Estate Planning: A Project for the Whole Family
The objective of all estate planning is to pass your property to your loved ones at the lowest possible cost. Additionally, once your property is in the hands of your loved ones, your planning should take advantage of strategies that will help protect your property long after you are gone. In other words, all estate planning focuses on your children or loved ones. Therefore, an effective estate plan should involve not only you and your spouse, but also your children and other beneficiaries of your estate plan.
Because all estate planning is essentially a gift to your children, it is essential that the children play an active role not only in the planning process, but also in the administration of your plan in the event of a death or disability. For example, a good estate plan should be designed to protect property, save taxes and costs, while keeping you and your spouse in complete control of your property. But for the vast majority of us, there will come a day when we are not able to manage our own financial affairs due to a disability. Your plan should specify what is to occur in the event of your disability. Typically your plan should set forth exactly when you are disabled, who manages your property when you are disabled, and how your property is to be managed when you are disabled. Frequently, family members are called upon to fulfill these duties and will be actively involved in your estate plan.
The children are likely to play an even greater role in your estate plan after your death. Children, along with a surviving spouse, play a critical role in the administration process that is necessary after you pass away. Additionally, children will be receiving property as beneficiaries of your estate plan.
Therefore, your children should be informed and educated regarding your estate plan to ensure that they understand their duties in the event of your death or disability. Also, when your children understand your estate plan and the strategies employed therein, there is very little confusion and contention amongst the family after your death.
You worked hard to acquire property during your lifetime. Your children should be given all of the tools to ensure that your property will pass smoothly to the next generation. Those tools should include a customized estate plan that addresses your family’s specific goals, as well as an atmosphere of open communication between you and your children to ensure that there are no surprises in the event of your death.
Conversely, children whose parents are living should openly discuss estate planning issues with their parents. Doing so will encourage parents to talk to an estate planning specialist to make sure that all of their property passes to their children and loved ones as intended. If children do not discuss estate planning with their parents, unintended results can materialize which cannot be corrected. The time to address these issues is today.
How a Trust is Like An Acre of Land
Having an acre of land may tell you what you have, but it says nothing about the value of the land. Some land is worth $500 per acre and some is worth $5,000 per acre. Having a trust is much the same. Many folks know they have a trust, but the value of that trust depends on what it says and how it says it. Some trusts say the right things and some don’t. Trusts that are incomplete, out of date or simply incorrect are of little value.
Our mission statement is “Effective Planning Made Easy”. Here are some things to look for in your trust to help insure it’s as effective as it should be in meeting your planning needs:
1. Have you re-titled your property? In order to avoid probate your revocable living trust should be “funded” properly. Funding is re-titling your property to the Trustee of your trust. You are normally at least one of the Trustees of your trust. Having assets titled in your individual name with no reference to your trust is a dead giveaway that your trust is not completely funded. If you are married, you and your spouse usually each have your own trust with some assets/property titled in each trust. Very few trusts are funded properly. Remember that retirement accounts are treated differently and you should never change the name on your retirement account while you are alive.
2. If you are married, does your trust contain up-to-date estate tax planning? There have been many law changes over the years and many existing trusts contain out of date language dealing with estate tax planning. More and more farm families are having estates that will be subject to estate tax next year when the current law rolls back the exemption amount to $1,000,000. It is vitally important that your trust contain current strategies for minimizing or avoiding estate tax. Don’t pay needless tax dollars.
3. Does your trust address disability issues? Your trust should contain instructions dealing with a possible mental disability. It should define when and how you would be determined to be mentally disabled so that a successor Trustee could take care of you and your assets. The goal for many folks is to avoid the expense of going to Court to deal with disability issues. A well-drafted trust will address these issues and provide for your care with your assets.
4. Does your trust contain protective strategies? In recent years, trusts are including increased asset protection for beneficiaries. They also are being drafted to protect assets if your spouse should remarry after your death. They can also protect assets if your child is divorced.
If your plan is gathering dust, you’re not alone. You owe it to yourself and your family to have your plan reviewed and brought up to date. Contact your estate planning attorney to learn what your trust can and should say.
What Does a Good Estate Plan Look Like?
