Due to Congress's failure last year to pass a revised version of the 2001 estate tax bill or to extend 2009's rules of a $3.5 million exemption and 45% estate tax, the estate tax law expired on January 1. Thus, with the repeal (for now) of the federal estate tax for 2010, it is widely assumed that the estates of high net worth Americans who die this year will be exempt from estate taxation.
Not so fast. While that might be true for some, it is also true that beneficiaries who inherit appreciated assets this year may now face a capital gains tax.
Here’s why. When the estate tax law expired, so did a provision that allowed assets to be "stepped up" to their date-of-death value at the passing of the owner, thus avoiding the levying of a capital gains tax on the appreciation of those assets. Therefore, while the current law has no estate tax, it does tax assets that have appreciated above a $1.3 million exemption when sold by heirs.
This peculiar situation poses some challenges with respect to estate planning. While the demise of the 45% estate tax certainly would help some families more than a 15% capital gains tax would hurt them, for many other families the opposite is true.
According to the Tax Policy Center, this change will negatively affect the families of at least 50,000 taxpayers who die this year. In contrast, the old law affected only about 15,000 estates per year.
This fiendishly complex issue is discussed in a February 13, 2010, Wall Street Journal article, "Why No Estate Tax Could Be a Killer," that includes estimates showing who would be better off under last year's law versus this year's system. The author determined that heirs of estates with assets totaling between $1.3 and $4.3 million would have been better off last year, while those with larger estates will fare better this year.
This is a very interesting argument that is causing a lot of discussion. If your estate includes any low-basis assets, such as stocks, real estate or a family business, you should review your asset situation with your estate planning attorney to gain a clearer notion of how the current law will affect you. While this situation remains unresolved, you should avoid taking any irrevocable actions, such as distributing or selling major assets.
March 23, 2010
Selecting the Guardian for a Minor Child
Who would you like to be the guardians of your young children if you pass away?
Nothing will stop a good financial, estate, or life insurance plan dead in its tracks quicker than the following question: “Who would you like to be the guardians of your young children if you pass away?”
Squealing brakes. Usually, the parents just look at each other with terror and confusion. In many ways, it's an overwhelming thought and the ultimate conversation stopper. This is where parents really need help from their advisors. Few couples can think through this alone and if they try, they simply stop planning. As a result, they leave their children — the most important thing in the world to them — at risk. No judge in the world wants to appoint a guardian for a minor child; they would rather have the decision made before the case gets before them.
The “least evil” guardian. Parents usually procrastinate choosing a guardian because they're looking for the best one. Considering that parenting is usually a mix of elation, love, guilt, and self-loathing, all at the same time, it's hard to find someone who would be ideal to replace you. Where will you find someone who'll love your children like Mother Theresa would, while investing like Warren Buffett? The answer, of course, is that you never will.
The first thing we suggest is to divide the responsibilities. First, choose someone to raise the children (the guardian). Then, select someone else to invest the money (the trustee). The guardian's job is to raise the children until they reach 18. Once they reach this age, the children, in theory, are adult enough to make their own decisions.
But how do you choose among all the different candidates? The best guardian is the “least evil” one. This is the person among all your client's family and friends, who would never live up to the ideal standards of Mother Theresa and Warren Buffet, but would raise young children better than anyone else.
Benefits of a trust. The trustee can be a family member, or an independent third party like a trust company. Its job is to manage the investments for the children. It's important to remember that, while the children are adults at age 18, a trust can be structured to last longer than the children's lifetimes. This provides a tremendous amount of flexibility to parents when considering how to leave money to their offspring. They don't need to give a lump sum distribution at age 18. A trust, therefore, is the preferred estate planning tool in many cases.
But it also begs the question, “Who should be the trustee - the “Warren Buffett” - for the kids?” Who is that special person who can profitably invest money for your heirs with a long-term perspective? It's a crucial decision.
Nothing will stop a good financial, estate, or life insurance plan dead in its tracks quicker than the following question: “Who would you like to be the guardians of your young children if you pass away?”
