An Expense Worth Considering (But Often Overlooked)

June 22, 2016
H. William Wolfson, DC, MS, MPASSM, CFP

Nobody likes to think about their eventual demise, but those willing to plan ahead and get their estates in order will save their friends and families considerable headaches.

We never know for sure when that ill-fated day will come. For all of us, death is the finality of life. However, for many families and beneficiaries it is just the beginning of a potentially long and arduous process of an estate’s dissolution, transfer, or continuance. Some leave it to remaining family members to figure it all out, with potentially disastrous results—finding assets and liquidity challenges, tax and legal issues, arguments over who gets what, custodial concerns, and more. Most estate trepidations can be allayed if prepared for in advance of that inevitable day. The process can be seamless and reconciled in a reasonable time frame and with the decedent’s intended results.

You Need a Will

A will directs how assets should be disposed of or transferred and who will be named guardian and custodian of children and assets. A will allows a named personal representative to obtain the estate’s asset and debt values, pay creditors and taxes due, take appropriate deductions, transfer assets and property to designated beneficiaries, and if necessary, conclude the decedent’s estate under the direction of a probate court. Regrettably, the process of probating a will can be expensive and time consuming. Each state is responsible for this process and the costs can vary greatly. It all depends on where the decedent established a primary domicile, but this does not preclude additional states from getting involved if property exists in their respective state. This can substantially add to costs, thereby reducing the net estate value to beneficiaries. Additionally, probate is open to public scrutiny and potential legal challenges.

Consulting an attorney with knowledge of estate planning can help minimize the negative ramifications of an estate’s ultimate disposition, including curtailing the cost and process of probate. Will substitutes should be considered if avoiding probate is desired. Payable or transfer-on-death designations to specifically named beneficiaries from investment and bank accounts are not subject to probate or public scrutiny. The use of specific or special trusts can allow for certain transfers or purposes and avoid the probate process. States have different rules on which and how assets are probated.

Maximizing Your Estate Exemption

The use of certain business tax structures (S-corporation, LLC, LLP, FLP, etc.) can prove to be cost effective and tax saving, and allow transfers to intended interested parties or beneficiaries. In addition, high-net-worth families have used family limited partnerships (FLP) or family limited liability companies (FLLC). However, according to The New York Times, “The Internal Revenue Service is about to toughen the rules on a type of investment vehicle [FLP and FLLC] that has been abused by some very wealthy families to avoid millions of dollars in taxes.”

Reducing Your Taxable Estate

As of 2016, “An individual can leave $5.45 million to heirs and pay no federal estate or gift tax. A married couple will be able to shield $10.9 million from federal estate and gift taxes.” An unlimited marital deduction exists between spouses. If elected timely and correctly, the surviving spouse may benefit from any unused portion of the decedent’s estate exemption. However, special IRS rules exist for non-residents and non-citizens.

A goal of reducing the overall gross estate value can be accomplished via specific gifting which does not reduce the lifetime estate exemption amount. According to the IRS, the following gifts are not taxable gifts: gifts to anyone of an individual’s choosing and if not more than the annual exclusion for the calendar year (ie, $14,000), direct payments to a school or healthcare provider of service (tuition or medical expenses you pay on behalf of someone), gifts to your spouse, or gifts to a political organization for its use. Life insurance held in a properly executed irrevocable life insurance trust allows for tax-free distributions to beneficiaries and remains outside the decedent’s gross estate.

The IRS Forms

The myriad and complexity of tax forms and filing deadlines, rules, and regulations are often overwhelming and cumbersome. It’s critical to pay close attention and file the appropriate forms in a timely manner. According to the IRS, “the estate tax return is due nine months after the date of death. A six-month extension is available if requested prior to the due date and the estimated correct amount of tax is paid before the due date.”

A Coordinated Team Makes the Difference

Who will take the lead in coordinating the efficient gathering, analyzing, paying, tax efficiency maximization, and conclusion of the estate process? The appointed personal representative has the responsibility to complete the task of estate resolution and often looks to professionals knowledgeable in navigating the process to finality and with minimal stress and potential challenges.

The Certified Financial Planner (CFP) professional or financial planner is often an individual’s first contact for prudent plan development and asset allocation with the different and varying stages of life’s events. It is also the CFP who assists family members in managing assets before and after distribution. The CFP is often integral during the estate process and helps coordinate amongst the fellow professionals to ensure a timely and efficient conclusion.

The CPA or accountant is responsible for ensuring gross estate calculations are correct after receiving all the pertinent data (bank, investment, and retirement statements; insurance values; and appraisals of real estate, jewelry, art, business, etc.) from ancillary sources (bankers, investment brokers, appraisers, insurance agents, etc.) and filing the appropriate tax forms.

The estate attorney, after producing the will and trust documents, is responsible to effectively handle any legal issues, including probate. Equally important you must ensure that your family or other interested parties know your final wishes and know where to find your will and trust information. Generally, the estate attorney who drafted these documents maintains the original and supplies a copy to the client.

Frank and honest communication with those you care about should happen while you are alive and competent. Any mortal demise is traumatic to the people who care about you. However, compounding their grief by causing a treasure hunt is unacceptable. The reality of not knowing and being able to ascertain the full estate value may preclude beneficiaries and heirs from their rightful share you have worked diligently to provide.

The Finality of it All

Remember the basic rule of having an emergency fund to pay expenses of six months or more? Once deceased, your emergencies end but a family’s can begin. A family requires unfettered access to cash for immediate use to pay upcoming and unexpected expenses. Any life insurance disbursements or bank and investment assets can take time and paperwork, or worse, court permission. One more often-overlooked item to consider is how you will pay for your burial or cremation and where will you be interned.

An Expense Worth Considering But Often Overlooked

Death can be expensive. Most of us avoid contemplating this morbid inevitability, but being realistic can be the difference between burdening your loved ones at their most vulnerable and emotional time or allowing them to grieve in peace. Planning and choosing the right professionals can make the difference in minimizing the potential chaotic scenario that befalls those who are not prepared.

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