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Articles >
Asset Protection > Article |
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Proper Estate Planning Documents May Be Worth Millions |
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By Ray Chodos and Adam Chodos, Esq., CPA |
 Wills, trusts, and the like are unpleasant subject matter that is usually
considered shortly before departing on vacation. Many of us do not have a
good understanding of what our documents call for, yet these documents
represent all that we possess for those we love the most. Often, when
wills are drawn the environment is uncomfortable and time inadequate to
consider how the world of our family would function without us.
Unfortunately some attorneys draw wills while not being tax expert, or
specialized in estates or trusts. When our attorney asks questions, we
answer, often without a full understanding of the ramification of our
reply, or alternative strategies. When we are given a draft to review,
there is little other than check the spelling of appointed persons that
we are fully qualified to review. The scope of this article seeks only to
disturb and provoke action that might otherwise have gone undone toward
realizing ones objectives through planning.
Wills
This document merely expresses our stated wishes at the time of death.
The probate process which includes the court's examination and
"processing" (probate) of our will determines if it is enforceable,
legal, and subject to challenge by heirs, disinherited family, creditors
or predators. This public process is not without cost, generally 5% or
so. This percentage is of the gross estate (not reduced for mortgages and
such). On a three million dollar estate, probate costs can translate to
$150,000. Essentially what happens is that the assets we owned during
life become transferred after our death to the heirs we or the court have
selected. That is where the probate expense for lawyers, appraisers,
accountants, and administration is consumed. What would happen if little
or no property needed to be transferred by will at death? Well, the
probate process would cost little to nothing, privacy would be
maintained, will contestability would be largely removed, and the cost of
probate would be saved for heirs to enjoy. In order to achieve such a
desirable result, we may wish to transfer title of our important assets
while we are among the living. The instrument we use is a "Revocable
Living Trust". A trust is simply an entity that contains assets to be
held for the benefit of beneficiaries. The rev trust will be designed to
have a manager called the trustee. We may be our own trustee while living
and competent to do so, when we are not able or alive, we have appointed
a replacement for ourselves. Our replacement trustee may dispose of the
assets at our passing in accordance with our wishes and mindful of the
circumstances of that period in time. We select the "pool" of
beneficiaries as well. While the probate process is no longer needed since
little or nothing will pass by our will, we should still have a will in
case any asset failed to be transferred by us to our rev trust. In the
event of our mental or physical incapacity the replacement trustee will
act according to our prescribed wishes and their own best judgment to
keep all we started going while we are not able. This step eliminates the
cost and discomfort of the family taking legal steps to appoint a
conservator and have a relative declared incompetent. It seems so
sensible, unfortunately most people don't know about revocable trusts or
use them.
Estate Transfer Tax
The federal government, as well as many states, levy estate taxes when
assets succeed to a second generation. The federal rate of tax on assets
above $675,000 is 37% rising to 55% on amounts over 3 million. This is no
doubt, the largest tax any of us will ever have the privilege of paying.
Since the first $675,000 is not taxed, why not gift it to children (or
even grandchildren) if you can do without it and avoid the estate tax as
well as the tax on the growth while younger generations hold it? A gift
of $675,000 during life could be worth an astounding $4,500,000 at 10%
compound twenty-five years later. In fact the scenario can be leveraged
with a gift of life insurance to reach $10,000,000. All this is possible
with no estate tax. Why don't more people who can afford to do so use
gifting?
Since estate tax is measured by the "fair market value" of an asset at
the time of death, why not see to it that the market value is discounted
by techniques allowed by law? Creating an entity, which has two forms of
ownership, one with a vote, the other without would reduce the market
value of the interest without a vote. Such an instrument is a "Limited
Partnership". By placing our business assets in a family limited
partnership (FLP) we can reduce the taxable value of our assets by as
much as 40% (varies with type of asset). This reduction in market value
saves us the tax in direct proportion to the discount. This may be worth
millions in saved taxes, and even more since our children will have the
funds to grow during their lifetimes rather than losing them to tax.
Life Insurance
This unique product is poorly understood as a tax tool and planning
device. Many of us think of life insurance to protect our dependants
while they are young and vulnerable. That of course is a basic and vital
application of life insurance. As we age and accumulate more assets, we
tend to think we can "self insure" for our income replacement needs. Of
course we can, but what about the estate tax? If we use our own money to
settle the estate tax, we need to create a fund to pay the tax on the
fund we set aside for tax. Simply put, the tax is taxable. A one million
dollar tax may cost our estate $1.5 million. How much could one million
of life insurance cost? A well-designed policy should cost less than 40
cents on the dollar total. Additionally, the policy will pay in cash; how
many of us keep 50% of our net worth in cash? The policy may be owned by
a special life insurance trust to avoid estate taxation, or our children
may own it. Once again we wonder why more families don't use the obvious
advantage over forced selling of businesses and other assets.
Summary
Not every attorney, accountant, or life insurance professional is skilled
and knowledgeable in advanced estate planning. For those fortunate enough
to have significant assets, locating and assembling such a team may reap
very large family benefits. |
 Explore
asset protection for my family |
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Ray Chodos and Adam Chodos, Esq., CPA are members of
the Wealth Preservation Group LLC, a Greenwich, Connecticut based planning
organization specializing in wealth preservation, business succession,
executive benefits, interacting with the legal and accounting communities.
[www.WealthPreserve.com] |
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Divorce and Your Finances – The 7 Most Costly Mistakes |
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year there are nearly 1 million divorces in the United States, or about
50% of all marriages1. The real tragedy, however, is the financial
devastation that occurs to many individuals after their divorce. |
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House rich, but cash poor? |
| For many senior homeowners, the
prospect of living a longer life only gets better with each new
advancement in medicine. But these medical "miracles" don't come
cheap, and the rising costs of institutional health care exceed even
the most aggressive inflation estimates. |
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How Being
At Fault While Not Financially Responsible Works |
| While sitting at a traffic light
waiting for the green light, you are slammed from the rear by a
drunk driver who never saw you and didn't even attempt to stop.
Clearly, you are an innocent victim with no fault in the accident. |
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