The primary goal of all estate planning is to pass your property to your loved ones at the lowest possible cost. Many different costs, taxes, and fees can erode value from your assets as they are passed to your children. For example, if you pass away after January 1, 2011, federal estate tax can take a huge bite from your estate if your assets are valued greater than $1 million on the date of your death. Estate tax is a very large tax. Families who do not effectively plan their estate to address federal estate tax can be forced to sell land or other significant assets in order to pay federal estate tax, which can be as high as 55%.
In addition, costs and fees associated with the probate process can reduce the value of the property ultimately received by your children. Any assets that you own at the date of your death need to be transferred to your loved ones as directed by your last will and testament. But, in order for those transfers to occur, your will must be probated through the court, and the power of the court enables your personal representative to re-title your assets from your name to your loved ones. This probate process conducted through the court costs money. Typically, an attorney is paid to file the proper pleadings and represent the personal representative in court. Costs and fees are often assessed as a percentage of the size of the estate.
Probate fees and unnecessary estate tax can be eliminated by a proper estate plan. The most effective tool to minimize these costs is a revocable living trust. A revocable living trust can maximize the exemptions and deductions allowed by the federal government which eliminates any unnecessary taxes. In addition, a trust plan can avoid the costs and hassles associated with probate court. As a result, more of your hard earned assets will pass to your children and loved ones, thus accomplishing the primary goal of estate planning.
However, a good estate plan should accomplish many other goals, such as protecting your property in the hands of your surviving spouse after you are gone. Your plan should ensure that your property will be passed to your children even though your spouse remarries after you are gone. The estate plan you design today can protect property in the hands of your children. Strategies can be employed to shield property from predatory creditors, or to ensure that property will not be lost if your child is divorced.
A good estate plan needs to be designed by an estate planning specialist in order to pass your property to your loved ones and the lowest possible cost, and to protect your property in the hands of your family after you are gone. Talk to an estate planning specialist. Your children can be given the tools to grow your assets and benefit your family for generations.
Every estate plan which effectively passes property to your loved ones needs to address two very important issues: First, you and your attorney must formulate a customized plan that addresses all the issues unique to your family, including farm succession issues, asset protection, minimizing taxes and expenses, and avoiding family conflict. Second, you and your attorney must conduct regular reviews and updates of the plan to ensure that all of your issues are addressed by your plan. Your estate plan needs to change over time as your life and family situation changes over time. Even if you have the perfect estate plan today, it will fail to work properly at your death if the plan is not regularly updated.
Total Costs of Passing Property to Your Loved Ones
In order to minimize the costs of transferring your property at your death, you should have two very important discussions with your planning specialist. One, how much will it cost to draft and put your plan in place. Often, planning will involve not only preparation of a will, a trust or disability documents, but also will require new deeds and re-titling of assets. Your attorney should tell you exactly what this will cost.
Two, how much will it cost my family when I pass away? There are several different taxes and expenses which may be owing soon after your death. Your initial estate planning design needs to consider the taxes to be paid by your estate. Furthermore, your estate planning attorney will also charge your family a legal fee to represent your estate in probate court or administer your trust plan. At the end of your initial meeting with the attorney, you should know how the attorney calculates these future fees.
Effective Planning Requires Updating and Maintenance
Once you have designed a customized plan which addresses all of your planning goals, your estate planning attorney needs to provide you with a process which allows your plan to be updated. As the years pass, your family situation, planning goals, and assets are likely to change. Your plan needs to be amended to account for those changes. Additionally, new estate planning techniques or law changes will occur which will require an update to your estate plan. Ignoring your plan will likely cause your plan to be ineffective at your death.
Contact an estate planning specialist that will customize a plan that addresses all of your planning goals, minimizes taxes and expenses paid by your family, and will have a process in place to update your plan as necessary. Your plan needs to be effective, not today, but later on when your family will be relying on your planning.
Is My Estate Large Enough to Warrant Effective Planning?
Nebraska families have seen the value of their land skyrocket in recent years. Farms that were purchased years ago for hundreds of dollars per acre are now selling for thousands. This dramatic increase in value affects us in many ways, including subjecting many farm and ranch families to Federal Estate Tax.
The law on the books today states that individuals who pass away after this year with estates greater than $1 million will be subject to Federal Estate Tax. Given the current prices of land, many farmers and ranchers are currently above this threshold. Without proper estate planning, farm families may have to pay an enormous amount of estate tax to the IRS.
