Accounting Articles > Estate Planning:
I just don't know where to start
Most customers don't want to do estate planning until it's too late. When your health begins to fail, preserving your assets for the next generation will be the last thing on your mind.
Further, once your health is failing, family members that don't know what they are doing will be more likely to get involved, further complicating an already ridiculous process.
There are three parts of estate planning that are consistently difficult.
- A customer has to face his or her own death.
- The process is quite complicated and confusing.
- A customer has to be willing to give up some control in order to pass on something like a business to the next generation.
Any one of these things can be enough to stop the process. Put them all together, and most customers would rather say, “Once I'm gone, someone else can worry about it.”
This is true, if there is anything left after the government takes up to 55% of your estate after the credit, which changes every year.
My favorite story about the lack of estate planning in Chicago is about Wrigley Field and The Chicago Cubs. When Mr. Wrigley passed away, no estate planning had been done for him, so the family had to sell off everything that was non-essential in order to pay off the government. Pretty much everything except the chewing gum business and their home had to be sold. So now The Chicago Cubs are owned by The Tribune Company, and we've all learned to say, “maybe next year.”
Estate taxes are due 9 months after the date of death, payable in cash or check. If most of your money is tied up in your business and in real estate, how is the family going to come up with the money to pay the estate tax? A fire sale. There goes everything you worked for over the course of your life.
Let's use an example to illustrate this point. You pass away tomorrow, God forbid. Your spouse has passed away years ago. Your estate is worth $4,000,000, split up in the follow way; your business is worth $1,000,000, your real estate, $2,500,000, your personal property is worth at $200,000, and your Cash and Securities make up the last $300,000. The credit, or the amount on which you don't have to pay estate taxes, is $2,000,000. So your estate has to pay estate taxes on $2,000,000. At a 55% tax rate, that's $1,100,000 which will be due and payable nine months to the day, after your death. They have $300,000. Where are they going to get the other $800,000?
Are they going to sell your business? Probably not, because once you’re gone, it probably isn't worth very much. There goes part of the real estate. And with only nine months to pay without incurring penalties, they probably aren't going to be able to get top dollar in today's real estate market.
The basic concept of estate inheritance planning is to get assets out of your name, while retaining control, so that when you pass, the fair market value will be less than the credit.
If you spend some time and, frankly, some money, dealing with these issues now, it could save your estate unbelievable amounts of money and assets. More importantly than that, your assets will go to the people you love, rather than to the Government.
Start today.
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