Putting a Lid on Your Estate
How many people can say that their last car cost more than their first house? If you are one of the many who responded positively, you can easily understand how an estate may have appreciated to levels that make gift or estate taxes a real concern. While most planners deal with $675,000 thresholds (in 2000 and 2001) for federal tax liabilities, married couples can now opt to shelter up to $1.35 million in assets from unnecessary taxes. However, this level of protection does not happen automatically, you must arrange for it through your legal, tax and financial advisors.
While most U.S. families will not have transfer taxes, it is an increasing problem. The wealth of America is primarily tied up in family farms and closely held businesses; by nature these are illiquid assets requiring special planning to preserve them. What most people who own a farm, a business, and those with a sizable pension or significant life insurance may not realize is that they have a chance to lose control of those assets unnecessarily. In case your planning goals include preserving something for heirs, then take action now. If safeguarding an estate for family is not a high priority, then planning so you will not outlive your assets takes preparation as well.
The basic tools of estate tax planning include whittling down the value of property owned by the client. This can be accomplished by gifts to family and charity or by reducing the value of estate assets. Recapitalizing and reorganizing corporate stock, or creating family limited partnerships, special trusts and private agreements all effectively devalue property. These tools have a place in many estate plans, but are not appropriate for every case. Another useful device is the $10,000 annual exclusion gift that can be currently used with any number of heirs. These must be gifts of present interest (no strings on the gift) or the IRS may consider gifted assets still owned by the estate. For those with a need to remove extra capital, married couples can join in a gifting program and shift up to $20,000 per year out of the estate. If any gifts are used within a life insurance trust, a special “Crummey provision” allows the funds to be utilized for premiums. This powerful technique is one of the last tax shelters still available in estate planning cases, and should be considered any time significant insurance contracts provide estate tax liquidity. However, many advisors do not understand its proper use and create additional problems by improperly structuring the plan.
Most clients recognize a need to transfer assets in ways that protect them from unnecessary tax and administrative costs. At the same time, they worry about needing those assets for unexpected future expenses. So the problem is really how to give away something you wish to control and still keep its use. While the IRS has very strict guidelines, there are still a number of ways to accomplish those goals.
Since no person has a corner on all of the good ideas, it makes sense to assemble a competent team. A proactive team of estate planning specialists will offer a set of options that address your particular needs. Include your accountant, an estate planning attorney who works primarily with tax and trust issues, an estate specialist in the financial services area and perhaps a trust administrator. Let the team of advisors prepare a plan that works, then present it for approval. Since many clients work in a piecemeal fashion, they never create a coordinated plan that meets every advisors’ concerns. Although a perfect solution for every problem is unlikely, a well-designed estate blueprint has the capacity to adjust as taxes, economic and family conditions change. In any case, it is worth the effort to get a good start on the process while there are options.
What if the estate has no estate tax liabilities? Work on easing transition concerns with powers of attorney, living trusts and basic family organization programs. If your estate exceeds threshold amounts for taxes, then more advanced planning alternatives must be used to protect the estate from taxation. Even if taxes are not your primary consideration, the issue of control is an important one. If you are fortunate enough to have accumulated enough to provide a comfortable retirement for you and your spouse, just how much of your remaining estate do you want to go to your heirs? T. Boone Pickens summarized it well by noting, “If you don’t watch out, you can set up a situation where a child never has the pleasure of bringing home a paycheck.” Many families are justifiably concerned about unearned money creating problems. They do not want an inheritance to be a disincentive for their children’s economic independence. If too much is given to heirs, will they fail to develop necessary skills or their own capabilities? The final question then is, “what percentage of the family assets should be passed to heirs, charity and the IRS?” A written family financial philosophy is recommended to help heirs and planners understand the whys of the planning process. Normally, professional advisors spend their efforts in the hows and whens of estate planning, but leave the motivation and “why” questions unanswered. This important area needs to be dealt with successfully or family conflict is a natural outcome.
The IRS can be eliminated from your estate if you make the decision to utilize specialized planning techniques. Zero estate tax planning is not all that hard to accomplish if you make the effort early in the process and stay on top of the problem. Use qualified advisors, then annual adjustments are easily made as the plan is kept updated. If taxes are not a problem, then improve control, privacy, liquidity and rest easier at night.
This information is for general education only. For specific cases, you should consult your tax and legal advisors.
- Disinherit the IRS
- Preserve Options and Protect Family Wealth
- Multi-generational Asset Protection
- Eliminate Unnecessary Expenses and Taxes
Failing to stabilize and protect estate values is one of the classic errors in most estate plans. Avoid this situation
by consulting your tax, financial and legal advisors. Learn how to organize your assets and eliminate the IRS with a ZERO Estate Tax Plan.
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Vaughn W. Henry
Henry & Associates
Gift and Estate Planning Services
22 Hyde Park
Springfield, IL 62703 USA
Phone: (217) 529-1958 Fax: (217) 529-1959
E-mail: VWHenry@aol.com
Last Updated: September 3, 2000
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