Wednesday, September 15, 2010

Procrastinators: Probable Pitfalls of Postponed Planning

Estate planning allows you to control your property while you are alive and well, take care of yourself and your loved ones in time of disability, and upon your death give what you have, to whom you want, when you want, the way you want, all at the lowest overall financial and emotional cost to you and your loved ones. 

Estate planning, however, cannot provide the thrill of a round the world cruise or the latest model Mercedes. So it is not surprising that many procrastinate in hopes of "getting around to it" when they "have the time." What are the probable pitfalls of postponed planning for procrastinators? Here are some typical ones:
  1. Misplaced Legacy: Your money may go to the wrong person(s) ‑ or to the right persons but at the wrong time or in the wrong manner: You predecease your wife, who remarries and predeceases her new husband.  How much of your estate your children receive?  How will your 10 year old or teen age children will handle your family business?  What about the child who has a drug or emotional problem?  Or the child who hasn't sent you a birthday or anniversary card ‑ in 20 years?
  2. Uncle Sam comes before your loved ones:  In 2011, the estate tax reverts to up to 55 percent of all assets over $1,000,000. Relying on state intestacy laws - the "one size fits all" rules that apply in the absence of estate planning - is a costly mistake since they don't even attempt to save taxes.  Why should they?  The state and federal government benefit ‑ from the plans you don't make!  So instead of cutting your tax in half ‑ or eliminating tax entirely ‑ your heirs will pay ‑ if you don't have a will and don't employ other tax savings techniques.
  3. Your business gets the business: Like Solomon, intestacy laws attempt to cut everything down the middle ‑ baby, business, and all.  So your new spouse may be sharing a business he or she never set foot in with your adult children who have worked in the business since they were teenagers.  Or your business may be shared ‑ equally ‑ between your children who work in the business ‑ and those who don't.
  4. See you in court:  If your estate planning doesn't grant specific powers to take action, either state law or the courts will decide if an action (e.g. sell real estate or operate a family business) can occur.  Each time your heirs wants to do ‑ even the simplest thing ‑ they'll have to get their attorney to request permission from the court, a potentially expensive and continually aggravating process.
  5. Affluenza:  Once heirs get theirs, there may be no stopping them.  Leaving an inheritance outright - rather than in trust - means they get cash and other property outright and without any limits or protection.  Are your kids ready to have as much wealth as your spouse?  Did you intend that your life savings be invested in college, a mortgage, a business, or a $100,000 red Porsche?
  6. Let em eat cake: What's a "tax allocation" clause? Without specifying where money to pay estate taxes will come from ‑ or by using a "boilerplate" clause in "economy" documents - it could come from a charity or family member you wanted to exempt from tax. Just ask the daughters of former CBS correspondent Charles Kuralt, whose share of their inheritance paid $350,000 in estate taxes attributable to real estate left to a secret mistress.  Without  a formula in a trust or will that specifies who pays debts and taxes, it's quite easy for one asset to generate tax that others will have to pay.  You leave a million dollars of life insurance and pension proceeds to your children and a million to your spouse.  Who pays the taxes?  Will your spouse and your children end up ‑ after taxes ‑ with equal amounts?  If you haven't checked, how do you know?
  7. Take the money ‑ and run: Do you really want your son's ex wife to get his share of the family business?  How about your daughter's husband's creditors ‑ want them to get a piece of the action?  Without planning, you can't protect assets from either in‑laws or outlaws, creditors or predators.  Why not?   Because without planning, heirs get theirs outright.  That means what they've got is up for grabs.
  8. Equal isn't (always) equitable:   One child's a brain surgeon with several children, the other's a single "ne'er do well." Is it O.K. with you that they receive equal shares? Should their shares be managed identically?
  9. Can I Please?   Die without a will and that's a phrase your surviving spouse will have to learn ‑ and get familiar with.  If half your estate goes to your spouse and half to your children (as it might if you have no will or trust), just because your spouse is named guardian of the person of your children doesn't mean she'll also be named guardian of their assets. If she is, she'll still have to hire an attorney and petition a court for access to those assets. Some states ‑ to create a check and balance ‑ require someone other than your spouse to be guardian of the property of your minor heirs.  That means your spouse will have to go ‑ perhaps hat‑in‑hand ‑ to ask for money to use on the children's behalf.
  10. Whatever!:  If you don't take the time to plan, the lasting message you leave is that you absconded ‑ left in the middle of the night ‑ probably because your heirs weren't important enough.   Go ahead.  Leave a mess.  See who cares!  The message you leave is, "You weren't worth the time."
    Tongue-in-cheek advice on buying life insurance suggests the most efficient date to purchase it is the day before you die. Estate planning has to incorporate your unique family situation as well as you hopes, dreams, desires and values, so even procrastinators shouldn't wait until the last minute, or day.  

