Don’t Get Stuck With a Stupid Tax

Have you ever heard the phrase, “stupid tax”? I hate paying a stupid tax, because it’s always something that could have been avoided.

A few years ago my wife and I went with my parents to see an Illini basketball game in Champaign. After eating at the Ribeye on Neil Street (good food!), I ran through the snow to get the car. As I approached the car I had a sinking feeling.

I had forgotten the tickets. 

Thankfully, the box office was able to reissue forgotten season tickets, but I had to pay a stupid tax of $5 for every ticket being replaced!

We all get stuck paying a stupid tax every now and then. A few dollars isn’t bad as far as a stupid tax is concerned, but when it comes to estate planning, mistakes can be very costly. One of my primary goals is to help you and your family avoid paying any stupid taxes by thoroughly thinking through things and planning ahead.

Recently, a younger high profile celebrity died without thinking through what would happen to his estate if he suddenly passed away. His estate ended up paying a $12 million stupid tax. While most people won’t make that big of a mistake when it comes to planning, we see people all the time who did not properly plan, and therefore, end up owing a stupid tax. And the most frustrating part? It could have been avoided.

If you’re not sure whether your estate will be slapped with a stupid tax, we encourage you to give us a call at 217-726-9200 or attend an upcoming workshop on estate planning. Wills & Trusts: How to Get Started is a great way to learn more about effective planning.

By the Numbers: A Look Behind the Scenes at Edwards Group

5 of 5 The number of Medicaid applications approved for our clients in the past 5 months. A perfect record! Giving peace of mind to 5 families, despite some complex situations requiring creative (but totally legal) strategies.

43 The number of hours Laura spent on a recent Medicaid application. Medicaid apps have plenty of potential pitfalls, plus they require old fashioned hard work to sort out 3 years of financial records showing everything that has happened.

52 The number of families currently enrolled in our Dynasty Membership Program. These families have an “extended warranty” on their estate plans. As a member, they get our help and reminders about keeping their plan up to date.

98% The percentage of Dynasty members in 2010 who renewed for 2011. Actually, this was a little drop, after having 100% renewals the prior year.

6 The number of Edwards Group employees after the addition of Nancy Bauer as Assistant Asset Coordinator. She will work alongside Laura to keep our clients organized and their assets funded to coordinate with their estate plan.

These are a few of our numbers. What are your numbers?

  1. How many years has it been since you updated your will?
  2. How much estate tax with you face at your death?
  3. Will your family know what number to call if something happens to you?
  4. If you need nursing home care, how much of your savings will have to be spent on it?

If you’re not sure of these numbers, sign up for a Long Term Care Essentials workshop or call us at 217-726-9200 to set an initial meeting with Dave.

Estate Tax Update: What the Changes Mean for You

It’s been a busy couple of weeks with estate tax changes — both state and federal. I spent last week at what some consider to be the Superbowl of estate planning. While at the Heckerling Institute on Estate Planning in Orlando, (not heckling as in what I do when Illinois plays Michigan, but Heckerling, as in Philip Heckerling, a long-time University of Miami law professor) I listened to top experts discuss the newest tax laws. Here’s my two-minute recap:

  • Cuts in D.C. New federal law allows the transfer of $5 million without being subject to the estate tax. Without Congress’ action, it would have been just $1 million in 2011.
  • Increase in Springfield. The Illinois estate tax is back for estates over $2 million. So, it is now possible for someone who may not owe federal estate taxes to owe the state version.
  • Ticking Clock. The renewal of the federal tax cut ends in 2 years. So, in 2013, estates over $1 million will face an increased tax unless Congress acts.
  • Portable? One part of the federal law is something new. It’s called “portability” of the estate tax exemption. (I like to call it a “coupon.”) Basically, the $5 million coupon can now be transferred to a spouse if not used. This means that a widow can use her $5 million coupon plus her deceased husband’s $5 million coupon, making that a total of $10 million that she can pass on without tax. Congress said it included portability to help people avoid “complicated planning.” We’ll see how that plays out, because the transfer is not automatic. When the first spouse dies, the spouse left behind must still take legal steps to transfer the “coupon.”
  • Illinois “coupon” is not portable. Unlike new federal law, the Illinois $2 million limit can’t be transferred to a spouse (so surviving spouse only has $2 million coupon, not twice that). To use both coupons, you must do planning prior to the first spouse’s death by having your plan leave assets directly to the kids or to a Family Trust (also called “Credit Shelter Trust” or “A-B Trust”) for the spouse to use.
  • It only counts when you die. What the law says now doesn’t matter unless you pass away in 2011 or 2012. What does matter is what the law says when you pass away. Who knows if taxes will be higher or lower then?

