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 Estate Planning: Is It Really Worth It? "$5,000 for an estate plan!! Is it really worth it?" That is a question that we hear frequently. And the answer depends upon the individual needs of you and your family. Let’s make some assumptions: 1. You are 57 and your spouse is 55. Neither of you have any significant health concerns. Statistically, you can each expect to live another 22 and 24 years, respectively. You have two teenage children. 2. You and your spouse are fortunate and have above average assets. You have a house, bank accounts, investment/savings accounts, other investments, retirement accounts (IRA, 401K, SEPs), life insurance, etc. Total value of your combined gross estate is about $1.2 million. 3. It is recommended that your new estate plan consist of a joint revocable trust, two wills, two durable general powers of attorney and living wills. The joint revocable trust provides that on the death of the first spouse, a portion of the assets are to be held in trust for the benefit of the surviving spouse. Discretionary distributions of income and principal are to be made for the benefit of the surviving spouse during life, and then for the benefit of the children until each reaches age 40. 4. You die unexpectedly at the age of 67, and your spouse passes away at the age of 79. 5. On the death of the first spouse, the combined gross estate has grown to $2.6 million (assumes an annual growth rate of 8% for 10 years). 6. On the death of the surviving spouse, the combined gross estate is estimated to be $3,960,000. This amount assumes an annual growth rate of 8% and distributions to the surviving spouse of $100,000 per year, after income taxes, for 14 years. So far there has been no discussion of the benefits of estate planning --- we have just been setting the stage. Naturally, some of the benefits of an estate plan are hard to quantify. For example, 1. The benefit of having everything pre-planned and well organized. This will help your surviving spouse, and later your children, in dealing with your affairs. Granted a lot can change between now and then, and you will probably want to review things from time to time to keep everything organized. 2. There is a lot of comfort to know that the money that is in trust for the surviving spouse is protected somewhat from future creditors and second spouses, and will pass to your children. 3. There is also the benefit of having the money in trust for children instead of having it distributed out-right to them at the age of 18 should you and your spouse pass away earlier than expected. The trust for their benefit provides a lot of flexibility over distributions. So although the money is "locked up in trust," the trustee can make discretionary distributions to the children as the trustee determines to be necessary or appropriate for their benefit. 4. There are many other benefits which may be unique to your situation, like dealing with business interests, special needs, unique assets, etc. A good estate plan can also save significant taxes. Although tax savings may not benefit either of you during your life, it will benefit your children — after all, would you prefer your money go to the IRS or to your family? Here is a summary of the tax benefits: 1. There will be less income tax paid on those assets sold by your surviving spouse because the assets held by the joint revocable trust receive an adjustment in basis to the asset’s fair market value on the death of the first spouse. This is the benefit of owning assets under the Alaska community property law. 2. Assume that you do no estate planning to minimize estate taxes. On the death of the first spouse all assets will pass outright to the surviving spouse free of estate taxes (assuming the surviving spouse is a U.S. citizen). On the death of the surviving spouse, the federal estate tax is approximately $1,473,000. This leaves $2,487,000 for distribution to your children. 3. In the alternative, assume that you followed the recommendations for a new estate plan. On the death of the first spouse, the maximum amount that can pass estate tax free ($1,000,000) is placed into a credit shelter trust, with the balance passing outright to the surviving spouse. On the death of the surviving spouse, the federal estate tax would be approximately $753,140. This leaves $3,206,000 to be distributed to your children. 4. Therefore, a properly prepared estate plan might save over $719,000, which represents a 14,280% return on investment. (Warren Buffett would be proud of you!) 5. But let’s take this one step further. Let’s say your son dies after the two of you but before the age of 40 and he leaves two surviving children (your grandchildren). Your son’s share of the inheritance continues to be held in trust until those two grandchildren attain the age of 21 (in another 12 years). By that time, your son’s share of his inheritance has grown to $4.2 million (assumes an annual growth rate of 8% for 12 years). 6. This $4.2 million passes transfer tax free to your two grandchildren. Because the money is held in a trust, it is not subject to estate taxes on your son’s death, which results in a minimum estate tax savings of $345,000. Further, the money that is distributed to the two grandchildren would not be subject to generation skipping taxes (assuming the trust is exempt from GST), thus saving an additional $2,300,000, Therefore, the total savings would be at least $2,645,000. There are numerous hard-to-measure benefits to having a well organized estate plan. In addition, the transfer tax savings of a properly planned estate are significant ---- over $700,000 in the above example. So is it worth it? Think of it like this: by investing $5,000 today, your family gets $719,000 in return ---- which means your investment has grown at over 23% per year. Someone once said that the estate tax is a voluntary tax. To some extent, that is true. Congress has provided us with laws that allow each of us to pay less estate tax than is required. But you have to plan for it and take the action now. Clearly the choice is yours. Justice Learned Hand, one of the most famous of all U.S. judges, once said: ". . . Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes."  The above material provides an example of the possible estate tax savings that can be achieved from a properly planned estate. It is given for illustrative purposes only and the actual results will be different depending on your specific facts, family needs, assets and overall goals. It is very important that you consult a qualified attorney that emphasizes estate planning in his or her practice. Too frequently the attorney is consulted after a transfer has been made, a life insurance policy has been applied for and purchased, or a spouse has already passed away. This often results in additional taxes and/or fees incurred to correct the problems created. Top of this Page |
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