Estate planning is a complex process to navigate. John E. Hill, J.D., LL.M., president and director of the estate and business planning practice at Peachtree Planning Corporation, says an estate plan needs maintenance in order to work properly. Changes in your life and in estate tax laws affect whether you can preserve the maximum amount of wealth and pass it on to the intended beneficiaries.
“You might draft and execute a will and not look at it for 10 years,” he says. “In that time, you’ve bought, sold and exchanged property, had or adopted children, divorced or remarried. Unless you’re looking at that on a regular basis, the intent of the estate plan may be defeated.”
Smart Business learned more from Hill about how to create an effective estate plan.
What are some of the more common pitfalls of estate planning?
One of the biggest pitfalls is the failure to update legal documents: wills, trusts, powers of attorney and medical consent documents.
With respect to a will, the exclusion amounts — the amount you can pass down from one generation to the next — has increased from $675,000 to $3.5 million in the last eight years. Failure to take that into account can lead to some difficult problems, especially with second marriages.
Another risk is failure to own property in a manner that passes that property in an expected way. You could be the sole tenant, a joint tenant or a tenant-in-common, and how you own your property determines how it passes. Often, people aren’t aware that is the case. They think everything can be handled through a will. For example, if you owned a lake house and you wanted it to pass to your children in your will, but the deed says you own it jointly with your second wife or husband, it would pass to that person as opposed to going to the children.
For larger estates, another pitfall is the lack of liquidity to pay estate taxes. That is probably more evident than ever now, because if beneficiaries receive property at depressed prices, they don’t want to have to liquidate those items to pay an estate tax today. But they might be forced to do so because the estate tax is due nine months from the date of death.
How can you make sure your documents are up to date?
Meet with your advisers, whether it’s your financial adviser, CPA or attorney. First, make sure your documents are current, then make sure your property is owned in such a way that the estate plan works the way you want it to.
You might have a lawyer drafting documents who is not actually looking to see how the property is owned. So you need someone in that position to be a quarterback of the planning process to make sure that it is all coordinated.
What opportunities should investors be aware of?
The biggest advantage is that we’re in a low interest rate environment. The prevailing interest rate that is used in calculating several gift strategies is at a relatively low figure. This means certain gifting techniques are very useful at this point, such as grantor-retained trusts, charitable lead trusts and sales of property to defective trusts.
Without getting too technical, these are things that people should look at, along with the fact that we’re in a depressed market, both with stocks and bonds and real estate. It might be a good idea to transfer some of those to the next generation. Go ahead and gift it today rather than simply waiting, because these are historically low points, in terms of valuation.
How can they take advantage of these opportunities?
Everyone has the ability to transfer $1 million of property during their lifetime. They also have the ability to gift $13,000 to any amount of individuals each year. Today might be a good time to implement those gifts with property at relatively low values. You can gift a stock that’s worth $20 today, but that you think in three or four years will be worth $40. This assumes you have sufficient cash flow to live on for the rest of your life.
Are there any restrictions as to who can receive gifts?
Both types of gift are available to anyone. A husband and a wife can consent to one of them making a gift of their property as long as the other one signs a consent form. So if a husband has $26,000 in a checking account and wants to give it to a grandchild, he can transfer the whole $26,000 himself — he doesn’t have to divide it up to give $13,000 from him and $13,000 from his wife — but the spouse has to consent.
If the spouse fails to consent to her gift of $13,000, the donor will be giving the entire $26,000 himself, thereby reducing his $1 million lifetime amount. If you surpass the lifetime amount, you will then have to pay a gift tax.
John E. Hill, J.D., LL.M., is the president and director of the estate and business planning practice at Peachtree Planning Corp. Reach him at (404) 260-1616 or John.E.Hill@peachtreeplanning.com.