What you need to know about… Estate Planning and Taxation
Author: Lew Wessel | Photographer: photography by anne
Let’s start with the basics: YOU ARE GOING TO DIE. Sorry, I didn’t mean to be the one to break the bad news, but someone has to do it. Apparently, many people have not gotten the word, because only 40 percent of all Americans have wills. Moreover, according to the AARP, only 60 percent of even those of us over 50 have wills, and we should truly know better. I would venture to guess that an even larger percentage have not prepared the other basic “estate planning” documents we all should have (see below).
You already have an estate plan
The good and the bad news is that whether you have a will or not, there is a plan in place for the distribution of your assets upon your death. If you should die “intestate” or without a will, the state in which you are domiciled at death has a very detailed plan for who gets all your stuff. The problem is that the plan may not be exactly what you have in mind. In South Carolina, for example, the state will give half your stuff to your spouse and the other half to your children. Is this what you had in mind? Or were you planning on your spouse getting everything? The probate court will also select your executor, and, if applicable, the guardian for your minor children. Again, not a result you may have intended.
Before discussing wills further, you need to know that some of your assets are probably going to be passed on according to directives outside a will. These include your house which if held in joint tenancy with right of survivorship will automatically go to your spouse upon your death. Your retirement accounts, including IRA’s, will also most likely have a beneficiary designated and will pass on automatically to that person(s). Note: These designations need to be reviewed periodically, especially in the case of a major event such as divorce.
The four basic documents you need NOW
What you need to do, right away, now, pronto, yesterday, is go out and find a competent attorney—a specialist in estate planning, probate and trust law—and have him or her prepare, at a minimum, the four basic documents you’ll need in place in the event of your death and/or incapacitation. These include:
Will. This is the document in which you will direct EXACTLY how you want your assets distributed upon your death. In addition, it will name whom you want in charge of the process (your “personal representative”) and, if applicable, whom you want to take care of your children in the event they are orphaned (“guardian”). Do you really want to leave these critical decisions to the probate judge?
Declaration of a Desire for a Natural Death (South Carolina). This document is a South Carolina statutory form which allows you to direct health professionals to provide or withhold treatment in the event you are in a terminal and/or vegetative state. Think Terry Schiavo, whose name you would have never known if she had completed one of these.
Health Care Power of Attorney. This document, again a statutory South Carolina form, names an individual you trust to make health decisions for you if you can’t (think coma, Alzheimer’s, etc.). Note that this agent’s power only kicks in if you are mentally incompetent and also that your Declaration of a Desire for a Natural Death trumps your agent’s powers.
Durable Power of Attorney. This document gives someone power over your financial assets, allowing them to pay your bills, for example, if you are mentally or physically unable. This is a very potent power, and you need to be extremely careful whom you designate; but without it, or a “living will” (see below), the probate court system will be in full charge of your checkbook in the event of your incapacitation.
Many people will not need a living and/or testamentary trust to accomplish their estate objectives. However, per Mary L. Barrow, Esq., a local attorney specializing in Estate Planning, Probate and Trust Law, a trust can serve a number of very important purposes, particularly if you are leaving assets to a minor child or grandchild, a “special needs” individual, or someone who needs protection from creditors, maybe in a bad marriage, or needs help managing money. Trusts are also very important for tax planning (see below) and are helpful if you own out-of-state real estate. Whether or not you need a trust is an issue you should discuss with your estate attorney. Some of us obsess over “avoiding probate” but, according to Ms. Barrow, this objective alone may not necessarily be reason enough to justify the expense and trouble of establishing a living trust. This is particularly true in Beaufort County where the probate court is well run and the fees are fairly reasonable (less than $1,000 on a $600,000 estate).
The pure gobbledygook and outright fabrications told by politicians regarding “the death tax” makes me want to scream! Forget whatever you’ve heard or read and listen to this: What you need to know about estate taxes is that you probably don’t have to worry about them.
The estate tax exemption for 2009 is $3,500,000 per person and it is a very good bet that this exemption amount will become permanent and inflation-adjusted beginning in 2010. So, plain and simple: If you are going to pass on an estate worth less than $3,500,000 you will owe NO estate tax. And remember, this exemption is per person. Thus, if you are married, then you and your spouse, with some help from an estate tax attorney can transfer up to $7,000,000 to your children without any estate tax. In addition, there is a 100 percent marital and charitable deduction allowed in the estate tax calculation, so even Bill Gates pays no estate tax if he leaves all his billions to Melinda. No wonder The Tax Policy Institute projects just 6,200 Americans will pay estate taxes in 2009!
Another important point to remember is that even though most of us will pay no estate tax, with few exceptions, anything that we inherit gets a “step-up” to its value on the deceased’s date of death. So, if we inherit the family homestead which cost Dad $1,000 over 40 years ago, we can now sell it for the $1,000,000 it was worth at the date of death with NO capital gains tax.
Now that I’ve hopefully convinced you to stop worrying about the “death tax,” DO ask the attorney preparing your critical estate planning forms for advice on your exposure to this tax. If you are one of the lucky few who are subject to this tax, there are many complicated but tested methods to reduce your ultimate tax bill.
There is no federal inheritance tax. Some states still have one, but not South Carolina. Stop worrying!
A Final Word
It certainly is possible to prepare your own will as well as the other critical documents mentioned above. I wouldn’t! Once you’re gone, there is no correcting honest mistakes, no righting of wrongs and even a clerical error can derail your plans. Find a good attorney NOW and get these documents done right.