Estate Planning | Live a Life By Design

The Power of Ownership

Posted on September 10, 2021 by Jimmy J. Williams, CPA/PFS, CFP®

You have worked hard for many years to accumulate the assets you utilize to sustain your retirement. This balance sheet of tangible and intangible items may last beyond your needs. What are you to do with the remainder of this estate?

As the owner of the assets, you possess a tremendous power of control. You may have heard, as I did, that “you can’t control what happens after you die”. Of course, this is a false statement! To benefit those you love, it is important to properly describe beneficiaries and charities in your estate planning. But there is a simpler method of transitioning assets to your loved ones. The secret is proper asset titling.

Let’s assume you own a parcel of land and a home in fee simple title. The property has no mortgage or claims against it and you wish for your children to own the home after you die. Instead of probating the property as part of your estate, simply consider the retitling of the deed to the property. Depending on the state of domicile, or location, of the property, you may be able to transfer the property to your beneficiaries (i.e., kids or other loved ones) through the filing of a transfer on death deed.

This process is simple and effective. However, there are a few caveats to this type of transfer. For example, the beneficiaries named on the deed must convert the title to their own name(s) within 90 days of death or the beneficial statement of the deed is void. Most real estate in Oklahoma may be conveyed to beneficiaries in this manner.

Other assets such as bank accounts may be transitioned to beneficiaries in a similar manner. By placing a paid-on death designation on the account, upon your death, the named individual(s) will receive the balance of the account without the process of probate. Checking, savings, certificates of deposit and other banking accounts may be conveyed using this type of designation.

Your individual retirement account and Roth accounts may be transferred to your heirs by using properly prepared designation forms. These qualified accounts require the naming of beneficiaries when establishing the accounts. Should you not be clear on the person(s) you wish to leave the account at the time of funding and opening, many people simply leave the assets to their estate. In my humble opinion, this is the last option. If you were to prematurely die, the assets will be owned by your estate and many tax planning options are lost.

Other types of investment accounts may be conveyed with a transfer on death designation form. You may name as manner beneficiaries as you desire to receive a portion of the account upon your death.

Life insurance policies require a beneficiary to be stipulated when procuring the policy. One horror story comes to mind where an individual divorced later in life to marry a much younger woman. His wife of 39 years was his beneficiary when he purchased the policy a year after they were married. During the divorce the assets were separated and support was sought for the wife. He agreed to pay alimony for a set term of years to resolve further property division.

As part of the divorce agreement, the paid-up life insurance policy and its $2,000,000 death benefit would remain in his ownership. After marrying his new bride of 28 years of age only two months after the divorce decree was filed, the man dies of a heart attack. Thinking she had just become a millionaire; the new bride attempts to claim the death benefits of the life policy. To her surprise, and angst, her new husband had not changed his beneficiary on the life policy even though he had been advised by his financial advisor to do so. The moral of this story is to annually verify your beneficiary designations name those you truly wish to receive your assets. Meanwhile, the ex-wife is smiling all the way to the bank!

A best practice in September of each year is to review two tasks: 1) check your beneficiary designations on your financial and other assets; and 2) check the battery in your smoke detectors.

If your estate plans are not complete, or existent, seek out a CERTIFIED FINANCIAL PLANNER™ professional to help you plan for the best outcomes in your life. See you on the jogging trail!

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Estate Tax Changes May Affect You

Posted on April 22, 2021April 22, 2021 by Jimmy J. Williams, CPA/PFS, CFP®

Big projects and changes in the operations of government are always sought by new presidents with in their first one hundred days in office. President Biden is no exception to this trend.

However, one of the areas of change proposed by the new administration is estate taxation. Under current law, most citizens’ estates in the United States would be well under the exemption allowed of $11,700,000. For those whose estates exceed this exemption amount, the rate at which their estate value is taxed is 40%. The current law is set to “sunset” after 2025 and the exemption would be returned to $5.5 million which would subject many more estates to taxation.

Biden has proposed a significant reduction in the estate exemption to $3.5 million and a limit of $1,000,000 on lifetime transfers. To provide some historical context, when I began my career as a CPA, the estate exemption was $600,000. While seemingly low, it did require many families to liquidate assets of their estates to pay the assessed tax. There were exceptions to the $600,000 exemption for farms and other “family-owned” businesses.

In the proposal to reduce the estate tax exemption, the proposed lifetime transfers limit of $1,000,000 will require many families to perform considerable planning to minimize the tax burden caused by such a low threshold. Under current law, the lifetime transfers, called “inter vivos gifts”, would be exempt from tax up to the amount of the estate exemption of $11.7 million. By uncoupling the exemption and gift tax amounts, many families will reassess their gifting plans for the next generation.

