Non-Tax Aspects of Estate Planning
Since the repeal of the estate tax in 2010, and the uncertainty of where the estate tax will be in 2011 and thereafter, people have begun to place added emphasis on what has always been important in estate planning
- the family. Clients with existing estate plans are reanalyzing their personal goals and objectives. Clients without an estate plan are developing a strategy that is based more on non-tax and non-economic objectives. These non-tax and non-economic aspects of estate planning include:
· Who should be guardian for minor children?
· Do I have enough life insurance for my spouse and children if I die prematurely?
· How will my children's education be paid for?
· Should I set up trusts for my children and if so, what should the terms of the trust be?
· If I set up trusts, who should I appoint as the trustees?
The list for these non-tax or personal objectives can go on and on.
The purpose of this issue of e-Counsel
is to educate you on some of the non-tax issues involved in estate planning and what ideas or techniques you may want to consider when developing or reviewing your estate plan. This issue of e-Counsel
is only intended to be an overview of the topic under discussion and is not intended to give specific advice regarding any person's particular situation. If you have any questions regarding this e-newsletter, please do not hesitate to contact us. Guardians
Deciding on who should take over the upbringing of your children is a topic that requires careful thought and reflection. Sometimes people avoid doing any estate planning because they cannot think of a person to serve as guardian. Other times, a couple may disagree on who should be selected and as a consequence avoid doing any planning at all. Neither of these options is a good alternative.
If you are having trouble thinking about who should serve as guardian, consider asking and prioritizing the following questions to see who may be the best fit:
· Does the guardian share your beliefs, values and morals?
· Is the guardian capable of loving your children?
· Is the guardian capable of disciplining your children in an appropriate manner (with you defining
what is appropriate)?
· If you want your child raised in a family environment, does the guardian have a stable family of his
or her own?
· Is the guardian too old to properly care for your children or too young to teach them valuable life
· Where does the guardian (and therefore where will your child or children) live?
· Finally, if your children are old enough, who do they think should serve as their guardian?
The prospect of planning for your family's life insurance needs may seem daunting. The array of confusing products available coupled with the calculations needed to find the right amount of insurance is enough to make anyone's head spin. Yet, if you do not plan for your family's insurance needs, the result could be a waste of thousands of dollars on inappropriate or ineffective insurance or, worse, financial hardship due to not having enough coverage. We do not sell life insurance, but we can help you sift through all of the difficult issues involved in analyzing your insurance needs and give you objective and unbiased advice and counseling. This advice and the issues you should consider include:
· Is there a need for life insurance in the first place?
· If there is a need for life insurance, how much life insurance is needed? The old rule of thumb was
to buy between five to seven times your annual salary. However, this general rule should not be
used as a substitute to making life insurance calculations based on your particular needs and family
· After you decide on the amount of insurance, what type of insurance policy will best suit your
needs? There are a variety of different types of insurance products, including term insurance,
whole life, universal life, and variable life. Even if you know the proper amount of insurance you
need, buying the wrong type of policy can prove costly.
· Should your current life insurance policy be reviewed? Life insurance products are consistently
changing. If you have a policy that is over a few years old, it is possible (and perhaps likely) that
your policy can be exchanged for a different policy that either gives you a higher death benefit for
the same premium or the same death benefit with a lower premium. Education Planning
Education costs have and in all likelihood will continue to increase. Therefore, it is critical to plan for a loved one's future educational expenses. As with life insurance planning, the first step in education planning
is to determine the amount needed to fund a loved one's education. Once an amount (or ballpark amount) is determined, a plan must be put in place to ensure adequate funding.
There are a variety of techniques available to plan for future educational expenses. Section 529 Plans are probably the most popular tool being utilized today. This is because 529 Plans provide tax incentives to save for a loved one's education under the Internal Revenue Code ("IRC"). From a federal tax perspective, contributions made to a 529 Plan are not tax deductible on your federal income tax return. However the income and earnings associated with a 529 Plan are not subject to current taxation. In addition, distributions made from a 529 Plan for qualified higher education expenses are tax-free. This makes a 529 Plan look very similar to a ROTH IRA, only it is for education as opposed to retirement. In addition, there is no income restriction on who can contribute to a 529 Plan. This makes a 529 Plan available to higher income taxpayers unlike other education planning techniques which are phased out based on a taxpayer's income.
Although 529 Plans are authorized by the IRC, they are established and administered at the state level. In Missouri, the 529 program is referred to as the "Missouri Savings for Tuition Program" or "MO$T Plan." Some states even offer state income tax incentives for using a 529 Plan. For example, in Missouri, residents are entitled to a state income tax deduction of up to $8,000 per year per taxpayer for contributions to a 529 Plan. With this deduction, the maximum tax savings for Missouri residents who participate in a 529 Plan is $480 for an individual or $960 for a married couple.
