Estate taxes

Do you know whether you would owe the government any estate taxes when you die? Did you immediately think “no – my estate is too small.”

There are two kinds of estate taxes that may be due when you die – federal estate tax and New Jersey estate tax (you never hear about our state estate tax). Most of the discussion is about the federal estate tax. It can be quite likely that you do not owe federal estate tax. In 2008, the tax code allows you to pass up to $2 million to anyone and an unlimited amount to your spouse. In 2009, that amount goes up to $3.5 million and in 2010 there is no estate tax at all. However, in 2011, the amount you can give without paying estate tax is $1 million. The most common scenario is that the husband dies first and everything has owns goes to his wife. That means his estate (all assets that he owned) pays no federal estate tax. Unfortunately, it is all too common that the widow does not re-write her will (assuming she has one in the first place) after her husband dies. And depending on how much money she now has, she may have an estate large enough to pay estate taxes.

What most residents of New Jersey do not know is that our state estate tax starts at an estate of $675,000. If you live in a fairly modest house with some equity built into it from the increase in house values in the past few years, and have some savings and a retirement account, you may have an estate large enough to pay New Jersey estate tax. If you have a will that was written before the law changed in 2002, or your estate has increased so that you might have to pay New Jersey estate tax, you should talk to a lawyer. You may wind up paying tens of thousands of dollars in New Jersey estate tax, when a little estate planning would change that outcome.

What You Need to Do After You Sign Your Estate Planning Documents

Congratulations! You did the best thing for your family and signed a will, advance health care directive and durable power of attorney. Your lawyer gave you a fat stack of documents. What do you do now?

Your original will should be safeguarded in a fireproof lockbox in your house. Even if you have a safe deposit box at a bank, your family may have problems accessing that box in the first weeks after you die.

If you have signed a durable power of attorney, the agent that you have appointed should have an original of the power. A power of attorney lets another person that you have designated handle your financial matters for you if you cannot. Banks and brokerage companies will not accept a copy of the power of attorney and may insist on their own form (you should find this out now, before you need to use the power of attorney). If you were smart enough to choose a back-up agent-in-fact, in the event your first choice agent-in-fact cannot or will not serve, the back-up person should also have an original power of attorney. You should have signed a few originals. If you do not wish to distribute the original to your agent-in-fact, you should keep the originals in the same fireproof lockbox that you have stored your will in and make sure that your agent knows where the original is located.

The third document that you should have signed is an advanced health care directive that appoints a health care proxy to make medical decisions on your behalf if your are unable to do so. The advance health care directive may also state your wishes as to what kind of medical treatment you would want, whether you would want nutrition if you are in a persistent vegetative state and whether you would want to donate your organs. Copies of this document should be given to your primary care doctor, the person you have chosen as your health care proxy, and your back-up health care proxy. It is important to discuss with your health care proxy and your family members what your wishes are in the event that you cannot speak for yourself. By going through various scenarios with them and talking about what medical care you would want or that you want no medical care in certain circumstances, the chances are much higher that your family will understand what you want and don’t want and will carry out your wishes. As unpleasant as it may be to have this talk, if you don’t say anything, they will be guessing what you would have wanted and those guesses might be the opposite of what you would have wanted.

Finally, if your estate is more complicated, do you understand what the estate plan that your lawyer has created and how it accomplishes your goals? Does it require your to set up one or more trusts while you are alive and to transfer assets into that trust? Do you need to have certain assets re-titled, perhaps so that it is not in a joint tenancy with your spouse? Do you know how to set up the trust or re-title your assets? If the answer to any of these questions is “no,” then you must go back to your lawyer, have him explain everything to you in simple language and have him take care of setting up the trusts and re-titling the assets. Yes, he will charge you for it and it will cost more money, but would you rather spend some extra money now and get it done right or hope that you did it right and find out that you owe thousands of dollars in estate tax because you did it wrong? It’s always cheaper to spend the money now to get it done right.

Have You Signed Your Documents?

If you are one of the smart ones, and you met with an estate planning lawyer, did you sign the documents that your lawyer prepared?

I just read an article in a magazine that stated that a frighteningly large percentage of people who consult with an estate planning lawyer never wind up signing the documents that the lawyer prepares. The article mentioned a few reasons why this happened: the client didn’t feel comfortable with the lawyer that they met with, they didn’t understand the plan that the lawyer drew up, or they didn’t like the plan that the lawyer created.

If you are serious about protecting your assets from estate taxes, transferring your wealth to your loved ones when you want to, and naming a guardian for your children, then you need to take the time and effort to find the right lawyer and to follow through. It may take more than one try to find an estate planning lawyer that you feel at ease with. When you were looking for a doctor or dentist, didn’t you ask around to find out whether any of your friends had a recommendation for you? It’s the same with a lawyer. Ask around and get more than one name if possible. And sit down with each and ask them questions. Are they talking to you in legalese? Do you feel that they are listening to you to find out about your ideas for your estate plan? If the answer is no, cross them off your list and move one to the next name. Keep going until you find a lawyer that you like.

