Estate planning forces you to face the financial and emotional consequences of death and take action to minimize its effects on your loved ones.
Why do I need to Plan?
Many people believe that estate planning is only for the very rich, but this is just not true. A modest size investment portfolio, a small business, a home, or even a life insurance policy makes you an excellent candidate for serious estate planning.
In recent years Congress has passed sweeping tax reforms that if ignored, can result in the government taking an unnecessarily large share of your estate. Estate planning is your only defense against the huge cost of probate, death, taxes, and unanticipated conservatorship proceedings.
Each of these problems can be avoided with a good estate plan.
What happens if you do nothing?
Unfortunately, a majority of Americans choose to do nothing about their estate plan. Statistics reveal that 70% of all Americans have no estate plan. As a result, upon their deaths, state law dictates who will get their property.
When you do nothing, your state of residence, in effect, writes your will for you. The court, not you, will determine who will get your estate. Also, your loved ones will have to bear the burden of unnecessary legal fees, bonds, appraisal fees and probate court costs.
Perhaps the most tragic outcome of doing nothing is that if both parents should die, the court; not you, will select the guardian of your minor children. Very often, overloaded courts are asked to decide battles over custody and money, leaving the fate of your children in limbo for months.
Is creating a simple will a good idea?
No! A simple will is a very poor estate planning document.
To illustrate the problems created by a will, let’s examine how probate, death taxes and conservatorship proceedings impact the lives of a typical married couple. Let’s assume their names are Bill and Mary. They have two children, a son John and daughter Susan. The value of their estate is $200,000, most of which is owned jointly. Bill and Mary have created a will under which all of their assets are left to the surviving spouse and then on to their children upon the death of the survivor. This type of plan is often called an “I Love You Will.”
Unfortunately, this plan guarantees that both Bill and Mary’s estates will be subject to the delays and expense of probate. What is Probate? Generations ago, the probate system was conceived as an orderly way of transferring the property of a deceased person to his or her heirs. It was designed to protect the heirs.
Today, probate has evolved into an expensive, ugly, legal nightmare where lawyers, clerks, guardians, administrators, appraisers and bonding companies help themselves to a substantial share of your estates.
For the benefit of the court’s “protection” your loved ones will pay a heavy price.
Excessive Fees: Attorney’s fees, executor’s fees, appraisal fees, court filing fees and bond premiums can range from 3% to 6% of the gross estate.
Excessive Delays: Probate takes an average of nine months to two years to complete. During this time your loved ones have virtually no access to your assets.
Public Record: Every detail of your family’s financial life is available for public scrutiny at the county courthouse.
Psychological Impact: Rigid court proceedings are a constant reminder of the death of a loved one.
Out of State Probate: Probate can occur in every state where real estate is located. What is joint tenancy and will it avoid probate? Joint tenancy means two or more people hold title to an asset with rights of survivorship. This means that if one of the joint tenants dies, the surviving joint tenant automatically becomes the owner of the property.
By owning assets as joint tenants you and your spouse can avoid probate on the first death. However, there will be a probate on the death of the surviving spouse.
Are there disadvantages to joint tenancy?
Many people believe that because they hold their property in joint tenancy with their spouse, children or parents, there is no further need for estate planning. Nothing could be further from the truth.
Joint tenancy is a poor substitute for estate planning. The results could be disastrous.
The first problem is that you have lost control of your property. You must have the consent of all joint tenants to sell the property. If one of them were to become unable to manage their affairs, the remaining joint tenants must get the court’s permission to borrow against or sell the property. If you live in a community property state, joint tenancy between spouses can create an unnecessary capital gains tax liability for a surviving spouse.
When property is owned as community property all income taxes, depreciation recapture, or capital gains taxes are forgiven at death. The property receives a new basis equal to the fair market value at the date of death.
How much does probate cost?