However, the bad news is likely to get worse. Leading economists and financial experts agree that the value of US dollar will continue to decline for many years to come. The US is racking up staggering deficits. According to the White House, the budget deficit for 2010 will be $1.565 trillion. The total national debt is over $12 trillion. (That is $12,000,000,000,000.) Other experts project that the US is on the hook for $99 trillion to pay for the government’s unfunded pension and health care liabilities. This is more than 7 times the size of the entire US economy.
How do these debts affect Nebraskans? The US government is relying on a gradual dollar devaluation to shrink its monstrous debt and to encourage exports. But this strategy for recovery will come at a cost to landowners in Nebraska. The devaluation of the dollar will cause land values to rise even further, and can create an enormous Federal Estate Tax problem that will be inherited by our children.
For example, if John and Sue currently have an estate $1.5 million, which some may even consider a modest size operation based on today’s land values, and both John and Sue die next year with no estate planning in place, John and Sue’s children would owe approximately $210,000 in tax. That tax bill is nothing to sneeze at.
But what if John and Sue are 55 years old and they live to their life expectancy? If their estate experiences average historical inflation (approximately 3.5%), their children would inherit a tax bill of more than $1.7 million dollars based on current law. If the devaluation of the dollar continues as a result of the government’s plan for economic recovery, and the estate increases at 6%, then John and Sue’s children would owe nearly $4.5 million in tax.
The federal government considers ag families wealthy enough to impose a severe Federal Estate Tax, and the tax problems will likely increase because of the government’s gradual devaluation of the dollar. If your estate plan has not been reviewed or updated recently, contact an estate planning specialist. More than ever before, farm and ranch families need to take advantage of every estate tax planning tool available in order to minimize or even eliminate estate tax paid to the IRS.
Save Even More Farm with “Upstream” Generation Skipping Planning
The mission of our law firm is to help our clients with effective planning that achieves results and is easy to put in place. Even the most effective plan means nothing if it is not implemented. Our process of plan completion, free legal news updates, and free phone calls for clients and free educational seminars for clients sets the standard that clients should expect in their planning experience.
Quality estate planning is based on client goals. In my 28 years of planning I find that clients have two overriding goals: to take care of their spouse and to keep all of their farming or ranching operation in the hands of their loved ones.
While taking care of the spouse in a plan is vitally important, it is easily done even in the most basic of plans. Let’s assume that you’ve done that, now let’s save some more estate tax.
Last month I wrote the following: One of the most effective strategies available to farm families for reaching their planning goals is Generation Skipping Tax Planning. This effective tool has been ignored for two major reasons: a.). it was misunderstood and b). it was considered as a tool for only the super rich.
I then went on to explain the misconceptions as well as the benefits of adding Generation Skipping Tax Planning to your estate plan. The bottom line is that with GST Planning, all or part of the estate tax skips a generation (or two), but your property does not. It can still pass to a trust your children can enjoy and control. The big loser is the IRS. There are some clients that are uniquely situated for even greater estate tax savings by using GST Planning in an “upstream” manner.
If you have or expect to have a taxable estate at your death, which is $1Million starting in 2011, and you expect to receive an inheritance from a parent, you can have your parent add GST Planning to their plan so that part or all of your inheritance will not be subject to estate tax in your estate. This will not hurt your parent, but can be a great savings for your descendants. If you already have a taxable estate, you will not want your inheritance to add to the estate tax burden. Your operation belongs in the hands of your family.
Many times we have seen traditional planning tools waste the estate tax exemption on the death of a spouse. This is a tragic waste and can cost hundreds of thousands of dollars in wasted estate tax. However it is even more common for folks to forget to use their Generation Skipping Tax Exemption and in so doing are causing their descendants to pay unnecessary estate taxes. If you’re in this situation, talk to your parents while there is still time to update their estate plans.
Saving Your Farm With Generation Skipping Planning
Our mission statement is “Effective Planning Made Easy”. The most effective planning minimizes estate tax, protects loved ones and keeps more of your property with your family for generations to come.
One of the most effective strategies available to farm families for reaching their planning goals is Generation Skipping Planning. This effective tool has been ignored for two major reasons: a.). it was misunderstood and b). it was considered as a tool for only the super rich.
