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Beyond Federal Estate Taxes

Every election cycle we hear the same drum beat to repeal the Federal Estate Tax (FET). Few issues are more politically and socially divisive. Truly, the debate over the FET provides fertile soil for economic class warfare. The purpose of this article is not to consider the merits of continuing or repealing the FET. Rather, we will consider the world of estate planning that exists independent of any tax considerations. But first, a little history lesson.

Wars and Rumors of Wars
  So far American taxpayers have seen three variations of the estate tax come and go, typically tied to "wars and rumors of wars." The first estate tax was enacted at the end of the eighteenth century to finance American naval expansion during tensions with France. It was repealed in 1802. The second estate tax arose following the outbreak of the Civil War. It was repealed in 1870. The third estate tax was implemented at the end of the nineteenth century to finance the Spanish-American War. It was repealed in 1902. The current estate tax was enacted in 1916, to underwrite America’s entry into World War I…the so-called "War to End All Wars." While it never has been repealed, the current FET has been overhauled several times.
  Even were the FET repealed, it has demonstrated a historical propensity to reappear when the federal government needs additional revenue. While the FET may come and go with the changing winds of politics, the need for proper estate planning will never go away. Let’s review some compelling non-tax reasons for proper estate planning.

Incapacity Planning
  Quick. Who would make your personal, health care and financial decisions if you were incapacitated due to an injury or illness? Would your loved ones or friends be able to negotiate your living arrangements, select an appropriate treatment plan for you from options presented by your physician, or file your income tax return? Unless you already have proper estate planning in place, you may not like the answer: Probate. While a necessary component of our judicial system by default, the Probate Court will make rather private matters a matter of public record. Such private matters include not only the nature of your incapacity, but also your net worth. Additionally, the decision-maker appointed for you by the Probate Court may not be your first, second, or even third choice.

Back-Up Parents
  Nothing is more valuable than one’s children. Most parents sacrifice considerable time and treasure to provide for them. Nevertheless, many of these same parents fail to make proper estate plans for the care of their children if orphaned. Without such planning, the Probate Court will appoint the "Back-Up Parents" it chooses for your children. Likely these appointees (the "Guardians") will also manage the inheritance for your children until they reach adulthood (e.g. age 18 in most states). Since you are careful to ensure a safe, secure and moral home environment for your children when you go out for the evening, why not make sure it stays that way even if you don’t return?

Inheritance Protection
  Without proper estate planning, your adult heirs (e.g. age 18 in most states) may receive their inheritance outright. Heirs who are minors may receive their inheritance outright upon reaching legal adulthood. In either instance, an outright inheritance without any control or protection may be lost due to divorces, lawsuits, bankruptcies and good old-fashioned squandering. There are estate planning strategies that could protect the inheritance both for your heirs and from them. Moreover, you may even create financial incentives in your planning to encourage responsible behavior and discourage irresponsible behavior.

Special People, Special Plans
  Do you have a "Special Needs" family member? If so, regardless of their age, special estate planning is required to protect both their inheritance and their access to important assistance programs. Without proper estate planning, their inheritance may disqualify them from many private and public assistance programs. Then, once disqualified, what happens when their inheritance is spent and the assistance program is discontinued? Alternatively, careful planning may enable the inheritance to comply with the letter and the spirit of various rules governing eligibility for such programs.

Blended Families, Blended Estates
  Statistics reveal that there are more blended families today than first-marriage nuclear families.* Under such circumstances how do you control and protect your wealth to accomplish the often-competing objectives of providing for your spouse and your own children? Without legal planning you may unintentionally disinherit someone. Who will it be? If that happens, relationships may be forever ruined, or vicious litigation may result. To make matters worse, your ex-spouse may be one of your heirs. *Source: Center for Law and Social Policy (www.clasp.org).

Specific Distributions
  A recent national survey** of inheritances found that 47% of family fall-outs occur over tangible personal property distributions. Do you have any heirlooms that hold significant emotional value for certain loved ones? If you fail to specifically designate the beneficiaries for such "valuables," then they may be sold in an estate sale to a perfect stranger. Proper estate planning here may preserve family harmony. By the way, the same survey found that 63% of families reporting "no conflict" over an inheritance had known what to expect ahead of time. **Survey by AARP/Scudder Investments.

Family Business Continuation
  An estimated 90% of all U.S. businesses are family-owned or family-controlled. At any given time, 40% of family businesses are in transition from the founding generation to the next generation. Less than 1/3 of family businesses survive this transfer. Of those that are successfully transferred, only about 1/2 survive another generation. Why such a high transfer failure rate? Too often it is the failure to properly integrate family and business estate planning into a comprehensive, overall strategy. You must be willing to ask yourself some tough questions. What are your priorities for business and family? Would your surviving spouse run the business or would you want your spouse to be financially secure independent of the business? Do you have children who are active in the business and others who are not? If so, do you intend to treat them equally in planning their overall inheritance? Will that be possible when the business is the primary estate asset…and there is little liquidity in your estate? If no family member will succeed you, is there an employee or friendly competitor who might be interested in acquiring it?
  Consider Life Insurance as the Swiss Army Knife of estate planning. It is an indispensible tool for estate creation, estate equalization and estate liquidity. Initially, Life Insurance can create an instant estate for your loved ones if you die before you have time to otherwise create financial security for them. That Life Insurance estate can be there for daily living needs, braces, college educations and weddings ... even if you cannot. Later on, your Life Insurance can equalize the inheritance among your loved ones, whether in a blended family or in a family business. Finally, Life Insurance can provide enough liquidity to satisfy any debts or expenses following your death and ensure that your surviving spouse can remain financially independent without you. Regardless of the purpose for your Life Insurance, only through proper estate planning can you be certain that the proceeds will be protected and applied as you intended.
  According to conventional wisdom there are only two certainties in life: death and taxes. While politicians can repeal the FET, it is doubtful that they will ever successfully repeal incapacity or death. Until they accomplish that, the non-tax reasons for proper estate planning will remain compelling.

Copyright © 2005 Integrity Marketing Solutions. All rights reserved. Some artwork provided under license agreement. This publication does not constitute legal, accounting or other professional advice. Although it is intended to be accurate, neither the publisher nor any other party assumes liability for loss or damage due to reliance on this material.