Contemplating your own mortality or incapacitation

Contemplating your own mortality or incapacitation, as estate planning requires you to do, is off-putting under the best of circumstances. And estate planning is often put off to avoid the reality that life is not endless.  This is compounded by the seemingly constant flux of the tax code which allows the “avoiders” to put estate planning even further on the back burner.

A recent article on Yahoo Finance highlights the minimum that you should do in spite of all the reasons to avoid the hard work of estate planning.   5 Estate-Planning Tasks That You Shouldn't Put Off by Christine Benz of Morningstar. 

It is a short read, and you are encouraged to take a few minutes to review the 5 tasks.  Commit yourself to a specific time to tackle these 5, and your estate will be much better for it.

Keeping tabs on the estate-planning rules during the past few years has been a little like watching Olympic-level table tennis: The action moves quickly, and it's difficult to keep up.

The amount of assets that could pass estate-tax-free drifted upward for most of the 2000s, and the estate tax went away altogether in a single year, 2010. Extremely generous exclusion amounts, which allow estates of more than $5 million to escape the estate tax, have prevailed for 2011 and 2012. But the tax is set to return with a vengeance in 2013. Barring Congressional action, estates of $1 million will be subject to the estate tax starting next year, and the top estate tax rate will be 55%.

But even if the amount of assets subject to the estate tax increases above the $1 million level that's planned for 2013, I'd still take the threat of higher estate taxes as a wake-up call. The exclusion limit has been extraordinarily benign for the past three years, affecting only very wealthy families, but it might not remain that way. When you consider that real estate holdings are included in one's total estate value, it's not hard to see how reducing the exclusion amount to $1 million or less could touch a lot more families. Even if the exclusion amount remains very high, the core estate-planning to-dos are actually pretty evergreen and don't have anything to do with the tax regime. They could, however, have an extraordinary impact on whether your wishes are carried out before and after you die.

Here are the key estate-planning to-dos.

Task 1: Update Your Beneficiary Designations

Even if you've never set foot in an attorney's office, you've laid the groundwork for an estate plan if you've filled out beneficiary designation forms for your financial accounts. Those designations, in fact, trump other estate-planning documents when it comes to distributing your assets, so it's worthwhile to periodically review them to make sure they're up-to-date with your current situation--if you've gotten married or divorced, or example. (How would your spouse feel if you inadvertently left your 401(k) account to your brother?) And if you have drafted estate-planning documents such as a will, your attorney should be able to help you review your beneficiary designations to ensure that they sync up with those documents. This article provides guidance on beneficiary designation dos and don'ts.

Task 2: Designate Legal Guardians

Here's another step that's important regardless of asset level: Parents of young children should designate legal guardians who will look after their children if the parents should die or otherwise be unable to care for their minor children. Spouses often put off this step because they disagree about guardianship, but it helps if you can focus the discussion on actual child-rearing abilities and willingness to do the job. Don't get hung up on hurting anyone's feelings or bypassing friends or family members who might expect to be your guardians but aren't the best choice. (Naming someone a guardian because you're a guardian for their children isn't a good reason.) Most important, your guardian should be willing and able to take care of your children if the need arises, so an essential step is to discuss the responsibilities with the potential guardian and make sure he or she is on board. You also want your children's guardian to share you and your spouse's values and views on parenting; financial wherewithal should be a consideration, as well. It's also worth noting that it's possible to name two guardians--one to take care of your child's needs on a day-to-day basis and another to supervise the child's financial assets. But that's usually not practical for obvious reasons.

Task 3: Create a Living Will and Last Will and Testament

A living will is another document that's important no matter what your asset level is; it tells your health-care providers and your loved ones how you would like to be cared for if you should become terminally ill and unable to express your wishes yourself.  Called a "medical directive" in some states, this document details your views toward life-support equipment. Not to be confused with a living will, a last will and testament details how you'd like your assets and possessions distributed after your death.

Task 4: Draft Powers of Attorney

Estate planning doesn't just relate to death and dying: A basic estate plan should also address what would happen to your affairs if you are still living but incapacitated. A power of attorney is a document that specifies who will handle your affairs if you are unable to do so. You'll need to draft two separate documents: one that names your power of attorney for health-care decisions and another for financial matters (often called a durable power of attorney). The person you entrust with your power of attorney for health care will, ideally, live in close geographic proximity to you and will also understand your general wishes about your own health care. The person who you name on your durable power of attorney form should be detail-oriented and comfortable with financial matters, and he or she should also have a general understanding about your attitudes toward and goals for your money.

