Call Robert Sayman today or Click Here for a free, no obligation consultation and learn how your heirs can receive their inheritance in the most tax and cost effective manner.

704-542-5499

Estate Planning

Who Needs Estate Planning

Are You Considering All The Various Estate Planning Strategies Available To You?

How do I plan my estate with changing and uncertain tax laws?

How Do I Reduce or Eliminate the Death Tax?

Who Needs Estate Planning?

The need for estate planning
At a person's demise there are certain typical problems, which if not planned for, create a burden on those who are left behind.

Proper estate planning can eliminate or reduce these problems. 

Financial Burdens

• Estate settlement costs are too high:  These costs consist primarily of probate fees and death taxes.
• Probate fees:  These are generally paid to the executor of the estate and the attorney who assists with the probate.
• Death taxes:  Estates which exceed certain amounts may be subject to both state and federal death taxes.
• Estate assets are improperly arranged:
• Liquidity:  There are not enough liquid (cash type) assets to pay estate settlement costs.
• Cash flow: There is not enough income to care for loved ones left behind; e.g. spouse and minor children.

Transfer of Assets  

• Estate assets may be subject to probate delays and expense.
• Assets transferred to minors may be in cumbersome guardianship accounts until they attain age 18 (or 21 in some states) and are then distributed outright to the children.
• Additional death taxes may be paid because there was no pre-death planning.

Care of Minors

• Guardians:  Parents can nominate a guardian for their minor children in a will.
• Asset management:  If the wrong persons are chosen to manage the assets left for the minors, the assets may be lost or unnecessarily reduced.

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Are You Considering All The Various Estate Planning Strategies Available To You?

A summary of benefits

Brief Description of Arrangement

• No will : Your estate passes to heirs picked by Legislature.
• Basic will : Generally passes everything to your spouse, if living, otherwise to your children when they reach 18.
• Trust will : May contain credit shelter and QTIP trusts or may pass everything to your spouse, if living, otherwise for children.
• Basic living trust : Designed to avoid probate and provide asset management.  Used for smaller estates and single persons.
• CST (credit shelter trust) with living trust :  Designed to use the applicable credit amounts of both spouses.  Can often save over $300,000 in death taxes and probate fees.
• CST (credit shelter trust) and QTIP (qualified terminable interest property trust) with living trust : Same as the CST with living trust, plus it gives the first spouse to die more control over who will eventually receive his or her assets after the surviving spouse dies.  Also called a QTIP trust.

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How do I plan my estate with changing and uncertain tax laws?

Crystal Ball Estate Planning
The enactment of the Tax Act if 2001 has introduced a considerable amount of uncertainty into the estate planning process.  Under this new law, the federal estate tax (FET) is only repealed for the year 2010, unless Congress in session at that time takes the initiative to finalize the repeal.  Predicting who will be in control of Congress almost a decade in the future, as well as what the monetary requirements of the government programs and the actual budget surplus/deficit will be at the time, is, of course, impossible. 

The year following 2010 (the one year that the FET is actually repealed)) is the year that the first baby boomers reach age 65 and become entitled to Social Security and Medicare.  The demands on the Treasury in the years that follow will be substantial.  A look at recent history tells us that Congress changed the tax law almost every year.  If the demands for government services rise, increased taxes are almost certain. 

Estate Settlement Costs
If we are dealing with the question of liquidity for estate tax purposes, most of the reductions to the FET do not come until the year before the repeal (2009) when the applicable exclusion amount reaches $3,500,000.  The table below illustrates the taxation of a hypothetical estate. 

Assumptions:

Current estate size: $10,000,000
Annual growth rate: 10%
Repeal of FET is not extended past 2010

Planning for the Future
Regarding liquidity to pay potential estate settlement costs, some have said you can make a “little mistake” or you can make a “big mistake” and only you can choose which.

If you adhere to the argument that the estate tax will probably be reinstated (it affects a very small percentage of the voting public), you will likely create (or retain) an estate plan that provides for sufficient liquidity for your estate to pay the anticipated federal estate tax.

Alternatively, if you take a more optimistic approach and feel that finally Congress has given us a good law and whoever controls the legislature in 2010 will likely vote to finalize the repeal and you feel you are likely to live another ten years, liquidity to pay a federal estate tax would not factor into your estate plan.

The second approach certainly will appeal to some, but for those who have spent a lifetime building an estate, which they would like to pass to their heirs, will find it fraught with uncertainty.

The “little mistake” would be to plan that the 2010 Congress will not repeal the federal estate tax.  If it is repealed, you will have extra liquidity to benefit heirs and/or your favorite charity, or use for your own retirement.