Misconceptions of Generation Skipping Planning
First and foremost, this planning technique will take nothing away from your spouse. This planning allows you to provide for and protect your spouse at your death. The planning implications are for your children/grandchildren.
The name of the planning tool is the problem. “Generation Skipping Planning” leads you to believe you are disinheriting your children and giving property to grandchildren. Many folks dismiss the concept for this reason alone. They wrongly believe that the property skips a generation. The correct view is that the estate tax skips a generation, not the property. It is a strategy which gives your children all or part of their inheritance in a way that makes it exempt from estate tax at their death. When correctly designed, your children inherit property up to the limit of your Generation Skipping Tax Exemption in a trust share specially designed to give them access to money and property to meet their needs, yet the property remaining in the trust share at their death is not subject to estate tax in their estate. In addition to allowing your children to have access to the money/property, these trust shares can provide greater protection from predatory creditors and can also add greater protection in the event that your child is divorced. These exempt trust shares do great things for your children and are one of the best gifts that you can give them.
People Who Need Generation Skipping Planning
It’s not just the super rich that love their children. Nebraskans take a long view in planning. We all want to thoughtfully provide for and protect our families. All of us would want reduce taxes for them. Depending on the size of your operation and the tax law in effect at their death, it can save your children hundreds of thousands or even millions of dollars in unnecessary estate taxes. For the family farmer estate taxes can be one of the largest avoidable expenses. It is a powerful tool for the family farmer who wants to keep the farm in the family for generations to come. It is one of the many effective planning strategies that are available.
If your plan has been gathering dust on the shelf, you’re not alone. On average, plans are reviewed once every 19.6 years. That’s not often enough. You owe it to yourself and your family to have your plan reviewed regularly.
Disability Planning, the Often Overlooked Aspect of Planning
Clients often contact our office after they realize the benefits of developing an effective estate plan. They recognize the potential for tax savings, proper distribution of wealth, increased creditor protection, and divorce protection. However, sometimes people neglect to consider the consequences of becoming disabled. As a result, clients do not realize the importance of disability planning. Many people have not considered who will be in charge of their affairs during periods of disability. There are several tools that can be employed which will protect your well-being and your property. These tools are most effective when included in a well designed revocable living trust.
Revocable Living Trust
A properly drafted revocable living trust should include a customized definition of “disability”. For example, the trust could state that you are deemed disabled if two licensed physicians find that you are disabled. Once the definition is satisfied, then the Disability Trustee assumes control over the trust assets. This control is defined by the instructions set forth in the trust. These instructions should define how your assets should be managed. For example, the Trustee can be instructed to utilize trust assets to provide for your spouse and your children during your disability. The Trustee is also given specific instructions regarding your care during your disability. For example, your trust could specifically state that you wish to remain at home and not be placed in a nursing home for as long as possible. Your instructions could require that you be provided with books, movies, or other media for your entertainment. The detail of your instructions to the Disability Trustee is infinite.
Revocable Living Trust Alternatives
A properly drafted revocable living trust which includes disability provisions is a superior tool to manage your property during your disability. In the absence of a revocable living trust, disability planning can be achieved through a durable power of attorney. This power of attorney appoints an agent to manage your property and accounts on your behalf. However, a power of attorney can present many problems. If the power of attorney is effective upon its execution, then your agent has the ability to access your accounts even if you are not disabled. Also, financial institutions are not required to accept your power of attorney. If the document is too old, or if the institution simply is unsatisfied with the language in the power of attorney, then your agent will be denied access.
Given the reasons above, disability instructions to a Disability Trustee within the context of a revocable living trust is a much more secure and reliable method of managing your assets if you become disabled. In addition, revocable living trusts also provide increased tax savings, creditor protection, protection from a divorcing spouse, and management of your property to benefit your family after death. Contact an estate planning specialist to ensure your wealth survives long after you are gone.
Death and Taxes
In Nebraska, your estate is typically subject to two separate death taxes, the Nebraska Inheritance Tax, and the Federal Estate Tax. With proper planning, you can take advantage of many tools that are available which can reduce the burdensome Federal Estate Tax liability.
