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You can't take it with you.

But they can take it from you. Here's how to protect you and your heirs through wills, trusts and estate tax planning.

Though you were born into this world with nothing, when you leave it you are sure to leave something behind. More the reason you should be concerned about what becomes of your estate. It's unfortunate that the idea of estate planning is cloaked in a veil of misconception. Many people see it as something only the rich do in their twilight years. Others shy away from it, because it's too painful to ponder their own mortality.

The truth, however, is that no matter how little you own or simplistic your individual situation, you need a well-designed and astutely executed estate plan. To wait until you're bedridden or retired, or both, before you begin to plan your estate is way too late. Too many promising lives have ended suddenly and tragically, compounded by the fact that those individuals failed to make the proper preparations for their loved ones.

Moreover, the longer you delay, the less time you have to maximize your income and investments and to make needed adjustments for changes in your family or business situations. Regardless of how you feel, you already have an estate plan arising from two sources.

For one, assets--savings account, stocks, bonds, to business interest, residence or other property--in your name, will pass in accordance with state intestacy laws (rules that govern your estate if you die without a will). Second, other types of assets have defined directions for their destinies after your death, including life insurance policies, pensions, profit-sharing programs or other qualified savings plans and joint accounts.

Then there's the horror of probate--a court-supervised process of dispersing your assets. Any property you own--including your car--may be subject to probate. This process can drag on for six months or three years at your expense. And it's not unusual for court costs and lawyer fees to eat up to 10% of your estate before your family can touch a dime of it.

"The point is that anyone who owns any assets needs estate planning," says D. Larry Crumbley, a certified public accountant (CPA) and taxation professor at Texas A&M University. "Because there are differences in people's objectives, attitudes, temperaments and net assets," explains Crumbley, "estate plans should be designed to meet their specific needs." One person's goal might be to dispose of their estate with the least amount of taxes. Another person might aspire to create a financial cushion for his or her spouse upon death.

While individual plans differ, the process is essentially the same for everyone. An estate plan takes your financial and retirement goals and combines them with a simple will to ensure your assets are passed on to your desired heirs. But a more complex plan is in order for anyone who has young children; wants to protect survivors from the delay, expense and public disclosure of probate and whose estate is large enough to be taxed.

Whatever your goals, an estate plan should entail four steps: gathering an inventory of assets and liabilities; evaluating obstacles; designing the plan and implementing and reviewing that plan.

Getting Started

The best place to start is to find out your net worth and the value of your estate. Record the complete facts regarding your sets and liabilities, including pension plans, life insurance policies and joint and separately owned properties. Also, document details concerning your beneficiaries, such as their names and birth dates. Then, sit down with your financial planner and take a snapshot--based on your findings--of what would happen if you died today. In other words, what would be your net estate--assets going to your heirs after death-related payments.

Next, evaluate anything that could shrink the value of your estate and prevent you from achieving your objectives. The more obvious obstacles include funeral expenses, administration costs and estate taxes.

The planner should consider all large and long-term debts, such as mortgages, installment contracts and business obligations. The plan must also provide for unpaid income, property and state inheritance taxes.

Business owners will need to assess other obstacles, says Crumbley. These include whether the current management has the technical ability and training to run the firm successfully; whether there are any heirs or key employees who have the aptitude, temperament and capacity to be potential successors; and whether additional capital will be needed to maintain the current level of earnings. "The planner must analyze the firm's cash flow to determine if the business can serve as a source of liquidity for the estate," notes Crumbley.

Other factors having significant tax consequences must be evaluated as well, if the estate owner runs a business. One is the different tax treatment of regular income versus capital gains.

After formulating the objectives of your estate plan, you are ready to move onto the next phase--designing the plan. Up to this point you'll probably only need the services of a planner. But from here on, you'll need a lawyer and possibly an accountant who specializes in estate planning.

Where There's A Will, There's A Way

Not everyone may need to worry about keeping their estate from the tax man's clutches. Individuals must have at least $600,000 in assets, and couples a combined $1.2 million before federal estate taxes come into play.

But even if you have nothing more than a car and a small bank account, you'll need a will. Donald E. Smart, a tax attorney in Bridgeport, Conn., points out that the benefits of a will are to provide for the orderly payments of taxes, expenses and debts; states an executor's power and limits for handling the general estate and specific assets, such as real estate; and transfers assets, either outright or in a trust, to named beneficiaries.

Regrettably, more than 50% of Americans who die each year do not have a will, says Smart. "Some just never get around to it," he explains. "Others have started, but found the process too difficult or confusing."

The various rules that protect beneficiaries differ from one state to the next. Wherever you live, the consequences of dying intestate can be disastrous. If you are single, the total amount will be taken over by the state and distributed among your surviving relatives.

Even if you happen to be married, don't assume that your spouse will naturally inherit everything. Many married couples would be surprised to find out that in many states, surviving parents, brothers and sisters are entitled to as much as half of their estate. If you're married with children, your spouse may only get one-third of everything. You may have been legally separated for years and never bothered to get a divorce; nonetheless, that surviving spouse whom you haven't seen in years is also entitled to a share of your estate.

