Estate Planning

The estate tax often diverts attention from important estate planning issues other than tax reduction. For many years, we have stressed that estate planning is about much more than taxes, but most people believe estate planning and estate tax planning are the same thing. Though wrong, it was understandable when the lifetime estate tax exemption was only $600,000. Many “modest millionaires” who considered themselves middle class would be hit by high estate and gift taxes if they didn’t plan.

Unfortunately, the idea that estate planning is all about tax reduction still is widely held. With the estate tax repealed for 2010 and likely to hit only estate worth $5.4 million or more in later years, many people simply are neglecting estate planning. Since estate taxes are not going to be a problem for them, they see no reason to put together an estate plan.

One way to avoid falling into this trap is to think about legacy planning instead of estate planning. Everyone needs a legacy plan, even those with less than $1 million in assets. With a new estate tax law likely to change over the years to come, we hope to stabilize the tax picture, this is a good time to begin putting together your legacy plan.

Legacy planning has four key goals. Consider these goals and how to accomplish them. Working with an estate planner will be easier and faster when you understand legacy planning this way, and it will make meeting these goals easier and more likely.

Financial security for you and the objects of your affection is a priority of legacy planning.

Though few people realize it, putting yourself first should be the priority of legacy planning. Establishing a legacy involves giving to or providing things (not necessarily money) for others. Yet, you are best able to give to others when your own standard of living is secure. You won’t be able to give to or provide for others when your own situation is precarious. As the plan is developed, keep returning to the question of whether a strategy would put your standard of living at risk under some circumstances. The sharp decline in asset prices in 2008 brought that home to many people.

Once comfortable with your financial security, establish goals for the ultimate disposition of your wealth to improve the financial security of others. Often, the spouse is the first beneficiary of the wealth. After that, children, grandchildren, and charities are the usual recipients. You need to decide who will benefit from your estate, the order in which they will benefit, and the amount or percentage of your wealth they should receive.

Continuing the management and caretaking of the estate is the next goal. If you are like most people, you have been calling the shots if not doing all the management. Too many estates, regardless of their size, dwindle rapidly after the first owners pass them on. Often the successors did not understand how the assets were to be managed or did not share the values and outlook of the founder.

This issue is particularly important with small businesses. The founding owner must decide who will own the business, who will benefit from its income, and who will manage the business. Those are three separate categories and do not have to consist of the same person or people. A key to successful legacy planning for a business, however, is to have a succession plan in place and to follow it.

Even estates without businesses need to address the issue of stewardship. It could be that the people you want to benefit from the wealth are not likely to manage it well over the long term. In that case, you want to consider trusts and other arrangements that separate management and ownership. It is important to recognize that those who benefit from the assets do not have to be the managers.

Protecting the estate is another key element of the plan. This goal is particularly important to small business owners and professionals. They feel a greater need to protect assets from potential creditors and lawsuits. But others might need asset protection from those sources as well as disgruntled family members, irresponsible family members, and ex-family members in divorces.

The legacy plan must address the potential tax burden. Once you have established who should benefit from the wealth, you want to transfer the wealth to them in the ways with the lowest possible tax bill that meet your other goals. Even when there is no federal estate tax, you still may have a state equivalent to plan around.

One reason many people do not develop estate plans is they do not realize how valuable the estate is and the potential tax burden. There often are “hidden assets” that are included in the taxable estate such as annuities, life insurance, IRAs, and some trusts. Other people “forget” about some of their assets or do not know their true value.

Planning a legacy involves far more than reducing estate taxes. It is time to start determining your goals and putting your plan together. Once the new estate tax law is final, push forward with the final details and implementation.

Recently in the news. The musician Prince passed away without a will. Now the Government will decide who gets what. No taking into account the extra tax and costs that just get donated to the government.

No matter what seize business you have. Take the time to plan your legacy. My grandfather taught me that!


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