Where there’s a will there’s a way--to leave your property to those you want to have it after you die and to minimize the tax bite in doing so.
But where there isn’t a will, the way is set by state law, and the courts decide who gets what.
“If you don’t make a will, the state has one for you,” said H. Lynn Hopewell, a financial planner based in Falls Church, Va.
Although the term “estate planning” often is used to mean estate tax planning, Hopewell and other planners and accountants emphasize that non-tax considerations are just as important.
“Wills don’t avoid taxes per se,” Hopewell said. “They just guarantee that what you want to happen to your assets actually happens.”
Contemplating death, which wills force you to do, is never pleasant. This, and the complexity of the subject, means that many people, even very well-to-do ones, don’t have wills. If you are among these, you should have one prepared without delay.
Job for an Expert
And remember, this is a job for an expert. There are some do-it-yourself guides to will-writing, but state laws and personal circumstances differ so much that it is much safer to have a lawyer do it. If you don’t know a lawyer, your local bar association can provide you with names of qualified practitioners. Financial planners and accountants can be helpful also, especially in the tax aspects of estate planning.
If you have young children, a will is particularly important. Suppose you and your spouse are killed in a car crash tomorrow--who will raise your kids? Absent a will, a court will decide. Do you want your relatives fighting over your children, or worse yet, fighting to unload them on one another?
While the likelihood of both parents dying at once is relatively remote, it is a contingency you should deal with. If you are a single parent, a will becomes even more important for the sake of your children.
Think about who among your relatives gets along well with your children and is physically and financially able to bring them up. Talk to those you think best suited. Are they willing to take on this responsibility? Such a decision should be a fully informed one on both your parts--you don’t want your children going either where they aren’t wanted or where they weren’t expected.
Planning for the disposition of your assets is a related question. Such devices as trusts and powers of appointment can provide survivors with the protection and-or flexibility you desire. Your relatives may be more willing and able to take care of your children if the little ones come with a trust fund to help pay some of their expenses. And you may rest more easily knowing that if the worst were to happen, your relatives wouldn’t be able to blow your kids’ money and leave them penniless.
“The proper view of estate planning is to find out how you want your assets to flow and what types of control you want to exercise, basically, from the grave,” said David M. Bradt Jr., a tax expert with the accounting firm of Arthur Andersen & Co.
Who Owns What
The first step, he said, is to “find out what everybody (in the family) owns and how they own it” because “the form of ownership will dictate the flow of an asset even if there is a will to the contrary.”
For example, assets owned jointly with someone else--a spouse, for instance--will move directly to the surviving joint owner despite what the will may say.
Bradt said it is not uncommon to find couples with everything in joint ownership--house, bank accounts, stocks, the whole works. Although there is an unlimited marital deduction--assets pass from one spouse to the other without tax--if everything ends up in the name of the surviving spouse there can be a big tax hit when that spouse dies unless adjustments are made.
It is also necessary to try to figure out what your assets are worth--and not merely what they are worth today in cash, but also what additional assets gain value at death.
Kathryn Ioannides of the College for Financial Planning in Denver points to life insurance as such an asset. A whole-life policy that might have a modest current cash value blossoms into a large asset at death.
In addition, she said, one should make sure to include any annuities, pension survivor benefits and other items that may not come to mind right away in a list of one’s assets.
Sharp Tax Reduction Possible
Federal law provides a credit for estates that effectively exempts from estate-taxation the first $600,000 of assets. By judicious use of the marital deduction and various kinds of trusts, it remains possible to eliminate or sharply reduce taxes on most small-to-medium-size estates.
But as Ioannides said, “Don’t let the tax tail wag the (estate) dog.” The proper goals of any wills, trusts and other devices should be first to make sure that assets go to the heirs you choose and that no loved one is left without adequate assets or income simply to avoid taxes.
And Hopewell noted that with people living longer, they more often need ways of protecting their assets before they die. “In many states it’s all too easy (for an ill or elderly person) to be declared incompetent,” he said.