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An Estate Planning Primer
By: Bill Willard
An estate is the total value of everything we own--and business and personal
assets can add up quickly. Everyone has an estate. And realize it or not,
everyone also has an estate plan.
An estate plan can be designed by clients and their professional advisors to
achieve the client’s personal and financial objectives. Or, it can be an
arrangement imposed upon survivors by state intestate succession laws if someone
dies without a valid, up-to-date will. Even though a will is the most basic
estate planning tool, two out of three Americans die without one.
A comprehensive estate plan can arrange the ownership, management and
distribution of your assets in ways that meet your needs and objectives while
minimizing estate shrinkage. Without such a plan, whatever you may think is
going to happen to your estate after you're gone probably won't.
• Estate settlement and distribution -- Estate transfer is a privilege that can
be exercised only by following specific legal procedures designed to protect the
rights of deceased’s heirs. Estate settlement, as this process is called,
involves the assigned executor making an inventory of the person’s business and
personal assets, paying all debts and claims against your estate, identifying
the legal heirs of the remaining estate assets, and distributing those assets
accordingly.
• The problem of estate shrinkage -- The costs associated with estate settlement
include funeral expenses, medical bills, legal fees, administration costs and
other debts, as well as various federal or state taxes. These costs can
drastically shrink the size of your estate. Because they must be paid before the
estate can be fully settled, they can also delay distribution of your remaining
assets to your heirs.
• The need for estate liquidity -- Estates are often cash poor. Unless
sufficient liquidity has been provided, the forced sale of nonliquid assets to
pay settlements costs can compound estate shrinkage. In these situations, the
buyer always has the upper hand. But even people of modest means who never
considered themselves rich enough to need much estate planning can be in for a
shock. In addition to having to settle-up with Uncle Sam and state tax
collectors, creditors must be paid in full before a taxpayer's heirs can receive
their inheritances.
• A false sense of security about estate taxes -- Part of the problem may be
that people are so concerned about reducing their income taxes, they forget that
the federal estate tax rate is virtually double the income tax rate. Actually,
anyone with at least $600,000 in assets has a potential federal estate tax
liability and may also face state death taxes. Federal estate tax laws,
particularly the unlimited marital deduction, have lulled many taxpayers into a
false sense of security. Even with a will, anyone who thinks "leaving it all to
my spouse" is the way to avoid estate taxes and other estate settlement hassles
needs to think again.
• The marital deduction is an important estate planning tool. It provides that
any assets passing to a surviving spouse pass tax free at the time the first
spouse dies (assuming the surviving spouse is a U.S. citizen). However, the
marital deduction ends after the first death. Unless the surviving spouse
remarries, the real impact of the federal estate tax is felt at the second
death. In fact, the bill may even be higher if the estate continues to grow.
• The "second-death" problem -- How big a mistake can it be for an estate owner
to leave everything to his or her spouse under the marital deduction? Consider
this example: A married couple with two children each have assets of $1 million,
which they intend to leave to each other under the unlimited marital deduction.
If the husband dies first and leaves his entire $1-million estate to his wife
under the unlimited marital deduction, his taxable estate will be zero. As a
result, however, if the wife does not remarry, her gross estate at her death
could be $2 million, under the unlikely assumption that the assets will not
appreciate. Without some careful estate planning, the federal estate tax could
take a big bite out of the children's inheritances at their mother's death.
Meeting estate planning objectives. If an estate is going to be big enough to
tax, a will is just the beginning. The client may also need to do some
additional estate planning to meet other important objectives:
• Avoiding probate
• Reducing or eliminating estate shrinkage
• Providing sufficient liquidity to cover estate settlement costs
• Minimizing federal estate taxes and state death taxes
• Providing for the orderly disposition of a business or professional practice
• Maintaining the family's lifestyle and meeting other financial security
objectives,
To avoid making mistakes, people need professional advice from a qualified
attorney, trust officer, accountant or other financial advisors. Estate planning
has helped countless numbers of people reduce their estate tax liabilities and
prevent the needless loss of business and other assets.
Remember, however, that while tax savings may be a primary issue, they’re not
the only issue. Estate planning is also a way for people to reflect, perhaps for
the first time, on what they'd like to have happen to their property after
they're gone. Much of the cost and inconvenience of estate settlement can be
reduced or eliminated during a person’s lifetime. It can be done by making
decisions to implement strategies for conserving and distributing your assets
most advantageously. Among these strategies are the use of:
• Jointly owned property
• Lifetime gifts
• Wills
• Trusts
• Life insurance
Planning to provide for a family’s needs at the household head’s death is
essential, especially if the employer’s pension option is "single payer."
Annuities offer the security of a guaranteed death benefit, which passes to the
owner’s named beneficiary(ies) free of the costs and delays of probate. With
some annuities, a spouse who is the primary beneficiary has the option of
assuming ownership of the annuity and continuing to accumulate money on a
tax-deferred basis.
Retirees should continually review their estate plans because life’s changes
often create a need to alter these arrangements.
Want More? Send questions and comments to w.willard3@knology.net
About the Author:
Bill Willard has been writing high-impact marketing and sales training for the
financial services industry for over 30 years. Through interactive, Web-based
"Do-While-Learning™" programs, e-Newsletters and straight-talking articles, Bill
helps agents and advisors get the job done: profitably improving performance,
skipping expensive mistakes, and making the journey to success faster, smoother,
easier. And fun!
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