Income exclusions phasing in and out, a dollar fluctuating in strength against global currencies, tentative stock markets, the unfamiliar phenomenon of deflation and interest rates lower than most of us have ever seen are enough to give you a headache and cause you to put off estate planning.
“A lot of people are taking a wait-and-see approach,” says David Hoffman, a partner with accounting firm Trosch & Co.
Hoffman believes that any tax provisions enacted won’t be abrupt; more likely, changes will be phased in or out in a measured way that will give investors ample time to make adjustments in their estate plans. As far as the other factors, you’ll have to roll with the punches.
Most people avoid estate planning for another reason, as well — they don’t want to pay the legal fees involved with creating or updating an estate plan.
That reluctance is understandable, but is penny wise and pound foolish, according to Diane Pearson, a certified financial planner with Legend Financial. Spending a modest amount periodically to ensure that your estate plan is up-to-date can be money well spent.
“You can either pay $1,000 now or you can pay $500,000 at your death,” says Pearson.
A lack of a plan or an outdated one can cost your heirs plenty and wipe out most or all of your assets.
Pearson says that, without exception, everyone needs at least to have a will, even if his or her estate is modest.
“If you don’t, the court gets to make the decision for you,” says Pearson.
Among the most common estate planning mistakes business owners make is failing to plan for the transfer of their business assets in the event of their death or the death of their business partner, says Rosalie Wisotzki, a lawyer who advises on wealth transfer issues and has a retainer agreement for providing services to Parker/Hunter’s clients. Without a plan, you might end up in business with someone you don’t care to be a partner with.
“All of a sudden, you’re in business with your partner’s family, and maybe you don’t want to be,” she says.
Family limited partnership
A popular vehicle used to protect assets is the family limited partnership, a device that can be useful in reducing taxes.
An asset is placed in trust to family members, usually children, who receive a share in the partnership. The grantor of the trust retains control of the asset, and receives more favorable tax treatment than he would if he gave the asset outright to his heirs.
Because they can be held personally liable for actions taken in the course of their practices, professionals such as physicians, partners in accounting firms and architects have a special need when it comes to protecting their assets.
“There are a lot of people today who are concerned about protecting their assets from lawsuits,” says Ed Grinberg, partner with law firm Feldstein, Grinberg, Stein & McKee.
This function has often been accomplished through the formation of an off-shore or foreign trust, but the IRS has taken a harder line on them in recent years.
The Delaware protection trust can guard assets by excluding creditors of the grantor from reaching trust assets. The grantor may veto distribution from the trust, determine who will receive assets upon death, receive income and principal and serve as investment counselor to the trust. Residents of any state may serve as adviser to the trust.
Wisotzki says a common generational conflict can be resolved by the use of a total return income trust.
As an example, a 70-year-old husband dies and leaves a trust to provide income for his surviving spouse. The widow wants a 5 percent return on the investment portfolio to provide her with income. To meet that requirement, the trustee will likely put the investment in bonds, which pay dividends but won’t increase in value over time.
The surviving children or other heirs want the trust to produce greater gains over a longer period of time.
The solution: a total return income trust, in which the grantor specifies that the wife will receive a fixed percentage return, say 5 percent or the total return of the portfolio, whichever is greater. The kids realize there is an underlying portfolio that can accumulate over time, and the surviving spouse gets the return she expects or more.
Additional gifting opportunities
Existing estate tax law allows an individual and spouse each to make a tax-free gift of $11,000 each year to each of their children, for a total of $22,000 to each child. Grinberg says that there is a provision in the law providing for an additional $11,000 gift to each child for college tuition and medical expenses.
Says Grinberg: “This is one of the best ways to pay tuition and medical expenses.” How to reach: Feldstein, Grinberg, Stein & McKee, www.fgsmlaw.com; Trosch & Co., www.trosch.com;Legend Financial, www.legendfinancial.com