    Saturday, September 11, 2010

    Estate Planning: Myth and Reality

    With the advent of the "information age," no topic is too obscure or esoteric to be shrouded in myth and mystery. So how is it that something as necessary and critical as estate planning is so misunderstood? 

    There are probably more myths about estate planning than about the Loch Ness Monster or global warming. Below are some of the more common myths, followed by a healthy dose of reality:



    "I am too young to worry about estate planning."
    Every myth starts with some connection to reality. This one stems from the connection between advancing age and consciousness of mortality. The majority are generally not concerned enough about estate planning to do anything about it until their fifties. However, this is to the considerable detriment of younger persons with a mortality risk and a much greater risk (six times greater) of incapacity.

    Anyone in their forties, thirties or even twenties is not too young to consider estate planning.  Generally people in these age groups are planning for their future.  Even if you do not have a “large” estate, there are many reasons to complete an estate plan aside from saving taxes.  If you have children, at a minimum, a Will is essential.  Without a Will, the State of Florida will select a guardian for your children, and that person will probably not be your choice.  Additionally, without a Will, the State of Florida will decide who gets your property and in what manner.  Finally, dying without a Will - and death can come before we expect it - ensures that your property will be subjected to the expense and delay of probate.

    "My estate is too small to worry about estate planning."
    Everyone knows that estate planning is important for the Rockefellers because they don't want to lose more than half their estate to taxes. But those with smaller estates have smaller margins for error.  

    Estate planning is important for everyone.  Proper planning, no matter how large or small your estate, will allow you to give what you have to whom you want, when you want, the way you want, paying as little as possible in taxes and administrative fees. It also provides instructions for your care and that of your loved ones in the event of your mental disability.  It allows you to leave explicit instructions for the care of your loved ones and create protective trusts for your young, disadvantaged, or adult children, and grandchildren.  

    Proper planning also allows you to control all your property, including retirement plans and life insurance.  Conversely, designating your beneficiaries on a standard form “beneficiary designation” often means losing control of a major part of your estate.  It does not enable you to leave instructions or provide guidance to your loved ones. With good planning you can be assured that your estate is ready for the future.

    "I have a Will; that should cover everything."
    In the minds of most people, estate planning is synonymous with preparing a Will. Wills are the most common estate planning tool used.  However, there are pitfalls to relying exclusively on a Will as your estate plan. Wills offer no planning or direction for you or your family in the event of your mental disability, only on your death.  

    Wills guarantee probate, which generate personal representative and attorney fees and cause much time delay before your loved ones can receive their inheritance.  Wills are fully public and open to inspection by anyone who wants to know about your Will and affairs.  Wills cannot control their maker’s life insurance proceeds, retirement benefits, or jointly-owned property.  Finally, Wills are often bare-bones form documents written in hard to understand language.  They do not capture the hopes, fears, dreams, values, and ambitions of their makers.

    There are many other reasons for preparing an estate plan.  These include providing disability planning for you, creditor protection for your loved ones, remarriage protection, and catastrophic illness protection, to name a few.

    "I have taken care of everything with a living trust."
    A properly created and funded living trust will allow you to avoid probate, provide disability planning and save money for your heirs.  However, although most living trusts appear to be better than Wills, they are about the same as Wills if not “fully funded” because they do not avoid probate.  Funding the trust means retitling of the assets and transferring them into the trust.  In addition, most living trusts are sterile legal forms that do not contain instructions for loved ones.  They only accomplish limited objectives. 

    If you have a medium or larger estate, a living trust alone will not protect you from the estate taxes that are due on the estate value above the threshold limits.  You will need to use some other planning tools to reduce the value of your estate and minimize the taxes due.

    Even if you have a living trust, you still need to have a Will.  One thing you cannot do with a living trust is to provide a guardian for any minor children you may have at your death.  If you do not have a Will providing for a guardian, the State will determine your children’s guardian.  Additionally, without a Will, any assets that were acquired and not added to the trust will pass to your heirs through probate according to the State’s rules, and may not go to whom you desire.  

    The final elements that may be overlooked, if you  think your estate plan is complete with just a living trust, are durable powers of attorney and advance health care directives.  These documents create a plan for your future when you may no longer be able to manage your finances or make decisions regarding your health or personal care due to mental incapacity.  With these documents, you identify a trusted person to act on your behalf and in your best interests to make financial and health care decisions for you. 

