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How To Pass on More of Your Estate to Your Heirs
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The How-To Business Book
11/20/2000
By: Mitchell Young
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A little knowledge can be a dangerous thing. And when the topic is your estate, there is the potential for some real damage.
IRAs, 401(k)s, appreciated stock portfolios, the explosion of small businesses and rising real-estate values have made estate-planning essential for a growing number of families. Democrats, Republicans and tax proposals aside, the old saw remains true: You can't avoid death or taxes. Put them together and you had better have a good estate plan - or be willing to surrender a lifetime's earning effort to Uncle Sam.
You must file an estate tax return with the IRS if your estate exceeds $675,000 for 2000-01 (also the exemption that your estate will receive). The exemption will grow to $1 million by 2005.
The federal estate tax is progressive, so as the value of your estate increases, so does the tax. For example, the marginal estate-tax rate on a transfer of $10,000 is 18 percent, while the rate of a transfer in excess of $3 million is 55 percent.
Connecticut began phasing out its succession tax in 1997. Anyone dying on or before January 1, 2001 may pass their estate to a spouse or children without incurring the estate tax. The tax will remain in place for siblings, aunts, uncles or other heirs until 2005. The current tax rate in Connecticut is between 10 and 20 percent, depending on the size of the estate.
Outlining proper estate planning is impossible in a simple “how-to” article. What we can provide are some rules of action to get you focused on preserving and controlling your assets.
• Teamwork matters. For most estates of any significance, a single professional will not have all the answers. Investment guidance, family issue resolution, business ownership matters, tax and legal advice are all necessary components. The first order of business is creating a team and choosing a quarterback. Working with a diverse group of busy professionals can often frustrate the planning process. A motivated financial consultant is a good option to keep the team organized and focused.
• Step 1: Identify, classify and value your assets. Your assets may seem obvious: home and vacation real estate, business or partnership interest, retirement accounts, spousal 401(k), likely inheritances. Their valuations, however, can be more difficult.
Valuing each asset professionally and keeping values up-to-date is essential. Current real-estate values, for example, may have re-appreciated from the depressed early '90s.
Business and partnership valuations are always difficult and often raise sensitive issues as well. But adopting a casual approach can mean the loss of your business equity to the tax man, or the destruction of a lifetime's work to unresolved family issues.
Remember the mantra of the profession: Death-bed estate planning is basically worthless.
• Ask yourself: What are my objectives? Who gets what, and in what form do they get it? First rule: Don't let the tail wag the dog. Put your personal objectives - not tax considerations - first. Clarify your goals then determine the most tax-efficient way to attain them.
How you deal with your legacy may become your true legacy. Ask yourself: Do your heirs all agree with your choices in passing on your business, or the family homestead, for that matter? Consider that these decisions may have greater emotional content then you supposed, and should be discussed with all potential heirs. If applicable, a family business-succession plan should be part of your estate-planning process.
• Understand the liquidity of your assets. Tax liabilities can be reduced and planned for through a well-executed estate plan. But even a small tax liability can become a big problem if there aren't enough liquid assets to pay them.
This problem will be especially true in transferring ownership of real estate, art, antiques or a business or partnership interest. The IRS may see a higher value in many assets than your bank, making it difficult to borrow to make the tax payments, and forcing the sale of an asset.
Even cash can be non-liquid without proper planning, as with, for example, a retirement account. Don't necessarily plan on a retirement account as a liquid source of funds to pay taxes, or your heir might find that they're paying both estate taxes and income taxes - effectively giving Uncle Sam up to 75 percent of your retirement savings. Ouch!
Business owners need to be especially aware of the liquidity of their legacy. How will your heir pay the taxes, or how will your business partner buy your share of the business?
There are a variety of techniques to plan for these events, including insurance.
Indeed, most professionals regard insurance as an essential tool of estate planning. But beyond collecting the death benefit, there are important issues such as policy ownership that will effect the tax consequences of the proceeds.
Remember: Your estate taxes are due within nine months and are payable in cash.
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