For more information on planning techniques for educational expenses, please contact us for our brochure titled "Planning Techniques for Funding Educational Expenses." Trusts
Careful thought should be given to how property should be left to children. At the most basic level, property can be left to children outright or property can be held in trust for a child's benefit. Whether property should be left outright or held in trust will vary depending on your family situation. For couples with young children, a trust is typically more desirable. However, merely because a child is over the age of majority (over 18) does not mean property has to be left to that child outright. The child may not have the maturity to handle the funds or a parent may want to control the ultimate disposition of the property and make sure the property stays "in the family" even after a child's death. Further, the need or desire for asset protection planning for a child may dictate holding the property in trust as opposed to an outright distribution.
There are many different types of trusts that can be utilized in estate planning, including:
· A "basket" or "pot" trust is a trust with multiple beneficiaries. With a basket or pot trust, one trust is used for all of an individual's children (or multiple beneficiaries). Typically, these types of trusts provide that if both parents die before the youngest child reaches a specified age (i.e., 25 or 30), all assets would be held in a single basket or pot trust for the benefit of all the children until the youngest living child attains a certain age. Usually, one objective parents wish to accomplish with a pot trust is to ensure funds will be available for all the children's education. Once the youngest living child reaches a certain age, the trust is divided among the children and either distributed to them outright or the funds may continue to be held in separate trusts for each child.
· The opposite of a "basket" or "pot" trust are separate share trusts; that is, one trust for each beneficiary. For example, if a parent has three children, his or her assets can be divided equally so that each child will have his or her own separate trust. Such trusts commonly provide rights to income and principal at specified ages.
· Long-term trusts are trusts designed to extend over multiple generations. They can be utilized for tax or asset protection planning. For example, a parent may want to make sure that their children have funds available to them if they need it, but the trust assets will not be available to a child's creditors, including a child's spouse in the event of a divorce. These trusts last beyond the child's life (although income and/or principal can be available to the child) and benefit grandchildren and/or more remote generations.
· Special needs or supplemental trusts can be drafted if a client has a child with special needs. These types of trusts are designed to ensure that a beneficiary's supplemental needs are taken care of without disqualifying the beneficiary from receiving government aid he or she would otherwise receive.
· Incentive trusts are not different in kind from traditional trusts; instead they are a sub-category of trusts that differ from traditional trusts in that they set specific criteria for beneficiary behavior. That is, provisions can be drafted in trusts that are designed to either encourage or discourage a beneficiary to act or refrain from acting in a certain way. For example, a trust may contain provisions that provide a child will get a certain amount from a trust if the child receives a college degree, thus encouraging education. A trust can also provide that a child gets a certain amount from a trust each month if he or she is employed, thus encouraging the child to maintain an occupation and not become a "trust fund baby." Trusts can also be used to discourage behavior. Distributions of trust assets can be tied to a child passing a drug test or not being convicted of a crime. Trustees
If a trust is used as part of your estate plan, a person or trust company needs to be named to serve as trustee and successor trustees. A trustee deals with the beneficiaries of the trust (such as your children) and also the assets that are in the trust (for administration, investment and tax purposes). The decision as to who should serve as trustee and successor trustees involves weighing many personal, family, business, investment and tax considerations. Depending on the nature of the trust assets, some of the criteria which could make a candidate a good selection as trustee or successor trustee include:
· Availability and ability to serve for the term of the trust
· Impartiality and lack of conflict of interest
· Financial security
· Investment sophistication, policy and track record
· Business sophistication
· Accounting and tax expertise
· Knowledge of and sensitivity to the beneficiaries
· Decision making abilities
Quite often, no one person or trust company will meet all of the criteria a person thinks is necessary in a trustee or successor trustee. In such an event the above criteria needs to be prioritized or one or more co-trustees can be appointed to serve together.
For more information on trustee selection, please contact us for our brochure titled "Selecting an Executor and Trustee."
The most important aspect of developing an estate plan that works for you is to analyze what goals and objectives you want to accomplish and understanding what options are available to you to achieve those goals and objectives. Some of these goals and objectives were discussed in the newsletter, but there are many others. We are available to assist you in flushing out and articulating your goals and objectives and then offering concrete solutions that will allow you to achieve your goals and objectives.
We trust you have found this issue of e-Counsel to be interesting and informative. If you have any questions regarding anything contained in this issue of e-Counsel or if you have any ideas as to how we can improve our newsletters, please do not hesitate to contact us.
CIRCULAR 230 DISCLOSURE
Under U.S. Treasury Department guidelines, we are required to inform you that (1) any tax advice contained in this communication is not intended or written to be used, and cannot be used by you, for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or by any party to market or promote any transaction or matter addressed herein without the express and written consent of the Richard C. Petrofsky Law Office and Helfrey, Neiers & Jones, P.C., (2) the Richard C. Petrofsky Law Office and Helfrey, Neiers & Jones, P.C. imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein, and (3) any fees otherwise payable to the Richard C. Petrofsky Law Office or Helfrey, Neiers & Jones, P.C. in connection with this written tax advice are not refundable or contingent on your realization of federal tax benefits from the advice contained herein.