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Wealth Management & Estate Services
Many people think of estate planning as making a will and making preparations for their heirs while attempting to minimize estate taxes and other monetary costs associated with death. People are reluctant plan their estate for many reasons such as, out of superstition or because it raises difficult emotional issues. However, Experience demonstrates that the instances of the most severe disruption to the economic and emotional well being of the family unit are those where proper planning was neglected through inattention or a misguided belief that "everything will be worked out later." Court dockets are full of sad tales, infuriating and costly court battles, unnecessarily excessive taxes, confusion about what the individual wanted to happen and, ultimately, frustration of the individual's desires. As in many other areas, an ounce of prevention is worth a pound of cure.
At SFI, we approach estate planning as a quality of life and develop techniques that enable our clients to express their values while sharing the wisdom of their experiences with future generations.
Some of the most important reasons why people plan their wealth are:
- To define and extend their wisdom, values, and beliefs for the benefit of future generations.
- To tailor the resources available to the needs and abilities of each beneficiary.
- To provide tax-advantaged funds for future generations, while retaining the flexibility to adjust the plans if circumstances change.
- To retain control over critical medical decisions, and select who will make those decisions, even after incapacity.
- To maximize charitable intent and the associated tax benefits.
- To minimize the delays, taxes, administrative expenses and legal fees that often accompany death or incapacity.
- To provide incentives for family cooperation and to avoid conflict over who will control the family business or other assets.
- To select fiduciaries (executors, trustees, etc.) who will be capable and honest, and who will in turn be able to select their own replacements, if necessary.
- To avoid the need for a forced sale of your business or other assets in order to raise cash for taxes or other expenses.
All too often, we find ourselves so busy devoting our time, money and energy to building and managing the day-to-day affairs of life, that we have little or no time to plan for the future. Most individuals do not focus on their estate planning because they do not wish to contemplate their own demise.
Incorporating estate planning into your overall planning can provide solutions to a variety of financial needs, including handling a concentrated stock position, tax-efficient wealth management and philanthropic desires. SFI offers you and your advisory team strategies that focus on the preservation and transfer of wealth, addressing your needs, aspirations and values.
The 50% Estate Tax
One of our never-ending goals is to minimize taxes as much as possible, preserving wealth for yourself and loved ones. That goal does not changed when it comes to effective estate planning. Estate taxes (which mirror gift taxes) can get much higher than your personal income tax ever did, with rates climbing as high as 50%!
This is how the IRS calculates your estate tax bill:
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| Taxable Gift or Estate |
Tentative Tax |
| FROM |
TO |
Tax on Col. 1 |
Tax Rate on Excess |
| $0 |
$11,000 |
$0 |
18% |
| 11,000 |
20,000 |
1,800 |
20% |
| 20,000 |
40,000 |
3,800 |
22% |
| 40,000 |
60,000 |
8,200 |
24% |
| 60,000 |
80,000 |
13,000 |
26% |
| 80,000 |
100,000 |
18,200 |
28% |
| 100,000 |
150,000 |
23,800 |
30% |
| 150,000 |
250,000 |
38,800 |
32% |
| 250,000 |
500,000 |
70,800 |
34% |
| 500,000 |
750,000 |
155,800 |
37% |
| 750,000 |
1,000,000 |
248,300 |
39% |
| 1,000,000 |
1,250,000 |
345,800 |
41% |
| 1,250,000 |
1,500,000 |
448,300 |
43% |
| 1,500,000 |
2,000,000 |
555,800 |
45% |
| 2,000,000 |
2,500,000 |
780,800 |
49% |
| 2,500,000 |
+ |
1,025,800 |
50% |
There Is Some "Unified" Relief
Congress has created what it called the "Unified Credit" (also known as the Unified Federal Gift and Estate Tax Credit). The Unified Credit allows every American citizen to pass a certain amount of their estate to heirs tax-free. This credit can be used during one's lifetime but is usually used after someone has died and the estate is being distributed. With the Taxpayer Relief Act of 1997 and the Tax Relief Act of 2001, the Unified Credit has gradually been increasing. In addition, the top estate tax rate will be decreasing until 2010, when estate and gift taxes are fully repealed. However, in 2011, estate taxes return to their 2002 levels. Here's a breakdown of the new Unified Credit and top estate tax rates:
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| Year |
Unified Credit |
Top Estate Tax Rate |
| 2002 |
$1 million |
50% |
| 2003 |
$1 million |
49% |
| 2004 |
$1.5 million |
48% |
| 2005 |
$1.5 million |
47% |
| 2006 |
$2 million |
46% |
| 2007 |
$2 million |
45% |
| 2008 |
$2 million |
45% |
| 2009 |
$3.5 million |
45% |
| 2010 |
Tax Repeal |
0% |
| 2011 |
$1 million |
50% |
| 2012 |
$1 million |
50% |
| 2013 |
$1 million |
50% |
In 2002, every estate holder who dies can pass $1 million of their estate tax-free to heirs. Unfortunately, the remainder is subject to estate taxes. Estate taxes are due to the IRS only 9 months from date of death. In many cases, heirs and loved ones are forced to sell personal property, real property, and other belongings at below market value to pay for this huge tax bill.
