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PROTECT AND ENHANCE YOUR ESTATE
Definitive Strategies for Estate and Wealth Planning 3/E
By ROBERT ESPERTI, RENNO PETERSON, DAVID K. CAHOONE
The McGraw-Hill Companies, Inc.Copyright © 2012The McGraw-Hill Companies
All rights reserved.
What Is Estate Planning?
It's More Than Money
Estate planning is people: spouses, children, grandchildren, favorite family members, charities, and close friends; their security and prosperity without you. It is state and federal taxes: income, death, and gift. It is lawyers, accountants, insurance people, banks, and financial planners. It is society's rules along with the red tape and courts of law that accompany those rules. It is a world of advisors busily accomplishing things that most people do not understand. It is time and money. It is protecting and enhancing your estate from an uncertain future.
Estate planning takes time: a little now or a lot later; time to identify and accomplish goals that are personally important; or time to react to a host of external forces that may have their own interests rather than those of your loved ones.
Estate planning involves money, business, and finance. It involves dollars, lots of dollars, to create and maintain a lifestyle for you and your family while you are alive, and for your loved ones after your death. It involves the sacrifice of dollars to purchase life insurance or to invest in a portfolio, in lieu of personal indulgences, with the sincere belief that you are creating security for you and the people and causes that matter to you.
Estate planning is human ambition and the fulfillment of that ambition by acquiring and holding property. It is a life statement of commitment to others, while maintaining a lifestyle that is comfortable for you.
Estate planning is living planning. It is your attempt to use your resources to create an environment for yourself and others that will be sufficient for you and extend beyond your life. It is the ability to share and control your success during life and after death.
We always ask our clients, "What do you want done with your property and life insurance after you're gone?" The responses have been different, but they all contained thoughts that could be summarized as follows:
I would like to give my property to whom I want, in precisely the way I want. Further, I wish my beneficiaries to receive my property when I wish them to receive it.
But, and this is very important to me, I want to save every last tax dollar, both state and federal, in accomplishing my objectives. Oh yes, I also want to avoid, or at the least reduce, attorneys' fees and court costs.
Finally, I don't want myself or my family involved in a lot of red tape that prevents my objectives from being accomplished quickly.
You probably know what you want to do with your property both during life and on death. You are sensitive to the red tape imposed by society's rules. You need professional help in accomplishing your planning objectives.
You are unique; therefore, planning for your estate must be unique. Planning, to be good, must fit you; it must be comfortable, like a favorite pair of shoes. You must understand the estate planning process, for without understanding there can be no comfort. Planning without understanding results more often than not in uncertainty and anxiety.
Our main objective is to assist you in understanding the rules, take the voodoo out of planning, and replace it with knowledge and comfort. In short, we hope to expand your planning horizons.
Your understanding is our mandate. With the comfort of knowledge, you should be able to confidently seek out the professional advisors and products and services you need. You should have the ability to communicate your goals and objectives to your advisors. On completing this book you should have a good grasp of the estate planning process and the techniques it utilizes. You should be able to discern between the knowledgeable professional and the not-so-knowledgeable professional. We hope to give you enough understanding of the estate planning process to enable you to participate in a meaningful dialogue with your advisors in accomplishing your estate planning objectives.
We have heard the question many times: "Why do today what I can put off until tomorrow?" In estate planning, tomorrow may instantly become today. None of us can predict the timing of our own deaths with certainty. Death sneaks up on most of us and respects no time parameter. Statistically, there may be a tomorrow, but don't plan on it! Planning now is mandatory.
Estate planning is a process that begins within your life and can continue far after death. It is not unique or indigenous to any economic class. Its audience is America, and its players are Americans. How often we have heard, "Estate planning for me? Heavens, I don't need an estate plan! I have so little." Really? No loved ones, no disposition toward a favorite family member, close friend, or institution (charitable or otherwise)? No property, no insurance or pension plan? No personal possessions, mementos, family heirlooms that require a loving pass on? No debts?
Estate planning is virtually for everyone, and it is getting more complex every day. When this book was first written in 1981, the Economic Recovery Tax Act of 1981, which was given the acronym ERTA, had just been passed. It revolutionized federal gift and estate tax laws. Since the passage of ERTA, there have been well over 150 tax laws passed, culminating with the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010. Each time a new act passed, the new laws were intended to reform, simplify, or reduce taxation. Each time, the laws became more complicated and more people were affected.
The good news is that these laws have led to the ability to reduce gift, income, and estate taxes. The bad news is that "death taxes" have become a political football kicked around so many times that there is far less certainty in estate planning now than there has been over the last 65 years. The Act of 2010 has a life of two years, one year of which is gone. There is absolutely no certainty what the federal estate, gift, and generation-skipping laws will be in 2013. The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 was passed on December 17, 2010, because the estate, gift, and generation-skipping tax laws were to revert to the laws of early 2001, allegedly ending the uncertainty introduced by that law.