SO, WHAT SHOULD YOU DO ABOUT YOUR PLAN? Here are some tips:

  1. Stick with the basics. Nothing Congress can do will change the basics. Regardless of what Congress does, you still need to update your legal documents, keep your assets organized, and have conversations with your family about what is most important to you.
  2. Don’t let Congress do your planning for you. You don’t want a knee jerk reaction whenever Congress does something. Instead, focus on what you want to accomplish. Of course you want to save taxes, but what ELSE do you want? How do you hope your plan will improve lives or impact others?
  3. Don’t do it alone. Too many attorneys are transactional – they draft a document and their job is done. To respond to these changing times, you need an ongoing attorney relationship and a system to keep your plan up to date. Our clients rely on our Dynasty Membership Program to let them know when updates are needed.

To learn more about taxes and estate planning, check out the “Tax” section of our website.

Planning with Life Insurance

We often use life insurance as a tool in helping clients. Life insurance is important in many estate-planning situations, such as the following:

  1. A young family. To help raise the kids and get them through college if a young parent dies.
  2. Business owners. A buy-sell agreement between partners in a business is important. But the agreement may not work without some cash to pay off the owner’s family. Life insurance helps provide that cash.
  3. Blended families. In a 2nd marriage with a new baby? But the husband already has grown children? Life insurance allows him to leave funds to his older children at his death, but still provide for the new baby and his new wife.
  4. Estate taxes. For our clients who are concerned about estate tax, life insurance is almost always considered in reducing it. Why? Because it gives more leverage. For instance, you can give $13,000 to your child (without any gift tax liability). However, if you instead use the same funds through a life insurance trust, that money may buy $1 million or more in death benefits. Proper planning will use pennies on the dollar to transfer money to your family without estate taxes.

QUICK TIP: If you have an old life insurance policy, you should consider having your financial advisor review it. You can probably get a better policy now. (One with more death benefit and a lower premium.) Why? People are living longer than they were 10, 20 or 30 years ago. So, that makes life insurance cheaper.

WARNING: You may have heard that life insurance is tax-free. Life insurance benefits are free from INCOME TAX. However, they will be subject to ESTATE TAXES at your death. If you are concerned about estate taxes, then more life insurance will only make the problem worse. There are specific estate tax planning strategies that we can use to keep the life insurance out of your estate.

Need to have your plan reviewed? Do you know whether your plan has adequately considered life insurance options along with the legal strategies? Call us to set an appointment at 217-726-9200. We will send you our Personal Information Form to fill out and return prior to your meeting. At our first meeting, we will discuss your family’s situation, what planning options may be best, and what it would cost to develop a comprehensive plan.

Brand new to planning and not sure how life insurance could impact your plan or family? Make plans to attend one of our upcoming workshops, Wills & Trusts: How to Get Started. At this 1.5-hour workshop you’ll learn about 6 common pitfalls of planning, which of these pitfalls are a risk to you and your family, and what you need to do to make sure you don’t leave a mess for your loved ones. Call us at 217-726-9200 to RSVP for the workshop.

So How Will the Election Impact Estate Taxes?

Remember, if Congress does not act in the next few weeks, then on January 1, estate taxes will kick in for anyone leaving more than $1 million, with a top tax rate of 55%. Will the new Republican majority in the House make a difference?

1. The election did sweep more anti-estate tax Congressmen into office. But even after the election, there are still fewer estate tax foes than there were under President Bush. And, under President Bush, they were unable to pass any estate tax repeal. Read more about that here.

2. Congress is good at doing nothing! 10 years have passed since the Bush tax cuts. No permanent fix to the estate tax has been done. Even in 2010, when billionaires are dying and the IRS is missing out on its cut, Congress did nothing.