Outside of your spouse and children, relatives inheriting your assets take in order of seniority (i.e., parents first; siblings next and then their children, grandparents, uncles, aunts and cousins). If everything passes to a class of relatives, such as your children and your siblings, they can act jointly or allow one person to serve as sole administrator. If your family does not get along, the court can appoint a total stranger to manage your estate.

In addition, nontraditional living arrangements and alternative lifestyles are not recognized by most state intestacy laws. You most definitely need a will to provide for someone you regard as the equivalent of a spouse.

Dying without a will also is likely to increase the costs of administering your estate. For example, most states require that a bond be posted--the cost of which will come out your estate funds. And extra costs may be imposed on heirs. Don't forget state imposed taxes. For example, in Delaware, should your estate pass directly to your child, he or she would have to pay taxes on anything over $25,000, whereas your spouse would owe no taxes.

To top that off, more than one state can tax your estate. Stocks, bonds and other paper assets are taxed in the state where you legally reside at the time of your death. However, real estate, jewelry, furniture and other property are taxed wherever they're situated. You're also considered a resident by the state where your car is registered, where you've gotten your driver's license, pay income taxes, do your banking and own a primary home.

Make sure your will designates an executor, who will be responsible for administering your estate after your death. It is important that this person have the business acumen to manage your affairs and oversee any services your estate might require.

Death And Taxes

When devising an estate plan, there are three expenses that individuals try to avoid, says Dean McGill, a certified financial planner for San Mateo, Calif.-based IDS Financial Services Inc.--probate, estate taxes and income taxes.

"Your will should outline instructions to the probate court," says McGill. "Typically, there are four ways to avoid probate: setting up a trust; acquiring assets valued at less than $50,000; owning property in joint tenancy with survivorship rights and devising a contract."

For example, you can set up a living trust, which starts paying some income to your beneficiaries during your lifetime. The assets escape probate. When you die, your assets could stay in the trust. Or the trust would simply terminate and the money would go directly to your heirs, adds McGill. A living trust directs how your assets and affairs are to be managed according to your wishes. You can even name yourself as trustee. You can also dictate what beneficiaries are to do with their share. A parent, for example, may stipulate that his or her teen-age children must finish college before they receive any proceeds. To be able to amend the terms of the trust, you need a revocable living trust.

The only other type of trust, a testamentary, is created by your will. Upon your death all or part of your estate would be handled by a trustee who has the right to buy, sell, mortgage or administer the estate as he or she sees fit and to distribute the proceeds in accordance to your wishes. Though probate applies, the distributions are not part of the estate subject to taxes.

For many individuals, the key to preserving wealth for their heirs will be to take advantage of techniques that reduce estate taxes. Estate taxes run from about 18% to 55% for taxable estates worth more than $3 million. To calculate the taxable portion of your estate, first determine its gross value and then subtract all allowable deductions. Even though this tax liability is due nine months after the owner's death, heirs may have a hard time paying it.

An unlimited marital deduction lets your entire estate pass to a surviving spouse without incurring estate taxes. However, when your spouse dies, your children could lose a significant chunk of their inheritance to federal taxes. Using an irrevocable bypass trust or credit shelter, you can take advantage of the up to $600,000 tax exemption, placing that amount into the trust and leaving the balance of your estate to your spouse (which would then fall within the limit for estate taxes after your spouse dies).

Anthony Smith, a JD, CFP in Atlanta, says another tactic, often used in second marriages, is a qualified terminable interest property (Q-TIP) trust. "Property placed in a Q-TIP qualifies for the marital deduction, which provides a lifetime income to your spouse, while the principal goes to your chosen heirs when your spouse dies."

You also can avoid estate and gift taxes through charitable donations. You could set up a trust, where the charity receives your income for a specified number of years and at the end of that period your beneficiary receives the principal.

If you are afraid your life insurance will push the value of your estate over the exemption line, you can transfer ownership to an irrevocable life insurance trust. But should you die within three years before setting up the trust, the insurance is included as part of your estate.

As much as you'd like to prepare your will, stash it in a safe-deposit box and then never see it again, resist that temptation. A safe-deposit deposit box is automatically sealed at the time of your death and only can be opened under court supervision. So, make sure both your lawyer and executor have a copy of your will.

Moreover, change is inevitable. You will outgrow your initial estate plan as new laws necessitate revisions and family situations change--marriage, divorce, birth, death of a spouse, purchase of a new or second home or a move to another state. Wills and estate plans are not once-in-a-lifetime documents.
COPYRIGHT 1991 Earl G. Graves Publishing Co., Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Title Annotation:estate tax planning; includes related article on keeping a business in the family
Author:Nash, Collin
Publication:Black Enterprise
Date:Dec 1, 1991
Words:2129
Previous Article:The gift of money.
Next Article:Savoring the sands of paradise.
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