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Part II of III
By Percy (Pat) Lorie III
None of us likes
having to face the simple truth that as soon as we are born, we live
on a time-line that is not infinite. Because so few wish to face the
reality of death, most die without plans or, in fact, a will or
trust. However, this is not entirely true, as if you do not make
plans for your hard-earned monies and other property, both real and
personal, upon your death, the state in which you live will decide
just what will become of your life’s work. All who die “Intestate”
(without a will) end up with a will, but the government, NOT YOU,
will be the one to write it.
I apologize again to
our non-USA subscribers, since the actual laws and articles
specified in this writing are applicable only within the USA.
Hopefully you can get some help from this article anyway.
For those of you
already convinced that some action is needed I just came across a
very good software program which includes documents complete with
AUDIO EXPLANATIONS. “Will & Trust Kit” by Suze Orman may be ordered
from her web site (
www.suzeorman.com ). I found it at COSTCO for $12.49. If you
already have these documents in place it is still a good idea to buy
and listen once again before you might give it to a friend or
relative. I do not recommend this program as a substitution for, but
in addition to, an attorney.
There are a lot of
figures thrown about but in general it is accepted that you are five
times more likely to become disabled than to die in any given year.
Disability will be discussed in a later article but accept the fact
that the USA Social Security disability is very difficult to obtain
and most employers’ disability payments and benefits continue only
for limited, relatively short periods. If you have not started pilot
training or have not flown in many years it may be substantially
easier to obtain needed “Disability Income” or “Life Insurance”
before you add aviation as an avocation. If you are self-employed
look into “Disability Extra Expense” coverage to protect your
business.
Let’s take a short
look at the USA estate tax laws in brief and how they may affect
you. Remember that in addition to this tax you may have to pay
probate including attorney’s fees, local state taxes and charges by
your CPA for preparation of the estate tax return. The average fee
charged by a CPA is at least 1% of the value of the estate. Sounds
high, but a good deal of the charge goes to pay for their “errors
and omissions” insurance coverage. Yes, with “inter vivos” (“living”
as opposed to “testamentary” set out in your will) trusts probate
may be avoided or reduced to almost nothing. However, in many states
it is advisable to file probate even on a zero estate to start the
“Statute of Limitations” running for liabilities or debts that may
have been incurred by the deceased. An additional advantage of an
inter vivos trust combined with a “pour-over will” (A will that
transfers non-trust assets to the Trust upon death) is the speed
with which the estate may be distributed and closed, normally less
than one year rather than a long indeterminate period.
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return”. By
“gifting” an automobile (and keeping your name on the title) you
have placed your entire net worth in the owner/driver’s hands. When
(not if) an accident occurs, you could potentially lose everything
you have worked to accumulate. Some states do provide for
designation of a beneficiary owner on auto titles and this does
avoid the liability problem. Many of us wish to stay in our homes as
long as we possibly can but with your children as co-owners there is
a conflict of interest that could rear its ugly head. You may have
absolute confidence in your children, great, but what if they become
disabled or die intestate which would automatically transfer
co-ownership of your home to their spouse or children? Then there is
always the possibility they could divorce. The bank account has
essentially the same problems as the car (gift tax concerns) and
home, except it is easily attached for their personal debts. Then
there is “stuffing” your safe deposit box with cash or valuables.
This idea is not new. Your government has dealt with this situation
before. On the “Estate Tax Return” is a simple question asking if
you own or have access to any safe deposit box. Most states will
seal the box upon death and it must be opened and inventoried with
officials present after death. Dual name on a safe deposit box just
won’t work within the estate tax laws.
Just when does Uncle Sam get into
my loved-one’s pockets? There is NO federal tax due if your spouse
is the beneficiary of your estate. BUT, what happens when the spouse
dies? In the year 2005, your estate tax exemption shields only
$1,500,000.00. to a non spouse, i.e. your children or others. This
amount increases over the next few years to become an unlimited
amount in year 2010, BUT the law “sunsets” in 2011. The reality is
you must plan for the law to be changed and I am forecasting that
the exemption will revert to $3,000,000. Both amounts sound large
but those with 401K retirement plans, farms, appreciated real
estate, and personal businesses may find this amount to be low. (I
know at least one of you must have purchased a P-51 new for $500,
which is now worth in excess of $1,500,000.) In addition “Life
Insurance” may add to your total estate. Your agent may have told
you it is “not taxable” but if you are the policy owner and/or pay
the premiums it is in fact part of your taxable estate.
Why is the USA
Government changing the estate tax exemption limits? The theory was
to protect the family farm and the family business. Often both had
to be sold to raise money to pay estate taxes. At the old exemption,
shielding only $600,000 and quickly becoming an effective federal
tax rate of 58% of the value of the estate over this exemption, many
non-spouses were paying total estate costs of about 62% . As of
today, the situation of estate taxes is much improved but in the
future you should expect the law to change and change still again.
These constant changes make planning very hard for us all and I
strongly suggest that diversification of methods of avoidance of
unnecessary tax payment takes serious thought. You will take some
actions which do not work out and, in fact, may cause you additional
tax. But if many methods of control are used, you may expect an
overall savings. By looking at what has worked and not worked in the
past, along with changes the USA Government has made in the past,
you will develop some insight into future changes to anticipate in
the USA estate tax |