The Generation-Skipping Transfer Tax (GST tax) is a flat tax imposed on assets transferred to a beneficiary two or more generations removed from the person making the transfer (e.g., grandparents transferring assets to grandchildren). Under the Tax Relief Act of 2001, the GST tax will be reduced to 50% in 2002, after which it will decline 1% each year until it reaches 45% in 2007. The GST tax is repealed in 2010. Unless extended, the repeal provision will expire after December 31, 2010, and the law in effect prior to the effective date of The Economic Growth and Tax Relief Reconciliation Act of 2001 will apply. If the GST tax exemption (currently $1,060,000 and increasing to $3,500,000 in 2009) is properly allocated to contributions, the trust assets will never be subject to the GST tax.
Annual Gifts - Give Today, Not Tomorrow
One of the easiest ways to provide for loved ones is by making annual gifts. Gifting today not only reduces your estate (and your possible estate tax liability), but also allows you to share in the joy a gift can bring.
Each and every U.S. citizen can give away up to $11,000 per person each year. A husband and wife together can give $22,000 to any child, grandchild... or anyone else they feel like. For instance, if a couple has two children and 8 grandchildren, they can gift a total $220,000 (10 beneficiaries x $22,000) per year, completely free of gift and inheritance taxes.
With the passage of the Tax Payer Relief Act of 1997 Congress began raising the original $10,000 limit to account for inflation. However, as politicians often do, they put some restrictions on the increases. Congress stipulated that the $10,000 limit would rise with inflation, rounded down to the nearest thousand. Suppose inflation is 3%; the limit would rise to $10,300, but be rounded down to $10,000. The next year, it would rise to $10,630, only to be rounded down again to $10,000. In 2002, the gifting limit changed for the very first time to $11,000, and it may take a few more years for it to increase, if low inflation continues.
Can You Give Too Much?
What happens if you gift too much (i.e., over the $11,000 "annual gift exclusion")? The beneficiary will have to pay taxes on the amount over $11,000. These taxes can rise as high as 55%, and closely mirror estate tax rates.
An alternative is to have the amount over $11,000 apply towards your Unified Credit. Everyone is given this credit by the IRS, and it is usually used for calculating estate taxes. Currently, the Unified Credit shelters $1 million of your estate from taxes.
If you give a daughter $50,000 (and you could only gift up to $11,000), then the remaining $39,000 could be subtracted from your Unified Credit. Your Unified Credit will be reduced to $961,000 but your daughter will not be taxed on the gift.
Another concern when gifting is that you give away too much of your estate, not to trigger a tax, but to maintain your lifestyle. Many people automatically gift, and end up giving too much of their assets to loved ones. Gifting should always be part of an overall estate plan that takes into account your current needs.
Skipping a Generation Can Be Costly
When you gift over $1 million to grandchildren (effectively "skipping" a generation), the IRS slaps a double tax on you. In fact, the IRS treats such a gift as "two gifts in one" and slaps a 55% tax on the gift twice. When such a gift is hit once with a 55% tax... and then again with another 55% tax, the gift is effectively reduced by 80%! That means $1 million of your hard-earned wealth immediately shrinks to $200,000 for your heirs, with the remainder going to Uncle Sam.
Reducing Taxes Is Critical
While you can never completely eliminate estate taxes, you can effectively reduce them with different types of trusts. Planning is a must. Many people with large estates, who create a simple living trust, often overlook their largest tax liability (and they won't even be around to pay it).