Task 5: Name an Executor

Your executor will gather all of your assets after you're gone and make sure they are distributed in accordance with your will. Ideally, your executor will be someone who's comfortable with numbers and good with details, and will also be able to find the time to work on your estate. It's common to name family members as executors, but in more complicated situations it might be preferable to use a professional, such as a bank trust officer, to serve as your executor. It's a good idea to tell your executor that you've named him or her, and also provide details on how to obtain access to important documents, such as your will and a master directory detailing all of your accounts.

Hopefully you’ve been motivated by these 5 Tasks that should not be put off.  If I can be of assistance, please call me or comment on this posting. And remember, “Don’t put it off”, so contact me this very moment.  

The Dilemma of Disinheritance

The motives for cutting a relative out of an estate range from the most primal — hate, abandonment, regret — to the most rational.

Planning what to leave behind to loved ones can be a difficult matter since, even with taxes out of the picture, it means explaining your choices and your hopes. On the other hand, planning to specifically disinherit someone can be even more difficult.

Inheritance and disinheritance are emotionally charged concepts. The motivations that go into disinheritance are especially complex, as discussed in a recent article in The Trust Advisor titled Why Are Family Members Disinherited?.

Teaching point: If you are considering disinheritance, then it also is important to think about what that means, both for yourself and the excluded heir. There are many reasons to disinherit, some more reasonable than others and some worth abandoning upon meditative reflection.

Still, if you must disinherit, then consider explaining your basis for that decision. While it is your choice and right, your legal documents must be clear and withstand (oftentimes) inevitable legal challenge by the affected heir.

If you want to talk in more detail about a disinheritance issue, please contact me.  I’m available to answer questions and to meet with you.

Reference: The Trust Advisor (April 15, 2012) “Why Are Family Members Disinherited?”

 

Good Preparations create a Graceful Exit

The wealth of many boomers is tied up in businesses they own. And that can be a problem when it comes time to retire. The Wall Street Journal published a very good article on this topic, and my WealthCounsel colleague, Lizette Sundvick, added the below commentary.

If you’re a small business owner, then you probably speak of your business and your life in the same breath. There’s nothing wrong with that. In fact, you are in good company.

All told, your business is one of the biggest challenges and accomplishments in your life. That said, it’s rare that the business is the only fulfilling thing in your life. In addition, do you really want to continue working in and on your business until the day you die, with no retirement or with old-age eventually getting in the way?

With your life and your business so intertwined, it makes it all the more necessary to plan properly.

The Wall Street Journal took up this matter in a recent article titled Preparing to Leave. I recommend this article to your reading list because it both warns of mistakes and offers solutions.

To whet your appetite, here are the “mistakes” identified:

1. Creating a business that’s too dependent on the owner.
2. Ignoring the tax benefits of planning ahead.
3. Incorrectly valuing the business.
4. Rushing to accept a rich number.
5. Hiring your brother-in-law to do the deal.
6. Underestimating the emotional impact of selling a business.

Like those old movie matinees, I am going to leave you pondering the solutions to these “cliffhangers.”

In the end, only you know when to hold’em and ergo when to fold’em when it comes to the continuation of your business. However, don’t delay. You, your loved ones and others dependent on the business will be glad you didn’t.

Any one of these issues is well worth meeting and talking about, so I invite you to call me to set up a meeting.  Let’s make sure you’re prepared to “Exit Gracefully”.

Reference: The Wall Street Journal (April 29, 2012) “Preparing to Leave”

Tax Court Rules for Taxpayer in Transfer of Closely-Held Business Interests

The Tax Court has just passed a new technique that closely-held businesses owners —and wealthy families — can use to pass assets to heirs with a minimal amount of taxes and complications. The ruling in the case, Wandry v. Commissioner, is stirring up excitement among experts.  The below commentary was written by a WealthCounsel associate, Lizette Sundvick, who practices throughout southern Nevada.

Just between us, isn’t it nice when the IRS loses a case to a taxpayer? For example, the little-guy victory in the landmark case of Wandry v. Commissioner affirms and simplifies a very powerful tool for passing on wealth, especially for the business owner.

While the case and the estate planning tool in the crosshairs have been the subject of previous articles, The Wall Street Journal provided a new explanation of the two in an article appropriately titled “Shielding the Family Business.”

