Estate planning: 7 rules for a solid plan
I have always been a Johnny Cash fan probably since I was about 5 years old and my parents let me stay up to see him play at Folsom State Prison, in the first live prison concert. He had an amazing voice and his life story was incredibly inspirational from being in prison to being one of the top musical performers in the world. His life story was brought to the movies in the 2005 biography film, "Walk the Line." So what does Johnny Cash have to do with estate planning? Everything! Please let me explain.
At one part in the movie, Johnny Cash has convinced Sam Philips, the owner of Sun Records, to give him an audition. Johnny started by playing a lot of Gospel songs, sounding like every other Gospel song around. Finally Sam Phillips stopped him, and says, "You have been run over by a truck, you are dying on the side of the road and you can only sing one song. Are you going to sing the same stuff as everyone else or are you going to sing something that truly says who you are?" That is when Johnny starts up with "Folsom Prison Blues" and they end up recording it that day in the studio!
Estate planning isn't just about taxes. It's also not about giving your kids money. It's about who you are and what is important to you. You can do what everyone does where you die and someone gets a check — that does work. This is your last document, your manifesto that says what is important you. Do you really want it to say exactly the same thing as everyone else (I'm dead, here's a check) or do you want it to tell the people around you, this is what is important to me?
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If you are looking for a "Manifesto", here are 7 things to think about.
1) Estate planning isn't just about taxes. Most of us won't have an estate tax problem as right now the limits are set at $5.25 million per person, $10.5 million for a married couple. So, unless you hit these thresholds, taxes shouldn't be the priority. The plan should still be both federally and state tax efficient but the taxes shouldn't be the primary focus. It's about control!
2) You will never pay an estate or inheritance tax on your money. Bottom line is that you are dead so you are not paying anything …they do. Giving up assets during your life, setting up irrevocable trusts, and most strategies that limit your ability to make changes generally I do not agree with. You can lose weight by cutting off your leg, but generally that is not a good long-term strategy. You can also reduce your estate by giving away many of your assets, and that may not also be a good long-term strategy. Don't limit your ability to make changes because of a potential tax that you may never pay!
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3) Mommy always liked you better! It is amazing how many families never speak after the death of a mother or father. Sixty-year- old people will bring up things from the second grade on how they were unfairly treated and how mom/dad always liked you better. Think about the family members and see what you can do to make this very emotional time a little less stressful. To have your family "blow up" after you die means that a lot of your life's work went down the drain for nothing. Balance things fairly and make sure the plan addresses the needs of the family. You may even want to speak with your family while you are alive so that everyone is on board with the plan.
4) Assume people make really dumb mistakes — never underestimate that! I have seen people title assets wrong, roll inherited IRA's into their own IRA; liquidate great investments, and a host of other things. Inherited assets are generally protected from equitable distribution (divorce), unless you comingle the assets with the spouse … so don't let them. On Inherited IRA's, you have to take minimum distributions; however, nobody will stop an 18-year old from liquidating the entire account and buying a Porsche. Set up your estate so it minimizes their ability to screw it up.
5) What do you want to inspire and what do you want to avoid? Giving junior a lot of cash doesn't help him/ her get the core values that are important to you. You want junior to save then have the trust match his savings. To give to charity then the trust matches his contributions? They want to start a business, than the trust matches their investment. On the opposite side, if junior has no job, then there will be no distributions. The trust cannot pay for child-support obligations. If they have a problem with gambling, drugs or alcohol, then the trust may pay for rehab, but not give cash distributions. Think about it: If you were alive, when would you say yes and when would you say no? Put that in the document to guide your kids on the right path. Money doesn't solve problems, it only intensifies them. Direction solves problems!
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6) Think about charity. Most of us will never inherit anything except maybe a few trinkets from mom and pop and maybe a few bucks in your pocket, but nothing substantial. If you have been fortunate to have amassed substantial wealth, again, think about what is important to you. Maybe it was your old prep school, a hospital, soup kitchen or any type of charitable organization that does work that is important to you. Helping these organizations tells everyone around you that this was important to me, and it should be important to you. If you are planning on doing this, fund it with a IRA (not a Roth), or another tax deferred vehicle as the 501(c) 3 organization won't have to pay income taxes, but your kids would if they inherited it.
7) The most important step. Retitle your assets and change your beneficiary designations. If you think about everything you have in life that has the most value, most of those assets will not go through a will unless you "force" them. Generally, if you own a property and you are married, it is owned jointly (with rights of survivorship). That means if you die, it goes to your spouse. Your IRA, life insurance and 401(k) all have beneficiary designations that supersede a will. Make sure that the assets are titled correctly or you just wasted a lot of money on a useless document.
So this is your chance, your last chance to say something important to the world and the people that you love. Make sure it is worth listening to!
(Read more: Roth vs. traditional IRA: Which is better?)
— By Jerry Lynch.
Jerry Lynch is a certified financial planner, chartered underwriter and chartered financial consultant (CFP, CLU, ChFC). He is president of JFL Total Wealth Management, a registered investment-advisory firm. Follow him on Twitter