    Establishing durable powers of attorney and advance health care directives while you are in good mental and physical health will allow you to avoid the prospects of a court-supervised and expensive conservatorship.

    "I have done an estate plan.  I don’t need to do anything more."
    We know an estate plan works when every expectation that the client had in mind when they began planning is completely met.  Unfortunately, most traditional estate plans just don’t work!  We believe it is because many clients and professional advisors see estate planning as a transaction.  They say, “I did my estate plan.”  In reality, estate planning is a process, not a transaction.

    Have you had any changes in your personal, family, or financial situation?  Have there been changes in the tax law or non-tax laws that impact your estate plan?  Have your advisors improved their knowledge through ongoing education and collected experience?  Since everything constantly changes, you cannot expect a plan to accomplish what it was intended to accomplish if it is never updated.  The costs of failing to update are typically far greater than the costs of keeping your plan current.

    "I don’t have anyone to leave my estate to.  Why should I be concerned with estate planning?"
    If you want to receive a posthumous “thank you” from the State for your generous gift, then stop right here and plan no further.  That’s right, if you do not have any heirs, and you do nothing, your entire estate will go to the State.

    As an alternative, you may want to consider leaving your estate to a charity.    Good planning of charitable gifts can be rewarding during your life, and can provide an ongoing gift after you are gone.

    How We Can Help

    Our office specializes in estate plans that work.  We offer client centered counseling to develop a plan custom-designed for you.  The initial counseling interview is used to learn about you, your family, your estate and, most importantly, your goals.  The next step is to design an estate plan based around your goals using a team approach that involves your other advisers, such as accountants and financial planners, in the planning process to ensure a plan appropriate for you.  The final step is implementing an estate plan tailored to your needs and goals.  

    It is our goal to provide you with a plan that works.  Plans that work allow you to control your property while you are alive and well, take care of yourself and your loved ones in time of disability, and upon your death give what you have, to whom you want, when you want, the way you want, all at the lowest overall financial and emotional cost to you and your loved ones.

    November is LEAVE A LEGACY® Month

    What is "Leave A Legacy"? 

    Chances are, you already donate a generous portion of your income to the non-profit organizations of your choice, such as your synagogue, Federation, Jewish Day School, or even a non-Jewish charity. But have you considered including those organizations in your will - so that you can continue to make a difference for generations to come? LEAVE A LEGACY® can help you start this rewarding process.

    Americans are the most giving people in the world. Almost three quarters of us make regular charitable donations while we are alive. It is even more astonishing, therefore, that less than 6% make charitable bequests (i.e. gifts though their will or trust) when we pass on. "LEAVE A LEGACY®" is a community‑based effort that encourages people from all walks of life to make a charitable bequest or other planned gift to the nonprofit organizations of their choice. It is one of 141 such initiatives in the United States and Canada. LEAVE A LEGACY® of Miami-Dade is a project of the Partnership for Philanthropic Planning of Miami‑Dade County which:
    • helps nonprofit organizations implement planned giving programs and spread the word about philanthropy (“Turning donors into benefactors”)
    • educates professional advisors about planned giving and philanthropy ("Making the ask; getting clients to do the right thing")
    • promotes planned giving and philanthropy to the general public ("Everyone can be a philanthropist")
    Why Should I Care?

    For Jews over the centuries, “leaving a legacy” has meant passing aspirations and values to the next generation. Today’s wills evolved from what we now call ‘ethical wills,” which served to pass on legacies when Jews were barred from material wealth. Today we live in a society in which wealth can be used to leave a legacy on a scale heretofore unknown.

    It is wise to hope for the best but plan for the worst, or at least the inevitable. It is still wiser to constantly remind ourselves that wealth perpetuation is only a tool to help our values live on. Although 10 Jews in a room typically have 11 opinions about most things, we all agree that Tikkun Olam – making the world a better place than we found it – is a quintessentially Jewish concept. By encouraging planned gifts, LEAVE A LEGACY® implements Tikkun Olam on a universal basis.

    What are “Planned Gifts”?

    Whether it’s the Yom Kippur appeal envelope, Federation pledge card or tree in Israel, most of us associate charitable giving with writing a check, or using a credit card. In short, giving right now, with cash or its equivalent. In the nonprofit parlance, it’s called “annual giving.”

    Many people are wealthy “on paper” but (relatively speaking) cash poor. Much of their wealth is concentrated in assets – real estate, art, small businesses, qualified retirement plans, etc. -- which are illiquid, unmarketable, low basis or otherwise unsuitable for converting to cash or passing to the next generation. Planned giving is the art – and mitzvah – of converting these assets, sometimes into an income stream, sometimes avoiding income, capital gains, gift or estate taxes, sometimes immediately, sometimes in the future and sometimes upon death, but always, always into a charitable legacy.