Our greatest fear is that you will be lulled into a sense of false security, believing you and your family do not have enough assets to be subject to these taxes on the very wealthy. Congress can change the definition of who is wealthy at any time. Under our new tax law, in 2013 the federal death tax laws could revert to those in existence at the beginning of 2001. That means that if your estate is over $1 million, it will be subject to federal estate tax!
We want you to understand why you should plan now and protect your estate from the vagaries of Congress and an economy that is as uncertain as the tax laws. Estate and wealth planning today is far more about risk management than about anything else. No one knows what the economy will be like and what taxes will be imposed when you die. Taxes could be low and the economy could be booming, in which case your family will likely do well if you have planned properly. But what if when you die the economy is not so good and taxes are high? Will your planning result in taking care of your loved ones or charities the way you wanted to? Planning is not assuming that things will work out for the best. That is wishful thinking. Our mantra has always been, "Plan for the worst, and you will never be unpleasantly surprised."
On the bright side, our federal gift and estate taxes are in many ways voluntary. Those with the knowledge of and access to expert professionals can escape most of these taxes. Creative lawyers, accountants, and other planners have developed very effective strategies for estate planning in light of both new and long-existing laws. In fact, the planning landscape has changed so radically that we and our colleagues now refer to estate planning as wealth strategies planning. Why? Because estate planning encompasses so many different disciplines and so many different techniques.
This book includes discussions of important planning techniques and how they can work for you and your family. It is designed to get you thinking about the incredible opportunities for planning: planning to make your life more enjoyable, planning to escape some of the economic problems of disability, and planning to reduce or eliminate federal estate and gift taxes. It is our hope that this book will motivate you to plan the right way, and right away. More important, we hope this book will make you understand that wealth planning encompasses huge doses of risk management, and that while you and those you care about hope for the best, you'll institute risk management planning to protect your estate from the worst, and enhance it as well.
How Do You Own It?
"I don't know how I own it" is an answer we frequently hear from our clients when we ask in whose names their various assets are held. One of the major problems confronting estate planners is that people frequently buy and sell assets without the foggiest idea of how those assets should properly be held.
Not understanding how property should be owned makes estate planning a frustrating and impossible exercise. You cannot plan for property that you do not own; and if for some reason you do attempt to do planning with what you do not own (and this does happen), your attempt will be to no avail.
There are three often-used methods by which an adult takes ownership of property: fee simple, tenancy in common, and joint tenancy with right of survivorship. We will explain each method.
The concept of fee simple ownership is easy. It means to completely own something by yourself. The fee simple owner is a sole and absolute owner.
To own property in tenancy in common is to own it with one or more other people. As a tenant in common, you cannot be a fee simple owner of the entire asset. An example of this form of ownership is if you and a friend own a 100-page book. You own the book as tenants in common. Each of you owns 50 percent of the book; that is, each of you owns 50 pages. Each of you would be able to leave half, 50 pages, on death to anyone. Each of you while alive could give your 50 pages away to anyone. Each of you owns absolutely 50 percent of that book. Each of you is a tenant in common with the other.
There is no limit to the number of tenants who can own something with others in a tenancy in common; 100 people could be tenants in common in the ownership of a 100-page book. Each would then own one hundredth, or one page, of the book.
The only real issue occasioned by tenancy in common is if one of the tenants wants to sell his or her interest and the buyer wants to know what he or she is purchasing, the selling tenant in common does not know which of the 100 pages is owned. All the seller knows is that he or she owns one hundredth of the book.
Of course, we very seldom see 100 tenants in common. Generally, we see two, three, or four people who have bought something together, with each owning a half, third, or quarter of the property. Should a proposed sale by one of the tenants pose a problem as to what pages that tenant actually owns, the local court will have to become involved. The court's solution is called partition. The court takes the asset and makes an actual, physical division based on each tenant's percentage of ownership.
That technique does not always work well. Does one tenant get every other page of the book? The front half? The rear half? Generally, it is better for the quarreling tenants to sell the book to a third person and divide the cash according to their percentage of ownership.
All in all, tenancy in common is a frequently used method of owning property. The important thing to understand is that if you are a tenant in common, you absolutely own your percentage share in the property. Your percentage share can be sold or given away during your lifetime and can be left to your chosen beneficiaries at your death.
