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Articles
Estate Planning- Can you live without it?
By: John C. DeFalco
Anyone owning a home, a car, investments, business interests, a retirement plan and personal belongings needs an estate plan. With the Federal gift and estate tax rates beginning at 37% and gradually climbing to as high as 60%, not to mention income taxes, which could be due at death, combined transfer taxes could consume over 70% of a person's estate. State inheritance tax must also be considered as well as the tax implications connected with the decedents final income tax return and the fiduciary income tax return for the decedents estate.
Currently, U.S. citizens are allowed an exemption against estate taxes to the extent of $675,000 that can be used during life or at death. This will increase gradually to $1 million by the year 2006. Through careful planning, a married couple can effectively transfer $2 million tax-free. Though taxes need to be given careful consideration, their effect needs to be coordinated with our clients overall planning goals and objectives.
One of the primary goals in planning the disposition of your estate is to make certain your property passes to those persons you intended to receive it. This goal may be accomplished through various methods, many of which may also serve to minimize or defer the payment of estate and income taxes. With the appropriate planning and guidance in structuring beneficiary designations of retirement plans and the titling of assets, estate taxes can be reduced or eliminated entirely.
Since the Internal Revenue Service requires payment of estate taxes within nine months of a person's death, liquidity is always a concern in estate planning. Many individuals have a significant amount of wealth tied up in real estate, a closely held business or other investments that cannot be converted into cash easily. This can create a situation where a family may be forced to sell a business interest at depressed prices just to pay estate taxes. A liquidity analysis will help determine the estate's cash needs, and we can suggest alternatives to fund any deficiencies. This may include the purchase of life insurance, a business continuity plan or qualifying an asset for a long-term payment agreement of estate taxes, or other strategies than may be appropriate.
Closely held business interests can comprise a significant portion of an individual's wealth. Planning for this type of asset usually centers on the value of the business. A relatively new provision in the tax law exempts small businesses valued up to $1.3 million from estate tax. Discounts are also available in valuing a closely held business for tax purposes. Many techniques are available for transferring the interest in a closely held business to the next generation, while maintaining control of management. These techniques may also include transfers to other business owners or employees.
The use of trusts in estate planning may be useful in avoiding probate. They may also be utilized for asset protection planning for the shifting of income to reduce income taxes, or for holding certain assets outside of your estate (such as life insurance) for estate tax purposes. We can assist you in determining how you may benefit from incorporating trusts into your overall estate plan.
A Will is a powerful estate-planning tool, when properly drawn you can:
- Protect your family by making provisions to meet their financial needs,
- Minimize estate taxes,
- Name an experienced executor who will carry out your wishes,
- Name a guardian for your minor children,
- Establish trusts for minors or others inexperienced in asset management,
- Make sure assets are managed prudently,
- Avoid delays and the added expense that intestacy proceedings involve,
- Secure peace of mind in knowing your family will be taken care of according to your wishes.
Choosing an executor is one of the most important estate planning decisions you will need to make. Anyone who is an adult and is legally competent can serve as your executor. The duties and responsibilities required of the individual may prove to be overwhelming if they are inexperienced in acting in this capacity. Careful consideration should be given to naming a professional as executor or perhaps to serve as co-executor with a family member or friend. A trustee may also be required if trusts are created in your will. The same consideration in naming an executor should be applied to naming a trustee.
The development and execution of a successful estate plan usually requires careful coordination of each of the components (i.e.: investments, retirement plan, business interests, and estate plan) and communication between the planning team. We will be delighted to work with your attorney, insurance advisor, or other professional to develop and implement a plan, which meets your goals and objectives. We can also bring to you an experienced team of professionals, all experts in their respective disciplines to facilitate the planning process. We will lead this team toward the completion of an estate plan for you and your family.
We can offer a full range of financial services to accommodate all your planning needs. We welcome the opportunity to discuss some planning strategies with you. Please contact your tax advisor at Sheehan & Company to arrange a consultation.
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