    From the point of view of the synagogue, Jewish day school, hospital, social service or cultural organization, planned gifts create endowments and other pools of funds, allowing them to achieve their long range vision. Planned gifts are a bridge to the future.

    Why Is a Program like "LEAVE A LEGACY®" Needed?

    According to the Chronicle of Philanthropy, the September 11 emergency relief effort exceeded $1 billion within a couple of weeks. The terrorist attacks were a grisly reminder of how interconnected we are, and we responded with a record – breaking outpouring of financial support. However, local charities, already whipsawed by a recession and federal budget cutbacks, saw a commensurate reduction in contributions. Unfortunately, there was no commensurate reduction in the amount of poverty, hunger, homelessness, crime, unemployment, illiteracy, incapacity, domestic abuse, substance abuse, and barriers to education, culture and opportunity. An important focus of this year’s LEAVE A LEGACY® campaign is to remind South Floridians that now, more than ever, charity begins at home.

    How Does "LEAVE A LEGACY®" Work?

    LEAVE A LEGACY® does not solicit gifts for any particular organization. Instead, the program is a cooperative effort of all types of South Florida nonprofit groups including social service and arts organizations, synagogues, hospitals, educational institutions and other philanthropic groups. The LEAVE A LEGACY® campaign provides resources to nonprofit groups and professional advisors, to urge their clients, donors and members to make a will, make a difference, and leave a legacy. Joining together the charities, the financial and estate planners and the media has proven to be an effective way to increase general charitable giving through trusts, wills and estates.

    A Planned Gift to Your Favorite Charity: Receiving while Giving
    The Zohar teaches us that the more we give, the more we receive, referring to the spiritual benefits of giving. A somewhat more pedestrian source of benefits is the Internal Revenue Code, which contains a plethora of ways to avoid or defer avoiding income taxes, capital gains taxes, gift taxes and estate taxes while benefiting the charity of your choice. Perhaps even less known than the mysteries of the Zohar (or of the Internal Revenue Code) are the ways in which these arrangements can be structured to transcend mere tax savings and achieve your personal goals consistent with leaving a legacy, such as protection against:
    • creditors
    • predators
    • bad judgment
    • divorce
    • “Affluenza”

    In future columns we’ll explore ways to meet your financial and charitable goals and coordinate the control of your social capital with charitable trusts, charitable gift annuities, supporting organizations and family foundations by turning unproductive assets into productive ones and even by giving away the IRS' money

    Where Do I Start?

    Before even thinking about ways to structure planned gifts, become educated about the many organizations which promote Jewish continuity, provide a place to worship, educate our children, care for the infirm, support a secure and thriving State of Israel, and otherwise carry out Tikkun Olam. Becoming involved with your local charity is your first step toward leaving a legacy.

    When is a 35% Gift Tax a Bargain? Right Now!

    It's not for everyone, but for a lucky few - particularly those with grandchildren, the 35 per cent gift tax may be the biggest bargain in history. The most recent New York Times Wealth Matters, A Year to Give to Your Heirs, and Save on Taxes, explains why. 

    In short, if you can't pass wealth estate tax free by dying this year, you can do it at a bargain  gift tax tate instead of waiting until January 1, when the rate shoots up to 55 percent.

    But wait, there's more! Uncle Sam knows most of us prefer giving to grandchildren, so he (through Congress) enacted a Generation Skipping Transfer tax, a tax equal to the estate tax which is levied on top  of the gift tax and estate tax.

    Even in the 2001-2009 world of increasing exemption amounts (from $1,000,000 to $3,000,000) and decreasing tax rates (from 55 percent to 45 percent), gifts to grandchildren over the exempt amount could incur a 100 percent tax. Under current law, when the exemption and rates return to the 2000 levels, such a gift could incur a tax of 140 percent. In this context, a 35 percent tax looks like a real bargain.

    But letting the tax tail wag the dog is not always the most prudent choice. From a purely tax standpoint, you can avoid the Generation Skipping Transfer tax in 2010 by leaving a gift to grandchildren outright, rather than leaving the gift in trust. But is that a good idea? A trust beneficiary's inheritance can be protected from creditors, predators,  divorce and even poor judgement. An outright gift - even one which avoids the extra Generation Skipping Transfer tax - can be lost in the blink of an eye.

    Which is more important? Like so many other estate planning questions, the best answer is "it depends." Specifically, it depends on your particular circumstances.