Focus On: Estate Planning
Eight Basic Estate Planning Tips
1 Have a Valid Will - Most people work hard for many years to accumulate wealth. They sacrifice many things (tangible and intangible) in this quest. Often, the last thing they consider is what will happen in the event of their death. Unfortunately, they frequently fail to prepare and sign a will; that is, provide a legal plan for the disposition of their assets after death. Everyone should have a last will and testament. A well-designed and executed will can accomplish three purposes. First, it can inform survivors exactly how the individual wanted to distribute his or her assets. Second, it can help to minimize the potentially onerous federal and/or state death taxes. Finally, it can provide peace of mind to the individual while he or she is alive.
2Periodically Review Your Will Often people think that a will is a permanent document, and that once it is signed it never needs to be addressed or changed. Nothing could be further from the truth! Over time, peoples thoughts, goals, and financial and personal circumstances change, and therefore every will should be reviewed periodically. Of course a person with a $100,000 estate has much less expensive issues to address than does an individual with a $10,000,000 estate. But frequently the issues involved, although differing in amount, are the same. How often should this review take place? Experts have differing opinions, but a good rule of thumb is every three years or so (or more frequently if a major event occurs, such as a divorce or the death of a spouse). Unfortunately, I have seen many occasions where people have not reviewed their wills for twenty or more years! This can have disastrous implications should an individual die in such a situation, especially if circumstances are significantly different than they were when the will was originally signed
3Keep a List of Your Assets One of the most difficult parts of the administration of an estate can be searching for the deceaseds assets after his or her death. Many people are very secretive about their assets, and this can make the job of the executor excruciatingly difficult. A list of assets owned by an individual (periodically updated and kept with his or her will) can be very helpful in ensuring that all proper assets are included in the persons estate.
4Estate Planning Issues Involving Children If you have small children, then your will can designate who is authorized to care for them until they reach maturity (custodial responsibility). This may be quite different from who has custody of their assets during this period (financial responsibility). These are very important issues, and ones that may affect the children for the rest of their lives. On the other hand, once children are grown and independent, the importance of custodial issues normally diminishes (and perhaps also financial ones). Here again, the importance of periodically reviewing (and updating, if necessary) ones will cannot be underestimated.
5Death Taxes The effect of federal and state taxes on estates can be devastating! The Federal Estate Tax rate begins at 37% and can range as high as 55%. For those who die in 1999, this tax is assessed on taxable estates valued in excess of $650,000. In addition, the Pennsylvania Inheritance Tax rate can be either 6% or 15%, depending upon the beneficiary. This means that, for wealthy decedents, the total death tax burden can approach 70% of a decedents taxable estate! And this does not include the possible income tax consequences for IRA beneficiaries, which can increase the tax burden even further. Fortunately, there are a number of excellent ways to reduce the tax impact of a persons death. But to accomplish this, careful and prudent planning is required. This is not something that can best be accomplished after the individual dies.
6 Trusts One of the most important areas of estate planning is the use of trusts to accomplish various goals. There are a number of trust options available that can be used to minimize death taxes, provide for the care of a spouse, children or grandchildren, give sums to charities, and so on. Trusts can be set up either during an individuals lifetime, or else upon death. Some are easy to set up and administer; others are more complex. Some trusts can be terminated if an individual changes his or her mind; others are irrevocable. Trusts should only be set up after careful consideration of the implications with professionals. The value of trusts in estate planning should not be underestimated.
7 Gifts One excellent way of reducing the tax on an estate is to have the individual give gifts to family members and/or others while he or she is alive. A person can give $10,000 each annually to another person (or persons) without any federal gift tax implications, and thereby reduce the potential estate and inheritance taxes on this amount. A long-term program of multiple gift-giving can reduce an individuals death taxes considerably.
8 Life Insurance One way to provide the funding to generate a significant estate for ones heirs and meet the potentially significant federal and state death taxes is through the use of life insurance. The amount of coverage, type of policy, and policy ownership are major decisions that should be made only after a careful review of the situation. For families with young children, this may be the best way to provide the children with educational and other life advantages should the breadwinner(s) die prematurely.
A Final Thought:
The above is not intended to be an all-inclusive discussion of the complexities of estate planning. It is designed to acquaint readers with some of the important concepts that everyone should be thinking about regarding their estates. If you have not reviewed your will recently or have other concerns about what might happen to your assets upon your death, call me for an appointment to discuss this very important issue. I will be happy to discuss your concerns with you, and I will work closely with your attorney, insurance agent, investment advisor, banker, and others as necessary to help you accomplish your goals.
Estate planning is not an area that will take care of itself; you must act to maximize the benefits!