What Does Estate Planning Cost?

People who do not have an estate planning documents signed are hesitant about going through the process for many reasons. One of the ones I hear very frequently is that it costs too much.

I am asked about the cost of doing a will before I set up an appointment with a potential client. I wish I had a quick answer. For many clients, after I speak with them and get answers to questions about amount of assets, whether a will has been previously signed, whether there is a divorce decree in the picture, I can get a better handle on whether the client has a fairly simple estate plan to write or a time consuming one, where I will have to read other wills, trusts, or divorce agreements. I will be able to see whether estate taxes are part of the picture and ask whether the client wishes to spend an extra $2,000-$3000 to save $99,000.

It is always the client’s choice as to whether they want the basic documents - a will, durable power of attorney and living will – without any tax planning desired because it’s too complicated or too expensive. Or, they may decide that it’s worth it to spend extra money now to save money later. So, I apologize for not being able to immediately answer that question of how much it costs. Sometimes, it takes a couple of hours of talking to each other to find out what the clients want and how I can help my clients achieve their goals. If there are no estate taxes involved, I can probably quote you a flat fee. If I am doing tax planning and reading lots of documents that you already have signed 10 years ago, I may charge on an hourly basis. I urge you not to be penny-wise but pound-foolish about your estate planning. It will be worth it.

Life Insurance – Do You Need It?

Life insurance can be a great tool in the event you die when you still have to support your family. It has other uses in helping your family survive when you die.

If you have a life insurance policy in effect when you die, your family receives a lump sum of cash that it can use to replace your income. This payment of cash helps them to pay the mortgage and other debts and to have an income from the investment of the life insurance proceeds. If you purchase a large enough policy, your family will have enough money to send the kids to college and for your spouse not to worry about paying the bills each month.

If you own a business, the business should have a life insurance policy on your life. This will enable your partner to have the cash to buy out your interest in the business. That way, your spouse can convert the value of your share of the business to liquid cash. Without proper planning, your death might result in the business being sold to a third party or being liquidated.

Life insurance can also buy you the funds to pay your administration and estate taxes. If your estate owes taxes, but most of your wealth is tied up in a business, or artwork, or real estate, it may be difficult to come up with the cash to pay those taxes. You may not want your family to sell those assets to pay the taxes. The lump sum cash payment from a life insurance policy would give you the means to pay off your debts and taxes, while allowing your family to continue to own your art collection and your real estate.

Some people do not need life insurance – if your children are on their own and not dependent on you, if your spouse earns a good living, if you do not have anyone dependent on your earning capacity, you may not need life insurance. But if you do need it, don’t procrastinate – get it now so you are protected.

What is the Value of Your Estate?

In New Jersey, a fair amount of estate planning has to do with avoiding paying estate taxes. We are more concerned about it here than in other states because residents of New Jersey start paying estate taxes if their estate is more than $675,000. How do you calculate the amount of your estate?

Your estate is the value of everything you own at the time that you die. That includes your bank accounts, any mutual funds, stocks and bonds that you own, the value of your home and all other real estate, your interest in a business, 401K and IRA accounts, life insurance proceeds, your art collection. If you own anything jointly with someone, you include your portion of the joint asset.

You can then deduct the liabilities and allowable deductions of the estate. This includes the cost of your funeral (it must be paid from the estate’s assets), the mortgage on your real estate, any other debts that you owe, charitable gifts, and any bequests to your spouse (only if your spouse is a U.S. citizen).

If your taxable estate is over $675,000, then it must pay New Jersey estate taxes. The estate pays the tax before it is distributed to your heirs. Your estate may be liable for state estate taxes even if your estate does not owe federal estate taxes.

Gift Giving and Estate Planning

I will bet that you are not aware that the tax code requires you to keep track of how much you give to others as a gift. If you give up to $12,000 per year to any one person, you do not owe gift tax and you do not have to file a gift tax return. If you are married, you and your spouse can each give up to $12,000 to any one person and not be required to pay gift tax or file a gift tax return.

How does this fit into your estate plans? Suppose you and your spouse have 3 children. You and your spouse each can give $12,000 to each of your children. That takes $72,000 out of your estate. If each of your children have 2 children, you and your spouse can give away another $24,000 to each of your grandchildren. So, in one year, you can reduce the size of your estate (and possibly reduce your estate tax) by $216,000 ($24,000 times 3 children and $24,000 times 6 grandchildren).

If you do this for a few years (and in 2009 you can give up to $13,000 to any one person), you can reduce the amount of estate taxes that might be due and make your children and grandchildren very happy. I do not recommend this strategy if you need the money for your own expenses or if you feel that the recipient will spend the money foolishly. You do not get a tax deduction on your income tax return unless you give a gift to a qualified charity. So that excludes your family and friends. The gift does not need to be in cash. You can give a gift of stock or other property. If you give a gift of property that can appreciate in value, you can escape estate tax on the amount of the gift as well as the appreciation in value. To give an example of this, suppose you and your spouse gift each of your 3 children stock that as of the date of the gift is worth $24,000. And suppose that the value of the stock increases over the next 5 years to $50,000. That means that not only did not your estate not have to pay estate tax on the original $24,000, but it will not be paying estate tax on the $26,000 of appreciation.