One of the most significant changes in the proposed law is the removal of the “step-up” in basis doctrine allowed by law for more than 50 years. Many attempts have been made over the years to repeal this valuable tool for estate planners. To understand how drastic this change would be to most American families, let’s consider the family home being bequeathed to the children of a decedent. When the parents purchased the home and 640 acres in 1960, the price paid of $25,000 would be their basis in the property. However, during the period of ownership by the parents, natural resources and subsurface mineral deposits of a vast amount were discovered. The land is now worth $5 million (keep in mind this is meant to be an educational example). Under current law, the heirs could sell the property immediately after the death of the parents and receive $5 million tax-free. Fast forward to 2022, assuming Congress passed the bill requiring taxation on capital gains and the lowering of the estate tax exemption to $3.5 million, the heirs of the estate would receive only $4.4 million after the payment of estate tax. The capital gains assessed on the conveyance would be another $1,386,000 to be paid by the heirs upon sale of the property.

To summarize our very simple example, the total value of the property inherited would be $5,000,000. However, under the proposed law changes by the current administration of our government, total taxes in the amount of almost $2,000,000 would be assessed the transactions. Today, if this same scenario occurred, the family would be exempt from all estate and gift taxation as well as no capital gains tax producing a savings of $2,000,000 to the family.

Allow me to reminisce for a moment. In 2010, the United States had an unlimited estate exemption meaning any citizens dying in the year could pass all of their estate assets to their heirs without U.S. estate tax being assessed. The owner of the New York Yankees, George Steinbrenner, had an estimated net worth of $1.4 billion at the time of his death in 2010. His passing in 2010 enabled his heirs to receive his net worth without paying any estate tax to the United States.

This is the thought behind the removal of the “step-up” in basis doctrine and lowering of the estate tax exemption. However, many Americans who have worked diligently to provide for their families and became successful over time may now be caught in the net of taxation at a time they can least afford it. Most family-owned small businesses may be worth more than $3.5 million but lack the liquid assets to pay the tax burden. This scenario would require the sale of the company, or at least its assets, to pay the tax. This draconian approach to taxing the middle class will not bring much treasury to the coffers of the United States.

Estate laws are very complex. If you wish to maximize the amount of assets you wish your heirs to inherit, now is the time to create a plan. Seek out the advice to take advantage of opportunities to reduce the burden of taxation on your wealth. Contact a CPA and CERTIFIED FINANCIAL PLANNER™ professional to assist you in creating and maintaining a plan for your future. I’ll see you on the jogging trail!

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Proper Planning For Your Estate is Critical

Posted on May 20, 2019May 17, 2019 by Jimmy J. Williams, CPA/PFS, CFP®

“Should I have a trust? A will? Which is better for my heirs?” These are the types of questions many of our clients pose when we are planning for their estates. The short answers to these valid questions are: Maybe, maybe and depends.

Now that I have clearly confused you, this article will provide you a simple strategy for determining the most important documents to meet your estate planning needs. First, determine what you wish to happen with your estate after your death. Notice I stated the phrase “after your death” in the preceding sentence. The reason for this qualification is that we perform two type of estate planning for our clients: Inter Vivos Planning and Post-Mortem Planning.

During the phase of Inter Vivos Planning, we utilize tax-free gifting and charitable donations to accomplish a reduction of the estate or meet some other objectives. Inter Vivos is a Latin word that means “between two living persons”. Many people have heard of a Living Trust or Inter Vivos Trust. These documents are established while the trustor, the person establishing the trust, is living. If a trust is developed and funded after the individual dies, it is referred to as a Testamentary Trust. Don’t allow the terminology to confuse you. Either way these trusts function in the same manner – distributing your assets to a beneficiary of your choosing.

Post-Morten Planning requires additional thought and serves as strategy to reduce the estate from taxes or to direct trust distributions to other than those individuals listed by the decedent. For example, we utilize disclaimers to avoid estate assets from being received by named beneficiaries, if the person does not wish to receive the asset. Some instances may occur where the decedent, the person that died, failed to update their documents prior to death and their family dynamic may have changed.

Trusts also serve another purpose for families – privacy. If someone dies with a Last Will & Testament, the document must be subjected to the district court’s jurisdiction to provide the recipients marketable title to property, release of any liens from taxes and all potential heirs have been given notice of the right to protest the estate administration. By utilizing a trust, the decedent does not require, in most cases, the decision of the court to disburse the estate assets and the document maintains its private nature with only the filing of a Memorandum of Trust if real estate is owned by the decedent.

We have experienced many different scenarios for families during our 30 years as a financial planner. Do not assume there is a “cookie cutter” approach. This is an area of law that can be very complicated and requires significant time to cure problems if the trust is not funded properly, titles do not reflect the correct ownership or the trust is defective in language.

Your lifetime of assets should be transferred to your intended heirs or charities in a manner that is cost-effective, tax-efficient and private. We provide proactive planning for our clients with estate concerns and work with estate attorneys to guide you through the process efficiently. Have you reviewed your documents lately? If you want peace of mind, spend a few minutes each year to confirm your documents are current. Seek out a CPA and Certified Financial Planner^TM practitioner to assure your family that necessary steps are taken to protect your family’s legacy.