EVERYTHING A BABY BOOMER SHOULD KNOW
It is a common misconception that Estate Planning is only for the wealthy, but after reading the foregoing seven chapters of reasons why every Baby Boomer needs to plan their estate, that common misconception should now be dispelled.
Estate planning is, of course, essential for those who have accumulated substantial wealth, but it is also important for those of modest or moderate wealth as well. Every dollar lost unnecessarily to taxes or administrative costs hurts the survivors more when the estate is small.
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What Is A Larger Estate?
There are three factors that decide whether you need to plan for the larger estate:
1. The size of your family;
2. How much money you want to save them; and
3. The aggregate value of your assets.
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How The Federal Exemption Tax Works
First, you have to be married. Second, your spouse has to be a U.S. citizen. Third, each spouse has an opportunity during their lifetime (not after death) to set aside from their share of the estate the “Federal Tax exclusion limit” which in the years ’06,’07, and ’08 is $2,000,000. This is $2,000,000 that the family does not have to pay estate tax on when the first parent dies.
This “applicable exclusion amount” will also never be included as part of the surviving parent’s estate, so the children will not be taxed on the money at the death of the second parent either. This is not the case with the QTIP trust. (See The Nuts And Bolts Of A Living Trust.)
This means you can put $2,000,000 (your half of a $4,000,000 estate) into a credit shelter trust, such as the Bypass Trust, when you die and this money can sit tax free to be used for the benefit of your surviving spouse during their entire life.
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The Capital Gains Tax May Replace The Estate Tax
If you are wondering who is responsible for this generous change in tax laws, it was President George W. Bush. But before you give him a big pat on the back, consider that if Congress does nothing before the year 2010, it is anticipated by many professionals that the capital gains tax will replace the estate tax. This means that the $200,000 mortgage on your $2,000,000 house will “carryover” to the heirs of your house.
As it stands now, the house’s value is reappraised at death and its cost basis is “stepped up” to $2,000,000 (fair market value) for the heirs. If your son or daughter sells the house they pay no income tax.
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The Titanic Of All Estate Planning: The Legacy of Rupert Murdoch
Here is the Titanic of all Estate Planning:
Mr. Murdoch is the 73 year old media mogul with an estate valued at around $35 billion. He owns such companies as the Fox Network, and the New York Post, along with another 186 publications he owns in a company called the “News Corporation.”
He has billions of dollars in assets strewn throughout the world – particularly in Australia, New Zealand, Britain and America. He also is a former owner of the LA Dodgers baseball team, as local baseball fans will remember.
Mr. Murdoch’s blended family includes four adult children, and two infant children. These six children include his daughter Prudence, by his first marriage; Elizabeth, Lachlan and James, by his second marriage which ended in 1999; and Grace 3, and Chloe 2, by his present marriage in 2005.
Mr. Murdoch has recently announced that all of his children will be treated equally in the distribution of his estate, but rumor has it that the heir apparent, his eldest son Lachlan, age 33, has quit the family business because of this sweeping change in his father’s inheritance plan.
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Bringing Big Concepts To Big Challenges
People in the league with Mr. Murdoch already have buildings full of attorneys. However, Estate Planning is not like business law because it requires substantially different skills. It requires attorneys who have affirmative people skills, not adversarial skills, and the ability to listen and work personally with the client.
It is not the intent of this guidebook to provide sufficient legal knowledge to write your own estate plan. You would have to go to law school and practice law for twenty years in order to do that right. It can get quite complicated and demand the use of several professionals to work in coordination. The information provided here is intended to stimulate ideas so you can better understand your needs and communicate them to your attorney.
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Different Strokes For Different Folks
1. Dr. Dentist is 55 years old and still married to his first wife, Nora. They have two minor daughters in private school and live in a 10,000 square foot home on an exclusive golf course. They buy a new car any time they want. Both the girls are equestrian riders and Nora is busy managing their home, the kids and charity events.
The Dr. has a twin engine Golden Eagle airplane he uses to commute to his other lucrative dental practice in another town. Besides their residence, they own a cabin in Lake Tahoe and a large medical office in downtown Santa Barbara which he purchased with two other partners. Dr. Dentist has received good financial advice over the years and developed a well rounded securities portfolio worth over $2,000,000.
2. Walt the plumbing contractor is 55 years old and has been working in the plumbing business for thirty-five years. He has recently married his third wife. He has two previous wives with whom he shares four adult children, but has always been the only parent with the financial means to help them.
The first two children from the first wife are in their thirties and each of them has two children, giving Walt four grandchildren. Walt’s second two children from the second wife have just reached college age. His oldest son, Derek, helps manage the plumbing business.
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Which Of These Two Scenarios Is Most Challenging?
Neither, they are juxtaposed with the same level of individual complexity but little in common after that.
The Dr. and Walt’s primary needs go in opposite directions. Dr. Dentist’s primary need is to provide for his wife and the future of his minor children (referred to above as the “traditional family”), and for his mother should something happen to him first.
Walt has recently remarried after toiling 35 years to build his estate. His “primary” need may be to provide for his adult children and his grandchildren, while assuring security for his new wife. Walt’s situation is something of a balancing act.
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Priorities And Property “Characterization” Must Be Discussed
The issue of “priorities” must first be discussed with your spouse and then communicated to the attorney. Questionnaires provided in this guidebook are helpful in getting those lines of communication open. Once your beneficiaries have been determined, you must decide which property belongs to which spouse, and which is community or quasi community property.
These are not always easy subjects to discuss because it may sound selfish identifying your separate property as your own. But it is absolutely necessary to characterize your property as separate in order to determine who can give what to whom, as an individual gift.
Not everything is community property! That inheritance you received years back, or that house you bought earlier, or that painting from your brother, is your separate property. Your attorney can be very helpful in this regard by offering a dispassionate analysis of the goods you own.
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An Insider's Guide to Estate Planning
TO ESTATE PLANNING:
KNOW WHAT YOU’RE TALKING ABOUT!
Why pay money so an attorney can try and explain the difference between a Bypass Trust and a QTIP Trust, when this book will answer that question long before you have to pay for a consultation?
This guidebook helps you map out your estate plan so it goes exactly where you want it to go. It explains the tools you need to give away or preserve your money, homes, businesses, heirlooms, cars, boats, jewelry, tools, art, memorabilia, and every other artifact of life you have accumulated over the last 45 to 65 baby booming years.
Mark S. Cornwall, Esq.
210 E. Figueroa Street
Santa Barbara, CA 93101