As advisors, we are often called upon to assist clients when a death occurs in their family. Based on what we have learned from these experiences, we want to help our clients understand that everyone needs to plan ahead for their death or incapacity, regardless of their level of wealth. Your clients should have the following documents to protect themselves and their families:
o Will and/or trust agreement
o Declaration of a desire for a natural death (often referred to as a living will)
o Durable financial power of attorney (addresses financial issues in the event your client is incapacitated)
o Health care power of attorney (addresses medical decisions in the event your client is incapacitated)
Having a will allows your client to legally control who gets their assets (heirs), who will care for their children (guardians), who will do the paperwork after they're gone (executor), and who will watch over their money (trustee). If your client doesn't have a will, the state they lived in will make these decisions for them after they've died. So if they want a say in how their assets will be distributed, they should get a will soon. And if they do have a will, make sure it's up to date.
While the estate planning process may seem unpleasant, your client's family will have to address their estate administration whether your client has planned ahead or not. And it is much better for them to be prepared than for their family to have to work with an outdated plan, or worse, for the state intestacy laws to determine how the assets are divided if your client has no plan in place.
Since we know death is one of life's certainties, taxes must also be another crucial topic when considering your client's estate plan. In order to determine if their estate might be subject to estate tax, you must first determine what would be included in their "taxable estate." Basically, anything they own or have the right to control is in their estate, such as:
o Any bank or financial accounts in their name
o Stocks, bonds, and mutual funds
o Assets that they share ownership in joint tenancy
o Their retirement accounts
o The face value of the life insurance they own
o The value of their annuity if there is a beneficiary designation
o Stock options
o Business interests
o Debts owed to them
o Miscellaneous items, such as automobiles, household furnishings, jewelry, furs, collectibles, etc.
Clients may also deduct any debts they owe at the time of their death to arrive at their "taxable estate."
If their estate value tops $2 million in 2006, their heirs may be subject to federal estate tax. The amount of assets that constitute a taxable estate will rise during the next few years, topping out at $3.5 million in 2009. The estate tax is set to "sunset" in 2010, meaning that if your client passes away in 2010, under current law there would be no federal estate tax due, no matter how large their estate. For years 2011 and beyond, however, the amount that can pass free of federal estate tax becomes $1 million.
In addition to estate documents, it is also important to address insurance needs. Life, disability, and long term care policies can help protect a family's financial well-being. If your client doesn't have these types of insurance, if they are unsure whether they need additional coverage, or if they have policies that were purchased some time ago, they should have a review in light of their current needs. Over the years, there have been many families who have been able to maintain and pass on legacies, as well as some families who have needlessly lost large portions of their wealth because of a lack of planning.
You may be aware that there is legislation afoot to repeal the estate tax. While this is a possibility, we encourage you and your clients to not "wait and see." Congress may take a good deal of time to legislate the issue. Aside from the avoidance of estate tax, there are many other compelling reasons for your clients to plan their estate. They include:
o Planning for disabled relatives
o Increasing the efficiency of estate administration (which often lowers the costs)
o Protecting family members who may be taken advantage of when inheriting assets
o Making certain that assets pass to those your clients choose (rather than allowing state law to determine their heirs)
o Passing sentimental items to specific family members
And if your client has already been through the estate planning process, now is a good time to review their documents and determine how the current laws may affect their heirs.
Richard Dail, CPA is a tax partner at Cherry, Bekaert, & Holland LLP and has more than 30 years of estate planning experience. He can be reached at rdail@cbh.com or 757-456-2400.