The basic plan for wealth transfer when there is a business involved is to give it in pieces, and that’s precisely the plan that benefits from Wandry v. Commissioner. Giving away the entire business outright is a good way to take a tax hit, since it will invoke a gift tax when you cross certain thresholds during the year and in your lifetime.

There’s currently a lifetime exemption of $5.12 million and an annual exclusion of $13,000. Nevertheless, it’s easy for a business to be worth more than $5.12 M, and using that exclusion in full will drain what you have available against the estate tax later at death. However, by their very nature and structure, business interests are especially amenable to piecemeal ownership transfer. This is because ownership of the business, and therefore the underlying assets owned by the business, is an abstraction, and you can simply gift your interests in the business without a tax hit. For example, you can chip away by giving a usefully small amount, say, $13,000 per year per individual (or whatever number Congress and the IRS set for that year), without gift taxes.

Of course, gifting business ownership is not entirely ideal. Fortunately, that’s what the Wandry v. Commissioner case tries to fix. Gifting exactly $13,000 is pretty easy by simply writing out the figures and name on a check. On the other hand, with an abstraction like business ownership, the gift depends on the value of the business and, more to the point, on the value that you and the IRS agree or disagree about.

If you give $13,000 of ownership on the basis of your valuation, but the IRS adds up $15,000 based on its own valuation, then the IRS might also think you owe a tax (or, alternatively, that your gift/estate tax exemption should erode by that much). As you might have guessed, that’s exactly what happened in the Wandry case. Unfortunately for the IRS, the court held that the Wandrys had clearly intended to give their annual exemption amount and, if there is a new appraisal and higher valuation of the gift, then the excess wasn’t intended to be gifted in the first place.

As is always the case with the law, there is much more to this case and more guidance to be gleaned for the business owner. I would recommend reading the original article if you are or will be transferring interests in your business. As always, make sure you engage qualified legal counsel before taking action.  I am available to talk on the phone or meet in person.

Reference: The Wall Street Journal (April 30, 2012) “Shielding the Family Business”

Separation of Church...and Estate

For many people, estate planning isn't just about financial assets and other practical concerns. It's also about honoring their religious beliefs and passing those values on to family members. That can be very tricky ground.  My legal colleague, Lizette Sundvick, has offered the below commentary in reference to a good Wall Street Journal article on this topic.

Planning your estate may seem like a simple matter of deciding who gets your stuff when you’re gone. What if you are a person of great faith and religious conviction? How does a person of faith plan for his or her estate when life (and especially life beyond) is so much more than mere “stuff”?

The problem of mixing religion and estate planning – that is, the problem of doing it well – is taken up by the Wall Street Journal in an article titled Joining Church and Estate.

If your decisions during life are guided by your faith, then likely your estate decisions will be too. For example, end-of-life, disposition of remains and even charitable giving decisions are oftentimes determined by one’s religious beliefs. These are personal decisions that directly impact you and collaterally impact others.

However, it is an entirely different matter to make religiously-motivated decisions for others. Given the numerous alternative planning strategies and tools available to plan your estate, it is possible to make (or attempt to make) religious decisions for your heirs. This is where problems can arise.

In the extreme, you can move beyond encouraging to requiring the observance of certain religious principles, rituals, or lifelong membership in the given religion to secure any inheritance. As the Wall Street Journal article illustrates, this is where problems can arise. In short, requiring heirs to uphold religious principles they do not share can work to undermine them.

The article discusses some particularly poignant examples and real life court battles. It’s worth a read and serious consideration when trying to strike that delicate balance of encouraging without alienating those whose beliefs may differ from your own.

I stand ready to assist you in striking the delicate balance between church and estate.  Please call me or email, and we’ll find a time to meet.

Reference: The Wall Street Journal (April 30, 2012) “Joining Church and Estate”

Estate Planning For Women (And the Men Who Love Them)

Question #7

A fellow attorney (and award-winning journalist) Deborah Jacobs authored the book, “Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide”.  In her Forbes article titled “Estate Planning for Women (And the Men who Love Them)” she indicated the below question is a question every financially savvy woman should be able to answer. 

Should you give away assets now to save taxes?

Now that the estate tax exclusion has gone to $5 million per person ($10 million per couple), this issue concerns fewer people. Keep in mind, too, that most methods of saving estate taxes require you to totally give up ownership and control over assets, whether you are giving them to people directly or putting them in a trust. A threshold question for anyone contemplating this strategy: Can I afford it? Be sure you are leaving yourself enough, and to be on the safe side, you should assume you will live to an advanced age.

