By Jonathan R. Bauer
(Published in the Idaho Business Review)
Print Estate Planning - Not Just for "Rich Folks" Anymore!
Whether or not you own your own business, there are many good reasons to create an estate plan. Parents with minor children should choose a guardian for their children (in the event the parents unexpectedly pass away). People with charitable inclinations must plan appropriately so that their special charity receives the desired contributions. Some people have children with special needs and others have one child who works in the “family business” and another that doesn’t. Also, as explained in more detail below, more families are likely to find that they have enough assets to subject their estates to estate tax. For these reasons, and others, almost everyone should have some form of an estate plan.
In 2001, a federal act was passed that gradually reduced the maximum rate of the federal estate tax from 55% to 45%. It also gradually increased the amount of property that you could pass free of federal estate tax from $675,000 per person in 2001 to $3.5 million per person in 2009. We can call this amount an “estate tax allowance.” This means that with fairly straightforward estate planning, a married couple would have a $7,000,000 estate tax allowance if they both died in 2009. Most people would agree that $7,000,000 is a significant amount of money, and whether or not you think there should be any tax on assets passed at someone’s death, the majority of people didn’t personally have to worry about it.
In 2010 only, the 2001 tax act repeals the estate tax. However, that act replaced the estate tax with rules that in most cases increase the income tax on assets inherited. The laws related to estates in 2010 are complicated and beyond the scope of this article. We will all hope to make it through 2010 and focus on why planning is so important for 2011 and beyond.
After December 31, 2010, the estate tax will increase to 55% and the estate tax allowance for a deceased individual will only be $1,000,000. Also, without estate planning, the $1,000,000 allowance belonging to the first deceased spouse is effectively lost because all of the assets will be left to the surviving spouse and included in the surviving spouse’s estate. Although $1,000,000 is a significant amount of money, you might be surprised when you look at your financial condition and learn a bit more about what assets are part of an estate, how close you are to exceeding the estate tax allowance.
The value of your estate for estate tax purposes is generally the fair market value of your assets at the date of your death. If you are a business owner, this will include the value of your business. Also, your IRA, 401k and other retirement assets are included as part of the valuation even though they might pass directly to designated beneficiaries. Finally, if you have life insurance, all the proceeds from any policies insuring your life are included in calculating the value of your estate. If these, together with all of your other assets, add up to $1,000,000 or more, you likely need an estate plan to avoid estate tax.
If you have fewer assets, your estate planning will probably be more simple, but it is no less important. If parents with minor children do not name a guardian in their wills, a court will decide who raises their children in the event of an unexpected death of both parents. Also, people can have provisions in their wills appointing a trustee to hold and distribute assets for the benefit of their children.
Many people, even those without significant amounts of assets, have charitable inclinations. They may want to leave some money to their college, a religious organization, or some other charitable organization with special meaning to them. With proper estate planning, you can meet these goals without having to donate the money now, and you can even provide that the money is to be donated after your children have reached an age where they are more likely to be financially independent.
It is very important to plan for children with special needs; those needs can be the result of physical or mental disabilities, substance abuse problems or simply immaturity and irresponsibility. Estate planning can also help protect the assets you leave to your children and/or grandchildren from claims in a divorce and legal disputes arising out of an accident, business breakup or other unpredictable event.
Small business owners often have some children that participate in the family business and others that do not. Often these businesses are the parents’ most significant asset. It may be best for the long term health of the business and the family to keep the non-active children out of the family business. With proper estate planning, parents can treat all of their children equally without risking the success of their business and the relationships among their children.
There are very few people who can’t benefit from an estate plan. Most of us spend significant time earning a living and taking care of our families. Without an appropriate estate plan, all of that hard work and care can vanish in a blink.
Jonathan R. Bauer is a partner with the law firm Meuleman Mollerup LLP. He focuses his practice in the areas of business law (mergers/acquisitions/sales, financing, general corporate counseling), real estate law, and estate planning and probate. Mr. Bauer can be contacted at 208.342.6066 or This e-mail address is being protected from spambots. You need JavaScript enabled to view it . More information is available at www.lawidaho.com.