3. Gridlock, anyone? Let’s see, Republicans have a big majority in the house, Democrats have a small majority in the Senate. Getting anything done through both houses will require compromise. What are the odds of that? In one blogger’s straw poll of estate planning professionals, 68% thought Congress would do nothing and let the estate tax come back. “Congress is good at doing nothing.”

4. Many newly elected officials are touting fiscal responsibility. On the Taxes Blog, Kay Bell says:

As much fun as some lawmakers have chanting ‘Kill the death tax,’ the levy still brings in a lot of tax money. And the 112th Congress will contain a lot of folks who won their seats by promising to reduce the deficit.

If members of Congress are forced to choose between keeping tax rates low for the living or taxing the estates of the dearly departed, I’m putting my money on laws that will benefit the taxpayers who will still be around to vote again in the next election.

5. What are you waiting for? Some have waited to do planning to see what Congress does. 10 years of waiting and no progress! You never know what year your number will be up. Waiting? It’s too risky.

So what do you do?

  • Decide what your tax risk is. Most people’s net worth adds up to more than they think. Gather all your asset information and then review your goals.
  • Look at your risk uppers or downers. Do you have things that increase the risk? (Liquid assets such as a family business, farmland or growing assets.) Or do you have goals that decrease your risk? The more you plan to give to charity, the less you will face in estate tax.
  • Have an experienced estate planning attorney (like me!) review your plan for the starting points (credit-shelter or “AB trust”) as well as help you consider other tax savings options. Get a 2nd opinion, especially if your current attorney is not communicating with you about the looming tax changes.

Your Bucket List for Estate Planning: Why a Trust Might Be Right for You

A recent movie with Morgan Freeman and Jack Nicholson inspired a lot of people to think about their bucket list – the things they would like to do before they die. While a trip around the world in a sailboat may seem a lot more exciting and glamorous than estate planning, thinking about what you want at the end of your life financially, and for those you love, can be even more important than achieving your bucket list. Join me as we explore a different kind of bucket list – one that will insure your loved ones, and the things that you’ve worked so hard for, are protected.

What is a trust?
When most people hear the word “trust,” they probably think of families like the Vanderbilts or Hiltons, but trusts are not just for the ultra wealthy. Established during the Crusades in the 12th and 13th centuries to protect the rights of landowners while away on their journey to the Middle East, trusts are still relevant and vitally important to the work I do everyday in helping my clients achieve their goals. You needn’t be a Rockefeller or a wealthy Englishman to benefit from the level of protection that trusts can offer in our modern life.

Why are trusts important?
I want you to think of a trust as a bucket. And what are buckets good for? They are helpful to put stuff in. When you create a trust, you are in essence creating a legal “bucket.” By placing assets like houses, vehicles, timeshares and farmland into that trust “bucket,” you are insuring that those assets will be managed according to your wishes, which will be written in the trust agreement by you and your legal advisor. Unlike a will, trusts can help protect and manage assets while you are still alive, but disabled in some regard.

How are trusts used?
So, how do you put stuff into the trust bucket? By directing assets into it, such as retitling bank or investment accounts, doing a deed to your house or farm, or changing beneficiary designations on life insurance. For everything that is in the trust bucket, you leave a set of instructions written in the trust agreement. You also name someone to carry out those instructions. That person (or bank or trust company) is called the trustee. The person you choose as trustee to manage your trust “bucket” has a fiduciary duty, which is one of the highest duties in the law, to carry out your wishes and do what is best for you – not what is best for them. They have to act in your best interest. If they don’t act properly, they can be taken to court.

The most important thing for your plan is to think about what you want to accomplish. What are your goals – for yourself and your family? Once we choose the goals (and I help clients do this nearly everyday), then we can see what tools will best accomplish those goals. A trust can often be the best tool to carry out goals such as:

  • Avoiding the delay and expense of probate court.
  • Transferring assets privately after death. (As opposed to a will, which is a public document.)
  • Protecting assets from a divorce or lawsuit.
  • Giving clear instructions for managing your money during your disability.
  • Organizing assets so someone else can help manage them.
  • Protecting assets from being used for nursing home costs.
  • Leaving money to someone who is too young or too unwise to handle it by himself or herself.
  • Avoiding estate taxes.
  • Preventing family fights regarding a family farm or business.
  • Balancing the wife and kids in a second marriage.