You can give anyone $13,000 a year (a couple can give $26,000) without eating into your $5 million exclusion. If you want to give away more than that, you can either count your gift against the $5 million exclusion amount or, if you have used up the tax-free amount, pay gift tax of 35%. Remember that each dollar of the exclusion used during life shaves a dollar off what is available for your estate to use after your death.

So before you dip into the lifetime exemption, consider some simple, tax-free ways to prune your estate. They include paying tuition and medical expenses for another person (such as a grandchild) directly, funding 529 college savings accounts and converting a traditional IRA to a Roth.

This concludes the "Estate Planning for Women (and the Men Who Love Them) series. I hope you have found these posts thought provoking and valuable. Questions like these can often trigger even more questions in your mind.  Please accept my invitation to schedule a meeting where we can discuss these topics and others that might be relevant to your estate planning.  Give my office a call to set a meeting.

 

6 Things To Do Before Your Spouse Dies

While important to both sexes, estate planning often affects women more profoundly. Women live longer on average and tend to marry older spouses, making them three times as likely as men to be widowed at 65.  It’s a staggering reality, and here is some pertinent information for coping with this reality.

Barbara Stanny recently contributed this article to Forbes.  The article gets right to the point in a practical and personal way. 

It's time to have "The Talk"

I heard from a woman whose husband had just been diagnosed with terminal cancer. She wanted to know what she should do before he dies.

Reading her words, I felt a mixture of heartbreak and admiration. Death is not easy to talk about, let alone prepare for. Sadly, most women will face a similar dilemma at some point. Instead of going into denial, like many do, this woman went into action.

Her question sent me back to when my father became seriously ill. I’ll never forget the day I went to my mother and asked: “Do you know what Dad has planned for you when he dies?”

“Oh yes,” she replied quickly, but when I pressed her for details, she couldn’t deliver any.

She also made it abundantly clear: this was not a conversation she wanted to have. I made it even clearer: avoidance was not an option. Here’s what we did:

1. We had “The Talk.” I made my Mom sit down with my Dad and we looked at all the financial documents: bank statements, investments, estate planning, etc. This was not, by any means, an easy conversation. Dealing with death is emotionally excruciating, at least it was for us. Nerves were frayed. My Mom glazed over. My Dad lost patience. I kept scratching my wrist (a nervous habit) until it bled. But by the end, my Mom knew where every penny was and what arrangements he had ( and hadn’t) made made.

2. We assembled “ The Team.” My Dad was very much a do-it-yourselfer. Mom needed her own team of professionals to support and guide her (during and after). First on our list was to hire an estate lawyer. Mom, my sisters and I met with him first, brought in my father, and together my parents created a very good, tax efficient estate plan… which my Mom not only understood, but had a big role in creating. The whole family helped her find an investment advisor (we interviewed 3). She also hired a CPA . It soon became clear he wasn’t a good fit, so she recently hired someone else. She meets with her “team” on a regular basis to this day.

3. We updated documents. We made sure the Will, Power of Attorney, EVERYTHING reflected their latest info and current wishes.

4. We envisioned a future without Dad. My mom started thinking about living single: how much money she’d need to live on (a lot… she wasn’t going to work nor did she have to, but she did like to spend); how she wanted her money invested (very conservatively);and who would assist her with this (her team).

5. We had regular family meetings. These meetings, though often emotional, were absolutely wonderful in getting everyone on the same page while Dad was still alive. Meetings included my sisters, spouses, and all the grandchildren (we eventually had great grandkids crawling around too). My Dad let everyone know what his wishes were, especially for philanthropy, and enrolled the whole family to the board of his foundation. These meetings drew us closer in many ways.

6. Mom talked to friends. She’d had several friends who lost their husbands, so she talked to them at length. They gave her great advice which really helped her see life goes on, happily so.

Having done these things, by the time my father died, all my mother had to do was grieve. Every detail was in order. There were no surprises. All papers signed. All major decisions made. Her team was in place. Practically speaking, his passing was seamless. Emotionally, it wasn’t easy. But being prepared, financially, made it a little easier.

If you would like to insure the stability in your financial life, please give me a call.  I work every day helping my clients “Be Prepared”.  I welcome your questions.  Let’s start early when the stress level is the lowest to work our way through this check list of 6 things to do before your spouse dies.   You are always invited to contact me by phone or leave a comment on this blog