A potential drawback of this form of ownership is that the other tenants may not particularly like the person to whom the deceased tenant has left the percentage share in the property. We commonly refer to this problem as the "breaks of the game." If an individual chooses this form of ownership, that person's co-owners and beneficiaries may face co-owners they do not like.
The third form of ownership commonly used in the marketplace is joint tenancy with right of survivorship. In our experience, this method of taking title is greatly misunderstood by the public. In fact, it is an extremely confusing form of ownership.
Joint tenancy with right of survivorship is a great deal like tenancy in common, yet totally different in its results. For example, we again have two people, each of whom owns 50 percent of that 100-page book; now, however, they own it as joint tenants with right of survivorship. Unlike tenancy in common, this method of ownership does not mean that each of them owns 50 percent of the book, or 50 pages. If they own the book in joint tenancy with right of survivorship, they each own 100 percent of the book for purposes of title holding. Both of them own the whole thing? Yes, that is correct.
Joint ownership—or joint property, as it is commonly called—is a fictional form of ownership created by English common law heritage. It is fictional in that two or more people can own the whole thing. What occurs to breathe realism into this fictional method of owning property is the added survivorship feature. Remember the proper name of this method of ownership: joint tenancy with right of survivorship. The survivorship feature means that as each individual joint tenant dies, that person simply falls off the ownership charts. Upon death, title is in the hands of the surviving joint tenants. Each of the survivors now owns a greater percentage of the property. Specifically, if there were three tenants and one died, the remaining two would own the asset. It is almost as if the deceased tenant never owned the property in the first place.
"My word," you say, "do you mean to tell me that if I own a mountain cabin with my brother in joint tenancy with right of survivorship, upon my death my spouse and children have absolutely no right to that cabin? That it all belongs to my brother? That once I die, I am removed from ownership, and since my brother survived, it is all his? That my family has absolutely no rights to that cabin?" Yes, that is exactly what we mean. Surprised? Many of our clients certainly have been.
Joint tenancy with right of survivorship is an automatic method of planning for property because taking title functions as a mini estate plan. It automatically passes ownership by law to the surviving tenants. In this case, there is no reason to plan your jointly held interest in your will or trust. As long as there is a joint tenant who survives you, the passage of the asset is already planned. So, if you have the opportunity to buy into a 100-page book as a joint tenant with 99 other people for the price of $1,000, and the total value of that book is $100,000, it might not be a good bargain. On the other hand, if the 99 other people are all 80 years of age or older and you are only 21, that might suggest a good deal. As each joint owner passes away, the remaining joint owners then own the book as 99 joint tenants with right of survivorship; 98 joint owners with right of survivorship; 97, and so on, right down to the last one to survive, which, in this example, might be you. What a deal. What a crazy form of ownership!
On the other hand, from a living point of view, let us assume that you are a joint tenant who wishes to sell your interest to someone else. You certainly could, and in most states you would not have to receive permission from the other joint owners; but what if you, as a joint tenant, wanted to carve out your interest for your sole and personal use? You would have to go to the local courthouse and ask the judge to apply that old legal remedy of partition. You would have to ask the judge to divide the property; or you could hire a lawyer to come up with a complicated and technical solution. Amazingly enough, jointly held assets, when viewed from a living point of view (without the survivorship feature), function just like assets held in tenancy in common. It is the survivorship feature that distinguishes the two.
There is another offshoot to joint ownership, a special kind of joint ownership called tenancy by the entirety. It is used in some states by a husband and wife to hold real estate. For most practical reasons, it works the same as joint tenancy. The major difference is that generally, under tenancy by the entirety there is no right to split the property during marriage unless both spouses consent. For our purposes, think of tenancy by the entirety as joint tenancy, except it is only available for spouses. As we will see in Chapter 34, "Protecting Your Assets," tenancy by the entirety is a method that can be used for asset protection. If you do own assets in tenancy by the entirety, consult your attorney, because your state's laws are probably unique.
Often a client will ask, "What if I just put my name and someone else's name on a piece of property and don't specify whether it is owned in tenancy in common or joint tenancy; which method have I elected, if any?" In our jurisdiction, that property would be held in tenancy in common. In others, it would be held in joint tenancy with right of survivorship. The answer, therefore, depends on the law of your state. Each state has its own laws. Do not assume anything; find out the correct answer from your advisors.
Always know how you wish to take title to assets and properly communicate that intent to others. Is it fee simple, tenancy in common, or join tenancy with right of survivorship? Know what you are doing in this area, because taking proper title to property is a very serious business, as you will see throughout this book.
Excerpted from PROTECT AND ENHANCE YOUR ESTATE by ROBERT ESPERTI. Copyright © 2012 by The McGraw-Hill Companies. Excerpted by permission of The McGraw-Hill Companies, Inc..
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