A trust is just one of the legal tools we at the Edwards Group use to carry out your goals and dreams. Our other tools include wills, powers of attorney, living wills, contracts, and deeds. A trust is one of the best tools we have to carry out your wishes and plan for a time when you might become incapacitated or pass away suddenly.

Remember, a trust is nothing more than a tool. It’s not a magic document. All it can do is carry out the instructions written in it. And the only assets it governs are those you actually put in the “bucket.” Call us today to schedule an appointment and get started on your bucket list!

Bills, Debts and Taxes: Will your debts die with you?

So, who pays your debts when you’re gone? Your wife? Your kids? What happens when someone dies, leaving debts and not enough money to pay them?

The Good News

Here’s the good news: No one else is required to pay your debts, as long as they are not on the debt, too. Your wife, your kids, your executor, your power of attorney – none of those people are required to pay off your debts with their money. What they are required to do is use your money to pay your debts. But if your money runs out, then the creditors are just plain out of luck.

The Vital News

Even though your debts die with you, they can still haunt your family and the assets you leave behind. Maybe you’re thinking – I pay my bills on time, why should I worry about debts after I die? Let me give you a few examples about how obligations you leave behind could haunt those you care about most. Let’s think about the various kinds of “debt” – not just overdue bills, but any obligation that may be left unpaid at your death.

Your house. Suppose you have a house with a mortgage. When you’re gone, the mortgage must be paid or refinanced. Will your spouse be able to stay in the house?

Your property. Failure to plan for the skyrocketing costs of long-term care can result in the state putting a lien on your real estate.

Your business. Without planning, your business may be at risk. Does the business depend on a loan or credit line based on you? Without you, will the business be able to access needed bank credit?

Your partners. If you’re in business with a partner, how will your share be bought out at your death? Maybe a lot of your wealth is in the business, but, without a plan, how will your family get the money?

The family farm. Do you have a child who farms and other children who don’t? What is your “debt” to each of the kids? Without a plan, the farmer son may be left without a way to make a living.

College. How strong is your desire to help your kids (or grandkids) get an education? Does it rise to the moral obligation of a “debt”? When you’re gone, how does your plan make sure the funds are there when the kids are ready to go to college?

Uncle Sam. Many of us have IRA’s or annuities. Taxes were deferred during your life, but after you are gone, someone will owe those taxes. Do you know how much tax your family might owe after your death?

You may not leave behind unpaid credit card bills or overdue bank loans, but you may leave other obligations.

You must have a plan in place with enough funds at the right time to take care of them. Without a plan, your family will be left paying – in legal fees, time, stress, frustration, and strained relationships.

A plan to address these issues is more than getting the right kind of legal document. Addressing these issues and others will require you to integrate your legal and financial plan. We help clients do this every day at Edwards Group. Let us help you, too. RSVP today for one of our upcoming workshops to find out where your family is at risk, and how to have true peace of mind.

Should you care about the 2011 estate tax changes?

Don’t you have to be rich to worry about estate taxes?  Well, that depends on how you define rich.

Beginning in 2011 (unless Congress does something different), the estate tax exemption will be $1 million per person.  Experts have been speculating for years about what Congress will do.  But Congress has done nothing so far.

What does this mean? It means that you need to add up your savings, real estate, life insurance, IRA’s, and other assets.  For most people, all of those assets will be counted in calculating estate tax.  Any asset value above the $1 million exemption (our “coupon” as we call it) will be subject to upwards of 50% tax rate.

So, if someone has $200,000 in savings, a house worth $250,000, an IRA worth $300,000, and life insurance of $500,000, they suddenly have an estate tax risk.  Add in a business, farm or other non-liquid asset, and the estate tax is tragic.

Will Congress change this prior to January 1st?  Well, let’s look at the facts:

  • Congress has not passed any permanent estate tax changes in the past 10 years, although numerous bills have been introduced.
  • The government certainly needs the money from the extra tax, based on current deficits and future spending plans.
  • If Congress does nothing (which some people would say they are good at doing!), then the coupon amount will be $1 million next year.  This is not speculation, it’s a certainty unless Congress takes action.

I’ll leave you to your own conclusions.  Watch for upcoming estate tax workshops with David Edwards to learn more about how to protect your family’s wealth.

We can’t plan for what we think.  We can only plan for what we know.  And what we know is that, as of now, January 1st will expose many to estate tax risks.