Squealing brakes. Usually, the parents just look at each other with terror and confusion. In many ways, it's an overwhelming thought and the ultimate conversation stopper. This is where parents really need help from their advisors. Few couples can think through this alone and if they try, they simply stop planning. As a result, they leave their children — the most important thing in the world to them — at risk. No judge in the world wants to appoint a guardian for a minor child; they would rather have the decision made before the case gets before them.
The “least evil” guardian. Parents usually procrastinate choosing a guardian because they're looking for the best one. Considering that parenting is usually a mix of elation, love, guilt, and self-loathing, all at the same time, it's hard to find someone who would be ideal to replace you. Where will you find someone who'll love your children like Mother Theresa would, while investing like Warren Buffett? The answer, of course, is that you never will.
The first thing we suggest is to divide the responsibilities. First, choose someone to raise the children (the guardian). Then, select someone else to invest the money (the trustee). The guardian's job is to raise the children until they reach 18. Once they reach this age, the children, in theory, are adult enough to make their own decisions.
But how do you choose among all the different candidates? The best guardian is the “least evil” one. This is the person among all your client's family and friends, who would never live up to the ideal standards of Mother Theresa and Warren Buffet, but would raise young children better than anyone else.
Benefits of a trust. The trustee can be a family member, or an independent third party like a trust company. Its job is to manage the investments for the children. It's important to remember that, while the children are adults at age 18, a trust can be structured to last longer than the children's lifetimes. This provides a tremendous amount of flexibility to parents when considering how to leave money to their offspring. They don't need to give a lump sum distribution at age 18. A trust, therefore, is the preferred estate planning tool in many cases.
But it also begs the question, “Who should be the trustee - the “Warren Buffett” - for the kids?” Who is that special person who can profitably invest money for your heirs with a long-term perspective? It's a crucial decision.
Naming a Guardian for Your Children: Six Common Mistakes
If you have named guardians for their kids, you may have made one of these six common mistakes:
You may have named a couple to act as guardians, but you have not indicated what should happen if the couple broke up or one of the spouses died. This means your kids could end up in the care of someone you did not choose.
You may not have named enough alternates to serve if your first choice cannot serve.
You may have considered financial resources of potential guardians when deciding who should raise your children. Your guardians do not have to also be financial decision-makers for your kids; your guardians are the people who will be in charge of your kids' emotional, spiritual and physical well-being – not necessarily their money. It's your responsibility to leave enough money behind to take care of your kids, either through savings or life insurance. You can name someone other than your guardians to take care of that money if the best-choice guardians are not good with money.
You may have not provided for someone to take care of the money you are leaving behind. That means your money could go outright to your kids at 18 – unprotected.
You probably named only long-term care guardians and did not make any arrangements for the short-term care of your kids if you were in an accident. This means your kids could be taken out of your home and into the care of strangers until the authorities could figure out what to do.
You probably did not exclude anyone who might challenge your decisions or who you know you would never want raising your kids.
The good news: Avoiding these mistakes is easy when you have the right guidance.
You may have named a couple to act as guardians, but you have not indicated what should happen if the couple broke up or one of the spouses died. This means your kids could end up in the care of someone you did not choose.
You may not have named enough alternates to serve if your first choice cannot serve.
You may have considered financial resources of potential guardians when deciding who should raise your children. Your guardians do not have to also be financial decision-makers for your kids; your guardians are the people who will be in charge of your kids' emotional, spiritual and physical well-being – not necessarily their money. It's your responsibility to leave enough money behind to take care of your kids, either through savings or life insurance. You can name someone other than your guardians to take care of that money if the best-choice guardians are not good with money.
You may have not provided for someone to take care of the money you are leaving behind. That means your money could go outright to your kids at 18 – unprotected.
You probably named only long-term care guardians and did not make any arrangements for the short-term care of your kids if you were in an accident. This means your kids could be taken out of your home and into the care of strangers until the authorities could figure out what to do.
You probably did not exclude anyone who might challenge your decisions or who you know you would never want raising your kids.
The good news: Avoiding these mistakes is easy when you have the right guidance.
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