Nebraska Inheritance Tax
This is a state tax that is paid by your beneficiaries to the county where your property is located when you pass away. A surviving spouse has an unlimited marital deduction for inheritance tax purposes. Therefore, you can give all of your property at your death to your spouse and no inheritance tax will be due. On the other hand, if property is passed to immediate relatives, such as parents, grandparents, siblings, children, or grandchildren, these recipients will pay a tax of 1% of the value of property in excess of $40,000. If an immediate relative receives less than $40,000 worth of property, that beneficiary will pay no inheritance tax. If property is passed to remote relatives or unrelated people, the tax increases to 13% or 18%, with a much lower exemption, depending on the beneficiary.
Typically, the Nebraska Inheritance Tax is a modest tax since most people give property to their spouse or immediate family members. If, however, bequests are made to remote relatives or to unrelated people, the tax becomes more significant. Even greater taxes can arise from the Federal Estate Tax.
Federal Estate Tax
Federal Estate Tax is paid by your estate to the IRS. If the value of all property in your taxable estate exceeds the exemption or “Applicable Exclusion Amount”, then your estate is subject to Federal Estate Tax. Under current law, if you pass away in 2009, your estate has an Applicable Exclusion Amount of $3,500,000. In 2010 there is no federal estate tax. (Most believe that Congress will address this issue before the end of the year and establish an Estate Tax for 2010.) The Applicable Exclusion Amount for 2011 and thereafter is currently $1,000,000. Therefore, if you pass away in 2011 or later, and your taxable estate is valued over $1,000,000, then your estate will be subject to estate taxes in the range of 41% to 55%. A surviving spouse has an unlimited exemption amount, similar to the Nebraska Inheritance Tax. However, passing all of your property outright to your spouse is a short-sighted solution which will actually result unnecessary taxes paid by your spouse’s estate.
Without proper planning, many families could be subject to hundreds of thousands, if not millions, of dollars in Federal Estate Tax. Estate Tax can be minimized, or in some cases even avoided, by contacting a qualified estate planning attorney. In addition to providing tax benefits, a well drafted estate plan ensures proper distribution of your wealth, increased protection from creditors, and management strategies that protect your wealth long after you are gone and the taxes have been paid.
Intestacy: The Government-Imposed Estate Plan
If you pass away without an estate plan in place, it is said that you have died “intestate” which requires you to commence intestate proceedings in probate court. State law then directs the distribution of your property. This article briefly describes how the intestate statutes apply to common family situations.
Example 1. If you pass away leaving a surviving spouse and three minor children, the first $100,000 of your property, plus one-half of the rest of the estate passes to your spouse. The remaining half would be equally distributed to your three minor children.
Problem. The minor children do not have the maturity to properly manage those assets. A Conservatorship action would have to be filed by an attorney requesting the court to appoint a conservator to manage the assets on behalf of the minor children. When a child reaches the age of majority, the conservatorship will terminate and the child will have full access to the property. Typically, those who plan their estate do not feel comfortable with granting a recent high-school graduate unfettered access to a large amount of assets. Most 19 year-olds are simply not mature enough to handle that responsibility.
Example 2. Same facts as above, except one of the children was born of a prior marriage, is 35 years old, and has a prosperous farming operation. According to the intestacy statutes, the spouse receives half of the estate ($100,000 less than Example 1), and the farmer and minor children equally share the other half.
Problem. The farmer is financially independent. Most would rather provide for college tuition or living expenses of the household. The spouse may suffer a financial hardship as she is receiving $100,000 less than Example 1, and a significant share of the estate is distributed to the farmer whom she may barely know.
Example 3. A tragic accident occurs and you have no surviving spouse or children. Your parents and grandparents passed away years ago. Intestacy statutes direct that your property be divided among your brothers, sisters, nieces, and nephews; or if there are none, to your aunts, uncles, and cousins.
Problem. In medium or large size families, each share of the estate may be so small that the probate attorney fees make such a distribution financially ridiculous. Secondly, an estranged or unknown relative may receive a share of your estate. Most would rather give the assets to a family friend or a charity. Also, one relative may receive a vastly different share than another relative, creating a breeding ground for intra-family fighting.
Solution. The above problems describe a small sample of the possible intestate distributions. Such problems can be avoided by contacting a qualified estate planning attorney. In addition to ensuring the proper distribution of your wealth, a well drafted estate plan provides tax benefits, increased protection from creditors, and management strategies that protect your wealth for generations to come. The government-imposed estate plan addresses none of these important issues.