Most married couples in America own their assets jointly. What almost all of these couples don't realize that if they have built up a combined marital estate of $1,000,000 or more the family can be hit with up to hundreds of thousands of dollars in federal estate taxes - due in cash nine months after the death of the surviving spouse. This results from the first spouse leaving everything outright to the surviving spouse via will or joint tenancy utilizing what is called the unlimited marital deduction. The deceased spouse has lost the opportunity of sheltering up to $1,000,000 assets from federal estate taxes. When these assets are combined with that of the surviving spouse-tax disaster can occur. For example if the surviving spouse later dies with an estate of over $1,000,000, the federal estate taxes will take a massive bite of hundreds of thousands of dollars. Every cent of federal estate taxes for a couple with a combined marital estate of $2,000,000 can be saved. Do a sound estate plan with a team of professionals and save every dollar that you worked so hard for.
Probate
The court process following a person's death that includes proving the authenticity of the deceased person's will appointing someone to handle the deceased person's affairs identifying and inventorying the deceased person's property paying debts and taxes identifying heirs, and distributing the deceased person's property according to the will or, if there is no will, according to state law.
Will
A will has often been described as a road map that gives direction in transferring an asset from one person to another or to a charity. A carefully prepared will is the easiest way to ensure that your heirs are provided for in the way that you intend. You can use your will to name your executor/executrix and a guardian for your young children. It is also one of the simplest ways to make a gift while keeping all your assets available during life in the event your circumstances and needs change. Though most Americans are aware that they need a will about 70% don't have one. People procrastinate for many reasons, but it's important to know that writing a will doesn't have to be complicated or expensive. And once it's done, you can rest a little easier, knowing that your wishes will be followed after your death.
- Living Will - legal document in which you state your wishes about certain kinds of medical treatments and life-prolonging procedures. (Medical procedures used to extend the life of someone who is terminally ill or permanently comatose.) The document takes effect if you can't communicate your own healthcare decisions. With this document you have control over the final phase of your life instead of leaving a decision like this to a person's family. A living will may also be called a healthcare directive, advance directive or directive to physicians.
- Healthcare directive - legal documents that allow you to set out written wishes for your medical care and to name a person to make sure those wishes are carried out. The best way for you to assure the best health care treatment possible is to have prepared a Health Care Power of Attorney which lets you nominate one or more family members or other individuals regarding your health care if you are not able to do so yourself. Health care providers are very reluctant to perform medical procedures unless someone comes forward with authority to make a health care decision.
- Beneficiary - A person or organization legally entitled to receive benefits through a legal device, such as a will, trust or life insurance policy
- Living Trusts - A trust you can set up during your life. Living trusts are an excellent way to avoid the cost and hassle of probate because the property you transfer into the trust during your life passes directly to the trust after you die, without court involvement. The successor trustee - the person you appoint to handle the trust after your death-simply transfers ownership to the beneficiaries you named in the trust. Living trusts are also called "inter vivos trusts."
- Executor / Executrix - The person named in a will to handle the property of someone who has died. The executor must collect and manage the property, pay debts and taxes, and then distributes what's left as specified in the will. In addition, the executor handles any probate court proceedings (with the help of a lawyer, if necessary) and takes care of day-to-day tasks--for example, terminating leases and credit cards, and notifying people and organizations of the death. Executors are also called personal representatives.
- Intestate - The condition of dying without a valid will. The probate court appoints an administrator to distribute the deceased person's property according to state law.
Estate Taxes
Taxes imposed by the state or federal government on property as it passes from the dead to the living. All property you own, whatever the form of ownership, and whether or not it goes through probate after your death, is subject to federal estate tax. Currently, however, federal estate tax is due only if your property is worth at least $1 million when you die. This threshold gradually rises to $3.5 million in 2009. The estate tax is scheduled to be repealed for one year, in 2010. After that, the tax will return, with a threshold of $1 million, unless Congress extends the repeal. Any property left to a surviving spouse (if he or she is a U.S. citizen) or a tax-exempt charity is exempt from federal estate taxes. A handful of states also impose estate taxes; these are usually called inheritance taxes
Guardianship
It is critically important for families (dual or single parent) to have prepared a legal document naming a guardian of any minor children. Guardianship without advance planning could be appointed by the court to an ex spouse or family member that you would never want care of a minor child to be turned over to. At the same time, you should establish a trust to provide adequate funds for the minor child(ren) until they reach legal age or older (eg age 25). The trustee of the funds does not have to be the guardian of the child(ren).
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