Retirement savings have long been the focus of many hard working people. In recent years, Individual Retirement Accounts (IRA's) and 401-K plans, along with life insurance, have become common vehicles to supplement Social Security and to ensure financial security for your "Golden Years". Unfortunately for many, estate planning stops there. Because of favorable tax treatment, Retirement accounts have grown to become the largest asset for many people. Often times, however, little thought is given to the naming of one’s beneficiaries and the potential savings of Income and Capital Gains tax. Through proper estate planning, you can minimize or delay the payment of death taxes by your beneficiaries otherwise due at the time of your death.
While it is said that one cannot avoid death and taxes, we can avoid or at least minimize your taxes by preparing proper plans to protect your savings from (1) Income and Capital Gains taxes; (2) Federal Estate and Gift taxes ("inheritance" taxes); and (3) unnecessary costs and expenses at death. Estate Planning seeks to distribute your assets in accordance with your desires and your family needs, not as mandated by Missouri’s inheritance laws. The most commonly used vehicles for estate planning are Wills and Trusts. In drafting all estate planning documents, a primary consideration is to provide for such family members, charities, and other beneficiaries as designed by you. In appropriate instances, consideration might be given to the use of a Family Limited Partnership which permits you maintain control your assets while transferring limited partnership interests to family members. You might also consider the use of various Charitable Trusts intended to benefit your favorite charity while safeguarding income for you and your family. Use of a Wealth Replacement Trust funded by life insurance may also protect your family assets or provide a source of funds to pay taxes and expenses at death. There are many ways to provide for your security and protection but it is necessary to begin now.
With the ever-increasing value of real estate, a greater number of two (2) income families, and inflation, not just the "Wealthy" are being forced to pay taxes. The Federal Estate & Gift Tax now rivals the Income Tax Code in its complexity and can result in a tax burden upon your family at the time of death. While no such tax currently is owed on estates under $625,000 (which increases to $1 million in 2006) the tax rate starts at 37% and grows to a staggering 55% for estates over $3 million. While it is never too late to start, early and well thought out Estate Planning is essential to protecting yourself and your family from estate taxes.
A Will, the most common estate planning tool, is a legal document which allows your designated family member, Personal Representative, to maintain control of your assets, pay your debts, and then distribute your assets to your family, charities or other beneficiaries. When properly drafted, a Will can be a powerful document to maintain family control, to provide guidance for the prudent management of your assets and to reduce Probate Court fees. You may also express your desire as to the appointment of a trustee and guardian for your minor children to eliminate uncertainty and to give peace of mind that the person you select will care for your children.
A well drafted Will can also contain the tax provisions necessary to avoid, or at least minimize, your Federal Estate & Gift tax liability by allowing you and your spouse to fully maximize the use of your Unified Credit. Charitable donations, as set forth in your Will, are also deductible and can help alleviate the tax burden while benefiting your favorite charity.
Wills are strong and powerful tools in Estate Planning and can provide a method to protect your assets for the benefit of your family or heirs.
The Revocable Living Trust, another commonly used tool in Estate Planning, provides the same features as a Will. Unlike a Will, however, a Trust is actually a "legal basket." To maintain control, you may manage your assets by serving as your own Trustee and then appoint your spouse or child, or in some cases even a corporation, to serve as your successor. During your lifetime, you transfer your assets into the Trust. Upon death, your successor trustee will pay your debts and distribute the balance to your family, charity or other named beneficiary. Unlike a Will, one advantage of a Trust is that if all your assets are properly transferred to your Trust, you will avoid Probate Court.
While Trusts have certain advantages, some additional effort is usually required in creating your trust and seeing that all your assets are properly transferred to your trust. Like a Will, your Trust can also be amended at any time during your lifetime. A properly drawn Trust also can be a powerful tool to protect your assets and provide for your family.
The Family Limited Partnership (FLP) is now widely used in Estate Planning. The FLP is created with both general and limited partnership shares. Typically, a parent after formation of the FLP transfers assets to the FLP which may be real estate or personal property. The parent retains the general partnership shares which afford control of the FLP while gifting limited partnership shares to the children. Since the limited shares are non-voting and represent a minority interest, the value of such shares are subject to a substantial discount in value. As a result, the parent can transfer more assets from his or her estate thereby reducing estate taxes while still retaining control. The FLP also removes future appreciation in the gifted asset from the parent's estate and aids in planning for succession in the family business. While requiring careful planning and appraisals to document valuation, the FLP has become a an important estate planning tool.
In the event, you become incapacitated or unable to handle your business affairs, a Durable Power of Attorney allows your "Attorney-in-Fact" (perhaps your spouse or your children) to act on your behalf by writing checks, paying your debts and taking care of your daily needs which may arise during your incapacity. A properly executed Durable Power of Attorney can ensure that your needs will be taken care of in the event of your incapacity and avoid the need and expense of a guardian or conservator appointed by the Probate Court.
Healthcare Directives are another consideration of your Estate Plan. In view of recent Supreme Court decisions, the need has arisen for a legal document, which allows you to make final decisions regarding your healthcare. A Healthcare Directive allows you and your family to make decisions, in advance, as to those necessary medical decisions. Your Healthcare Directive will keep you from being kept "alive" on machines if your doctors determine there is no chance of recovery. With proper planning, you can restore this important decision to you and your family and maintain control and direction at all times.
Births: At the birth of a child, it is a good time to look and see if you’re current. Estate Planning provides for your new needs.
Deaths: Upon the death of a loved one, it is necessary to look and see if all provisions are still accurate and what you desire
Marriages: If you marry, you will obviously have new obligations which must be addressed. Furthermore, if a sibling or your children are married, it may be necessary to review your estate plan.
Divorces: Upon divorce to protect your family members Major Changes in Assets. A substantial increase or decrease (for example, sale or purchase of a home) in your estate may determine that you have a need for changes in your plan.
Major Business Changes: Again substantial increases or decreases in business
Tax Law Changes: As the tax codes change, it is a good idea to revise your estate planning to ensure that the desired protections which were set up are still in place or perhaps there may be a better way of ensuring your assets.
Even if your estate will not be obligated for Federal Estate and Gift Tax, it is still wise to review the current beneficiaries of your life insurance and retirement accounts. Also consider that you may designate beneficiaries of your assets under Missouri statutes by employing the "Non-Probate Transfers Law". For example, Transfer on Death (T.O.D) or Payable on Death (P.O.D.), provisions may be used on your various banking and savings accounts, investments, and other assets. A Beneficiary Deed may also be used to specify a beneficiary for your real estate. Use of these "Non-Probate Transfers" will allow your assets to pass to your beneficiaries upon death without the need for probate.