The “big mistake” would be to plant that the federal estate tax will still be repealed in 2011 (it currently only dies for the year 2010) and not provide for sufficient estate liquidity.  Since many people use life insurance to provide liquidity for estate taxes, they must consider whether or not they will be in poor health in 2011 and thus precluded from using the liquidity tool.  Even if they are in good health, the annual premiums will likely be much higher than they are today.

Will the Federal Estate Tax Repeal Last?
Prior to June 2001, only two percent of persons dying were subject to any federal estate taxes.  During 1997 about one-half of all death taxes imposed were on the wealthiest one person of every 1,000 who died.  The 1/10 th of 1% of the population will, of course, benefit the most from the repeal of the federal estate tax.

Estate tax laws were enacted in 1797 (Federal Stamps for Wills and Estates), 1862 (during the Civil War) and 1898 (to pay for the Spanish-American Ware).  There were all repealed a few years later.  Our current law was enacted in 1916 and has been frequently modified over the years.  Will it change again even before the repeal scheduled for the year 2010?  If not, will the Congress then in session have the votes required to finalize the repeal?  And if they do, will the President veto their bill, as President Clinton did in the year 2000?

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How Do I Reduce or Eliminate the Death Tax?

Death Tax Reduction
The federal estate tax, which is imposed on taxable estates exceeding $1,000,000 ⁶ , can be reduced through various techniques.

• Lifetime gifts :  Each person can make annual gifts of $12,000 ⁷ ($24,000 per couple, if married) to any number of donees; e.g. children or grandchildren, without incurring a gift tax.
• Charitable transfers :  Bequests at death or lifetime charitable gifts can reduce the estate size and thus reduce the death tax.  Charitable gifts made during life provide the added benefit of an income tax deduction.  Gifts can be of a partial interest; for example, one can retain the right to income for life.
• Martial transfers : Generally, neither lifetime gifts nor bequests at death to one’s spouse are subject to death taxes.  This in effect defers the tax until the surviving spouse dies.  Special rules apply to non-citizen spouses.
• Credit shelter trusts :  The credit shelter trust makes certain that the applicable credit amounts of both spouses are used.  This can bring significant savings to many estates.
• Estate value freezing techniques :  Corporate recapitalizations, personal holding companies and multi-tier family partnerships which previously transferred future growth of a business to a younger generation while still retaining power to control the business, have been almost eliminated. 
• Private Annuity :  Generally, a private annuity is the sale of an asset to a younger generation in exchange for an unsecured promise to pay annual amounts for the seller’s lifetime.  This removes the assets from the estate; however, the payments, if accumulated, could build up over the seller’s life expectancy to the size of the asset which was transferred.
• Life insurance trusts :  By transferring small amounts of the estate (equal to the insurance premium) to an irrevocable life insurance trust, an estate owner can reduce his or her current estate while creating a much larger asset outside the estate.  The proceeds of the policy will be subject to income taxes or federal estate taxes at the estate owner’s demise.  See IRC Sec. 101(a).

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Call Robert Sayman today or Click Here for a free, no obligation consultation and learn how your heirs can receive their inheritance in the most tax and cost effective manner.

704-542-5499

¹ Probate administration costs may exceed 5% of the total estate.

² Some trust wills contain credit shelter trusts designed to save death taxes, while others merely manage assets.

³ Each living trust is generally accompanied by a “pour over” type of will which picks us assets not put into the trust during the lifetime and transfers them after death.  Executors/guardians are named in a will.

⁴ The applicable exclusion amount ($1,000,000 in 2002 and 2003) is the dollar value of assets protected from federal estate tax by an individual’s applicable credit amount.  It is scheduled to change as follows: $1,500,000 for 2004 and 2005; $2,000,000 for 2006-2008; $3,500,000 for 2009, zero federal estate tax for the year 2010; and $1,000,000 for 2011 and thereafter (unless permanently repealed or otherwise modified.)

⁵ The rules and regulations surrounding qualified plans are complex.  This discussion is intended to be only a brief, general description.  State or local law may vary.

⁶ The applicable exclusion amount ($1,000,000 in 2002 and 2003) is the dollar value of assets protected from federal estate tax by an individual’s applicable credit amount.  It is scheduled to change as follows: $1,500,000 for 2004 and 2005; $2,000,000 for 2006-2008; $3,500,0000 for 2009, zero federal estate tax for 2010; and $1,000,000 for 2011 and thereafter (unless permanently repealed or otherwise modified).

⁷ The annual gift tax exclusion ($11,000 in 2003) is indexed for inflation in increments of $1,000.