

 

                            

 

APPENDIX 3 – ESTATE PLANNING BASICS

 

Estate planning is a tremendously complex field.  The following is a very short list of ideas that most people should consider.  The more assets you have or the more complex your assets, the more complex will be a good estate plan.  Further, it is necessary to review and maybe alter an estate plan every three to five years.

 

Points to Consider

 

1.      Life insurance proceeds from a policy in your name will be included in your gross estate, even if you are not the beneficiary!  This causes many people to have a larger gross estate than they think.

2.    Transfers at death to a spouse or qualified nonprofit is done tax-free.  However, if done to a nonprofit during lifetime, can be a deduction against income which reduces income tax.

3.     Annual gifts of $11,000 per person to any person are not taxed.  To reduce the size of an estate, these gifts can be given to an unlimited number of people.

4.    Accurate record keeping is necessary to minimize estate taxes.

 

Estate Planning Tools

 

1.            Will

2.          Medical care statements (living will, health care representative)

3.           Power of Attorney

4.          Revocable (Living) Trust

5.           Pour over (Bypass) trust.  The most common estate planning trust which is designed to take full advantage of the IRS’s “applicable exclusion amount.”  Consider a disclaimer trust.  Also, understand the possible traps under the current law if you die in 2009.

6.          Other marital trusts

7.           Life insurance trusts

8.          Irrevocable trusts

9.          Donor Advised Fund or Foundation

10.      Charitable trusts

11.        Grantor-retained interest trusts

12.      Family limited partnerships