Estate Planning: An Overview

Your “estate” consists of everything you own. When you die, the things that you own – collectively referred to as your “estate” – are distributed to people that remain alive, specifically, your heirs at law or other beneficiaries such as charities or individuals. The process of gathering all your assets, valuing them, determining to whom they should be transferred, and getting them transferred can be time consuming, troublesome and costly. Some advanced planning, organization and action on your part can reduce the time, trouble and expense you leave behind. This type of advanced planning is called estate planning.

A book titled Strictly Business, by David Cahoone and Larry Gibbs, explains estate planning as saying, “I want to control my property while I am alive and well; plan for my loved ones and myself in the event of my disability; and then give what I have to whom I want, when I want, and the way I want; and do so at the lowest possible overall cost to myself and those I love.”

Strictly Business also offers this definition, provided by Robert Esperti and Renno Peterson: “Estate planning is the creation and implementation of a plan that will care for you, your loves ones, and your property if you become disabled and that will provide an orderly transition of your property, including your business, upon your death, so that all or many of these transactions occur with a minimum of delay, court intervention, publicity, cost and taxes.”

Sounds good, right? Start your own planning process today by doing the following.

Last Will and Testament (i.e. Will): A will is necessary for each and every person. You need one. A will is a written document that instructs who is to get which of your assets when you die. If you don’t create one, state laws will dictate who gets what – and this process can be time consuming and costly. In addition to who gets what, stipulate in your will the person who should become guardian of your children in the event that you and your spouse leave minor children.  This person will also oversee, as trustee, monies held in trust for your children. A will should also select who or what organization will act as executor (a.k.a. personal representative) of your estate. An executor is the person that will be in charge of making sure the provisions of your will are carried out after your death. A will cannot however, allow you to avoid probate. So, if you want privacy, you need a revocable living trust.

Revocable Living Trust: A living trust is one created during lifetime in which the grantor (often the grantor and spouse jointly) retains the right to revoke the trust, change the terms, and regain possession of the property in the trust. The grantor is typically the trustee of the trust during his/her lifetime. Assets held in a living trust go directly, upon your death, to the designated heirs, bypassing probate. The result is typically a swifter transfer of assets to your designated heirs and lower probate and related attorney fees. If the value of your estate, however, exceeds the personal estate tax exemption, be careful not to lose your exemption by simply passing all your assets directly to your spouse. Other benefits of the revocable living trust include:

• Privacy: A living will is not a document of public record. Upon your death, assets are transferred outside of probate (i.e. privately).
• Contingency: Your living trust can name a successor trustee in the event that you and your spouse become incapacitated.
• Simplicity and Lower Cost: For example, if you have assets in multiple states, a living trust can help you avoid multi-state probate proceedings that can add substantially to cost.

Beneficiaries on Your Retirement Accounts and Life Insurance Policies: Whether the value of your estate will trigger estate taxes or not, be sure the proper beneficiaries are named on your retirement accounts and life insurance policies. These types of assets are unique in that they automatically avoid probate and are transferred directly to the named beneficiary. Also, consider the tax consequences of whom you stipulate as beneficiary. If you have a sizeable life insurance policy, talk to your advisor about how is it is held and who is named as beneficiary. Ask also about a life insurance trust.

Continuity of Management and Ownership Succession for the Business: Often, the business is the most valuable family asset and accounts for a substantial portion of the business owner’s estate. Your estate planning needs to include:

• Who will run the business in the event that you die or become incapacitated?
• Who inherits ownership of the business in the even of your death?
• How will your business be valued for estate tax purposes?
• How will your estate tax bill be paid and will your estate qualify for installment payments?
• How will financial and credit arrangements and relationships be affected in the event of your death or incapacitation?

Estate Tax Reduction Plan: Estate taxes get a lot of attention, but only about two percent of estates are subject to estate taxes. It’s the legal fees that most often take the bite out of assets being transferred to heirs, especially when the deceased did not do the basic things such as maintain a current will and living trust. Still, for those that have an estate value that reaches into the estate taxable zone, the question usually turns quickly to “what can I do to eliminate or reduce the estate tax bill?”  Keeping it simple, estate tax minimization simply entails reducing the value of assets within your estate.  How does one do this?  Well, by getting rid of assets. Here are the ways:

a.    Utilize your annual gift tax exemption. Any person can give any other person or persons $12,000 per year, per person, tax free. So, if you have five children you can give away $60,000 every year ($12,000 to each), tax-free. Your spouse can do the same, taking the annual total to $120,000!  Use it or lose it!

b.    Utilize your lifetime gift tax exemption. In addition to the above, every person ALSO has a lifetime gift tax exemption of $2 million. So, you can give (gift) $2 million to anyone, tax free, at any time in your life. This is in addition to the annual $12,000 per person allowance, so this amount is not affected by gifts made under your $12,000 annual gift tax exemption. Gifts made in excess of $12,000 per year (i.e. made under the lifetime gift tax exemption) do reduce your estate tax exemption threshold ($2.0 million in 2008), but this lifetime provision is a powerful way to get assets out of your estate before they further appreciate and increase the estate tax bill.

c.    Avoid assets from ever entering your estate. This can be achieved by placing ownership interests – especially those that you expect to rapidly appreciate in value – in the names of your heirs … directly or via trust. This can also be achieved by disclaiming inheritances and having them pass gift tax-free to your children.

Get Liquid: Liquid assets such as real estate, rare coins or ownership in a private company cause difficulties during estate settlement in that they are more complicated and costly to value. Disputes could arise with the IRS. Also, the IRS wants estate tax bills paid with cash. If cash is not available to pay the bill, then some liquid assets will have to be sold or borrowed against.

Note: Estate taxes, both federal and state (most states), are due and payable nine months from the date of death.

Pay Down Debt: An estate that has little or no debt will be easier and simpler to settle. It might also reduce state estate taxes as some states levy estate tax on the gross estate rather than the net estate value. For example, if an estate has $2 million assets and $500,000 in liabilities, there are some states that will tax the estate at $2 million rather than $1.5 million.

Prepare Your Heirs: In addition to having an updated and very clear and well written will, living trust, and other estate planning documents, you should let your heirs know what to expect. Let them know who will get what and an estimation of value. By doing so, disappointments and potential disputes will be minimized.

Leave A Master Document: Prepare a master document that lists all your estate planning documents, assets, bank accounts, loan documents, life insurance policies, advisors, etc. Include information on where to find all of these documents, such as in a safety deposit box.

Andy Wolov, estate-planning specialist with Hall Estill (awolov@hallestill.com) and Jeffrey Rambach, tax expert with Gable Gotwals (jramback@gablelaw.com) each contributed their expertise to this series of articles on estate planning.

This article originally appeared in The Business Owner (www.TheBusinessOwner.com), the periodical of choice for owners of small and mid-size private businesses. All rights reserved, D. L. Perkins, LLC. Copyright 2006.