In most states, if the value of your property exceeds $75,000, your loved ones will have to bear the burden of probate. Probate fees are set by state statutes. For example, in Florida, the fees are up to 3% of those in excess of $100,000 up to $900,000, with a sliding scale on assets above $1 million dollars, and can be much higher if there are any unusual circumstances or if you have property in more than one state.
For example: If your property had a value of $200,000, probate fees of only 3% (which is low) would cost your loved ones $6,000.00! Also, depending on how assets are owned, there could be a probate when each spouse dies. This means both a surviving spouse and your ultimate heirs could pay probate fees.
Could my heirs have to pay estate taxes at my death?
Yes. In addition to the expense and delay of probate, your family may also be liable for substantial estate taxes. When someone dies, the federal government levies a tax on his or her right to transfer assets to others. The maximum tax rate is 40%.
However, the government has given every citizen or resident of the United States an exemption of $12,920,000; you must include everything you own, even the face value of your life insurance policies.
Also, in addition to the $12,920,000 personal exemption, there is an unlimited marital deduction that exempts all transfers of wealth between a husband and wife that are citizens of the United States. Regardless of the size of the estate there will be no federal estate taxes when a husband or wife dies and leaves his or her estate to the surviving spouse.
Keep in mind, however, that this is merely a postponement of tax. There will be a tax on the estate of the surviving spouse when it passes to your children or other beneficiaries.
And, because your estate most likely will continue to appreciate, taxes will be greater.
My estate is less than $12,920,000 – do I still need to protect it?
While an estate under $12,920,000 is free from estate taxes, it will probably not avoid probate. Remember, probate and estate taxes have nothing to do with each other.
Estate taxes are paid to the federal government. Probate fees are paid to attorneys, executors and the courts for supervising the administration of your estate and transferring assets to your loved ones.
How can I avoid these problems?
Fortunately, there is a way to plan your estate that will completely avoid probate, reduce federal estate taxes and eliminate the need for conservatorship – by creating a document called a revocable living trust. Trusts have been used for centuries as a way of holding title to assets.
How can I avoid these problems?
Although trusts can take many different forms, they are all either “living” or “testamentary, and “revocable” or “irrevocable.”
A living trust begins its existence during your life while a testamentary trust does not become a valid legal entity until you die. A revocable living trust can be changed or terminated at any time. To set up your revocable living trust, you transfer the title of all your assets from yourself as an individual to yourself as the trustee of your trust. You then manage the property for the benefit of yourself as the beneficiary. What this means is that you will have absolute and complete control over all assets in your trust.
There are no restrictions on what you can do with the assets in your trust. You can spend, save, invest or even give them away. If you change your mind about the terms of the trusts, you can amend it or revoke it at any time.
Let’s look at the advantages it provides to you and your loved ones.
A revocable living trust avoids probate: Upon your death, your assets go directly to your loved ones, without having to pay expensive attorney’s fees and court costs. With a revocable living trust there will be no delay in distributing your assets: Instead of taking from nine months to two years, your loved ones can have your property in less than a month. Plus, your estate planning goals will be completely private.
Avoid conservatorship: If you become disabled or are unable to manage your estate, your revocable living trust eliminates the need for a costly conservatorship. Your successor trustee can step in and manage your affairs without any government interference or expense. A revocable living trust gives you peace of mind.
Once your revocable living trust is completed, you and your family will relax knowing that at your death or incapacity, your estate will be managed and distributed by someone you have selected and trust, with no unnecessary costs or delays. As you can see, a revocable living trust can be an effective tool to transfer assets to your loved ones with the least amount of costs, time delay, public scrutiny, and hassle.
(Editor’s Note: This information is not designed to replace professional advice. Laws are always changing. People should seek professional advice before implementing any estate planning strategies.)
The many moving parts of your estate – business, heirs, real estate, philanthropy, investments – need to be orchestrated in concert to maximize your legacy and reduce your loss to estate taxes. This requires significant inter-disciplinary expertise to realize the benefits and avoid the pitfalls. Planning Network Partners is dedicated to examining this and other opportunities as part of a larger picture of your whole financial health.
Contact Us today for expert assistance.