Psst...Have You Done Smart Estate Planning?


When you think of "estate planning," do morbid thoughts come to mind that you can't get past?  Do you think it is only for the very wealthy? Do you think it doesn't apply to you? Are you unsure of answers to the many important decisions that go along with it? Do you know who to turn to for help? These are all reasons that keep many business owners from tackling this all-important topic.

Estate planning is crucial, no matter how much wealth you have. If left neglected, you could have unintended results-your assets passing to heirs you didn't intend (including ex-spouses!) or in undesired amounts, minor children in the care of the "wrong" guardians, burdens on your survivors to "clean up the mess," fire sale of assets to pay estate administration expenses and taxes, unnecessarily high estate taxes, and so on. Dying without a will when owning even just one bank account can wreak havoc for your survivors.

For those that think they've addressed this planning area, have you sought the advice of an advisory team, usually including a financial planner who specializes in estate planning-a CPA, an attorney and possibly an insurance agent? Are you sure your estate plan truly fits your financial situation? Has it been updated for changing financial situations and estate tax laws? Even when the legal documents were drafted by an excellent attorney, more times than not, we find loose ends that weren't tied, pertinent tasks that the client never finished, estate plans not structured as intended, etc.

First things first: what is estate planning anyway? Estate planning is a process that allows for your assets to be distributed as you intend with the least amount of expense and aggravation.

The basic arsenal of personal legal documents that everyone should have includes:

  • Will-Names executors and trustees, instructs on the disposition of your assets, names of guardians for minor children, etc.
  • Power of attorney- Names who would manage your financial affairs if you couldn't
  • Healthcare proxy- Names who would make healthcare decisions if you couldn't
  • Living will- Just think of the Terri Schiavo case

Smart estate planning includes having these documents drafted properly from a legal standpoint and coordinating them with your financial situation. Here are some things to consider:

Asset Titling and Beneficiary Designations

Some assets don't even flow through your will. Bank and investment accounts, for instance, that are titled Joint Tenants with Right of Survivorship (JTWROS) pass automatically to the surviving joint account holder at your death, no matter what your will says. The same is true with assets that name a beneficiary like retirement accounts, individual life insurance, group life insurance, annuities, etc. These assets automatically pass outside of your will to the individual(s) who are named as beneficiaries on those accounts. We have seen clients' wills that are picture-perfect, but almost useless. No assets would pass through the will, because they are all titled JTWROS or are beneficiary-designated accounts.

This could leave unintended results-heirs that receive larger inheritances than their siblings because they are named as beneficiary directly on an account. It is very important to flow chart how the assets would pass to determine if any changes need to be made.

Making Full Use of Your Gift and Estate Tax Exemption

Asset titling is also important to make sure you maximize the use of your lifetime gift and estate tax exemption. For 2006, each individual has a $2 million lifetime exemption for federal estate taxes. This amount is scheduled to increase to $3.5 million in 2009 and then become unlimited in 2010 when the estate tax disappears (Note: Under current law, the estate tax only disappears for one year. It comes back in 2011 with only a $1 million exemption!). Of this exemption amount, $1 million can be used during a lifetime to make gifts to heirs free of gift tax.

Often couples come to us with most of their assets titled in the one spouse's name. Should the other spouse die first, he/she won't have any assets in his/her name to apply the exemption against. His/her exemption ends up being wasted.

Similarly, when all of the couples' assets are titled JTWROS and/or each spouse is named as the beneficiary on the others' accounts, the assets flow in and right back out of the first deceased spouse's estate and pile up in the surviving spouse's estate. That leaves the first spouse with nothing remaining in his/her estate to apply the exemption against. Again, the exemption would be wasted.

Sometimes it makes sense to "equalize" the spouses' estates by putting an equal amount of assets in each spouse's name. This could mean an estate tax is due at the first spouse's death, but less total estate tax is due on both estates when the second spouse dies. The reason is that estates have marginal tax brackets just like individuals do for income taxes. Having the first spouse's estate pay some estate tax makes use of these graduated estate tax brackets. However, time value of money and opportunity cost should also be considered.

Assets All Passing Into Trust versus Some Outright to Spouse

With the increasing estate tax exemption, the wording in some wills could leave more wealth passing into trusts than originally intended. Many wills include provisions for some assets to pass into a certain kind of trust and the rest to pass outright to the surviving spouse. However, care should be taken to review wills periodically to make sure enough assets would pass directly to the spouse as intended rather than all of the assets being tied up in trust.

State Estate Taxes

Many states now have different estate tax laws than the federal law. This could result in state estate tax implications that should be considered.

Children with Special Needs

If any of your heirs have special needs, all family members' legal documents should be coordinated to make sure the special needs child does not receive an inheritance directly that could jeopardize any governmental benefits he/she receives. Certain


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