When you have found that lawyer, you should have one or more discussions on how you want your estate plan to work. You should have some ideas about whom to leave your assets to and when. Your lawyer should be listening to what you say and raising issues that you may not have thought about – at what age should your children inherit, would you want to name a couple as your children’s guardian, have you thought about how your spouse would manage your business if you were incapacitated or died? Through presenting your different options to you, your original plans should be refined or may undergo complete revision. But at all times, your estate plan should be something that you understand and agree with. If you don’t understand the estate plan that your lawyer suggests or the documents that he/she drafts are totally gobbledy-gook to you, then you must ask for clarification. If your lawyer can’t explain your plan to you in simple English, then either you have the wrong plan or the wrong lawyer.

Don’t be embarrassed that you don’t understand or the plan doesn’t carry out your wishes, it’s up to your lawyer to ask the right questions so that both sides come to an agreement about what you want done with your wealth. And it is up to your lawyer to explain your documents in such a way that you understand what they say and how they accomplish your goals.

It would be a shame if you were to take the time and trouble to sit down with an estate planning lawyer and never get an estate plan out of it. Take my advice and keep asking questions until you get to the point where you want to sign your will and then do it.

Have Your Team Help You With Estate Planning

I recommend to all of my clients that their team should all work together with me to help with their estate plan. What is your team?

In your life, you may have an accountant, a banker, a financial planner, an insurance agent, as well as your family. Each of these persons has a role to play in helping you make your estate planning decisions.

Your accountant will be aware of your tax situation and many of your decisions involving estate planning include issues of estate taxes. If you have a business, your accountant will be familiar with its structure and profitability, enabling you to make plans for exiting your business, either by selling it or leaving it to a family member. If living trusts are set up as part of the estate plan, your accountant will need to prepare the trust tax returns. If you give gifts to family members and others during your lifetime, your accountant may need to file gift tax returns, depending on the size of the gifts.

Your banker is familiar with the amount in your bank accounts, in whose name they are in, and whether any of the accounts have “pay on death” designations. All of this information is important when talking to your lawyer about your assets and which assets are part of your estate.

Your financial planner is the person who is informed about the rest of your monetary assets – your stocks, bonds, retirement accounts, and your children’s college funds. These assets, plus your bank accounts, are the core of the wealth that you wish to transfer to your family and loved ones.  Your financial planner needs to know what your plan will be and he/she will be the one changing the names on the accounts to your living trust or to your heirs.

Finally, if you have a spouse or children that you are supporting, then life insurance should be part of your estate plan. Life insurance provides immediate cash after you die, cash that will replace your income. If your spouse can work, and your children are grown up, then you may not need life insurance. But, if you do have life insurance, your insurance agent can be helpful in updating your beneficiary designations after you create your estate plan.

By working together as a team, you can get all of your experts working for you at the same time. This gives you the best shot at creating the estate plan that accomplishes your goals.

The Cost of Estate Planning

I talk to a lot of people who tell me they know they should get a will or appoint a guardian for their children, but they don’t want to spend the money for consulting an estate planning lawyer.

If you talk to anyone who has had a close family member die without having a will, you will never think about the cost again. Often the expense incurred in retaining an estate planning attorney to prepare and help you put an estate plan into place is worth hundreds of times what you and your family would pay with no planning or poor planning. It would also avoid the financial and emotional nightmares that can occur with a poorly drafted (or improper) plan. People who didn’t spend the money on hiring an estate planning have unintentionally cut their children out of their will, given money to their children outright which was spent on expensive cars and vacations, or unintentionally gave Uncle Sam thousands of dollars in estate taxes.

Many people assume that they have a simple estate and don’t need estate planning. They hear that the federal estate tax doesn’t touch people who have less than 2 million dollars (and going up to 3.5 million dollars in 2009) in their estate and believe that estate planning is not necessary for them. They don’t realize that in New Jersey, estate tax starts at $675,000, a number that many families easily surpass.

Estate planning and tax planning are not just about the documents. Yes, you will have the necessary documents after you have consulted with an estate planning lawyer. But more importantly, you will know that your plan is the

But if you’re at all serious about planning for your family’s future, and being in charge of what becomes of your assets, the time must come when you’ll have to address the issue. And like most things of importance, there’s no better time than the present. You’ll probably be quite surprised at how much easier you feel once you’ve formulated your plans, knowing that your loved ones will be taken care of in the way that you’ve envisioned.