Category: Estate Planning

Estate Planning – An Overview

Estate Planning – An Overview

Procrastination. Wikipedia defines procrastination as the deferment or avoidance of an action or task to a later time.   If you procrastinate on cleaning out the garage the result is a cluttered garage.  Procrastinate on reviewing and updating your tax planning and you are costing yourself money.  A painful reminder comes every time you write that check to the IRS.   If those quarterly checks don’t motivate you what will.

What about the proposition of splitting up to half of your accumulated wealth with the government, jeopardizing the future viability of the family business, and causing your loved ones financial and emotional drain into the next generation.  Do you want that to be your legacy?  This is exactly what could lie ahead if you procrastinate in completing and updating your estate planning.  And oh yes, estate planning provides no quarterly or annual reminders.  I dread the phone calls from the son or daughter as they are coming to grips with the fact that not only are they suffering a devastating loss but someone is telling them a large check needs to be written to the IRS in a few short months.  Will you have the liquidity to pay a large estate bill?   And if you do, why give it to the IRS?  Proper estate planning should eliminate your estate tax.

So where do you start.  Stop making excuses.  Excuses are many and varied, but don’t use them to justify your procrastination.  The estate tax isn’t going away, it’s not a tax reserved for the very wealthy, and yes, your estate may in fact be large enough to worry.

Do I really need to worry about estate taxes?

A common misconception among business owners is that there is no need to worry about estate taxes because their net worth will fall below the need-to-worry threshold.  Boy are they shocked when their estate tax is calculated.  What did you miss?  A reliable value for the business, insurance death benefits, and a simple will that results in the first spouse to die losing their million dollar or more exemption are just a few examples.  Your will is not an estate plan.  A simple will does nothing to minimize your estate taxes.  An estate plan utilizes trusts and other vehicles to move assets during your life so that they are not included in your estate tax calculation.

What’s included in my estate tax calculation?

Are you ready for some math?  Add your non-business assets and subtract liabilities.  Add the face value of life insurance policies that you own and the value for your business.  (note: It is imperative that any planning or legal document utilizes a number from an unrelated, licensed valuation professional.  If it is not the IRS will likely challenge the value.)  This should provide you with a “ballpark” number to think about the level of estate tax planning you need.

Assets (add 1 through 5))

  1. Cash and Equivalents (include cash, checking and savings accounts, CDs, and money market funds)
  2. Investments and Retirement Accounts (include vested pension plans and profit sharing accounts, 401(k), IRA, stocks, mutual funds, bonds, antiques and collectibles.)
  3. Real Estate (market value of home, vacation home, rental property, and land)
  4. Vehicles (automobiles, boat, and recreational vehicles)
  5. Personal Property (personal and household assets, furs, and jewelry)

Liabilities (add 1 through 5 and subtract total liabilities from total assets)

  1. Mortgages
  2. Vehicle Loans
  3. Home Equity and other Credit Lines
  4. Credit Card Debt
  5. Other Liabilities

Net Worth = (Assets – Liabilities)

Life Insurance – Face Value of Policy(s) you own (add)

Estimated Value of Business (add)

Total – Estate Net Worth = (Net Worth + Life Insurance + Business Value)

If your total estimated estate exceeds $1 millions dollars make arrangements to meet with an attorney who specializes in estate planning.

What can you do?

1.  Don’t let a simple will be the extent of your estate plan.  Utilize trust planning for assets and insurance to ensure that you and your spouse are taking full advantage of the current maximum exemption.

2.  Your estate plan must include a living will that includes all necessary medical directives and the appointment of a health care power of attorney.

3.  Take advantage of annual gifting. You can gift $13,000 annually ($26,000 for husband and wife joint gifts.)  State sponsored programs also permit funding for children and grandchildren’s future college planning.

Is it time to revisit your estate plan?

With the estate tax’s exclusion amount likely to return $1 million in 2011 and beyond – complacency might not only be costly but might also produce a division of your estate in ways that you did not intend or desire.  There is no question that this is a complex, confusing and seemingly ever-changing area of the law.  If knowledge is power, knowledge combined with proper and timely planning is king.

Does it really matter if there is no estate tax in 2010?  If you die in 2010 your entire estate could pass to your heirs with no estate tax.  Planning note – You should review the medical directive in your estate plan if it contains language about deciding when to pull the plug on life sustaining measures.  Hopefully no decisions concerning when to end a life are based on estate tax ramifications but stranger things have happened.   For those planning on still being included in the census as of January 1, 2010, you better have your estate planning up to date.

When do I need to update my estate planning?

Once you have a comprehensive estate plan in place, it should be reviewed annually and anytime your family experiences a death, birth or significant change net worth.

Unfortunately, you will never know exactly when you need it until it’s too late.  Make sure your estate plan is complete and up to date.  Don’t leave confusion, family disharmony, and a fire sale of your assets as your legacy.


Copyright 2010 The Business Wealth Preservation Group, LLC.