More simple estate planning

A Fortune article reinforces the basics of estate planning; gifts, life insurance and trusts.

Gifts

Gifts of $13,000 or less a year to an individual aren't taxable.

Life Insurance

Look into using a life-insurance trust as the beneficiary of your life insurance policy. Another (maybe somewhat depressing) suggestion is to gift money to your children to use to take a life insurance policy out on you.

Trusts

Grantor-retained annuity trusts (GRATs) are seeing a surge in popularity due to depressed asset prices.

Estate planning for your home

Most of us won't be hit by the estate tax when we shed this mortal coil. Even adding in the value of a home, the vast majority of Americans won't owe an estate tax, so their homes can be passed on to their heirs and avoid most taxes. Those who would be hit by the estate tax can do some prior planning to pass on a home with as little tax implications as possible. One sophisticated strategy is a qualified personal residence trust.

Here's how a QPRT works. Say a retired doctor in Florida wants to give his $1 million beachfront home to his two daughters. This strategy would require the doctor to put his home into an irrevocable trust for several years, while he continues to live in it. Through a complex IRS calculation based on interest rates, the length of the trust and his age, the IRS values his right to live in the house at, say, $600,000.

For the purposes of his taxable estate, that knocks the value of his house down to just $400,000 -- regardless of how much the house appreciates in the meantime. (That $400,000, though, comes out of the doctor's federal gift- and estate-tax exemptions.) When the trust is up after the stipulated number of years, if he chooses to continue living there, he can pay his daughters rent, further reducing the size of his taxable estate.

Simple estate planning

Money Magazine recently covered the basics of estate planning. First, understand how the estate tax rates are going to change over the coming years.

In 2009 the federal exemption - the amount of an estate not subject to a 45% federal tax - has increased from $2 million to $3.5 million for individuals. This move is the result of a 2001 law that continually increased the limit for the eight years following. Oddly, the law calls for estate tax to be eliminated in 2010, then to revert back to 2001 levels ($1 million with a 55% tax rate above that) in 2011.

So, as of right now, you only have to worry about estate taxes if your estate is going to be over $3.5 million when you shed this mortal coil. However, even if your estate won't hit this level of assets, you should have an estate plan.

You need a will to make sure your inheritance plans are carried out as you instructed. Money recommended the site, aaepa.com, to help you find an estate planning attorney. You'll also want to do whatever you can to avoid probate. Why?

"It's not unusual for a $1 million California estate to generate $23,000 in probate fees," says Liza Weiman Hanks, a San Jose estate attorney and author of "The Busy Family's Guide to Estate Planning."

Some other things to understand; living trusts, 'pour over' will, irrevocable life insurance trusts, bypass trusts and disclaimer bypass trusts (read the fine article).

I'll describe irrevocable life insurance trusts to pique your interest. Normally, if you designate someone other than your spouse as the life insurance policy beneficiary, such as a child, the benefits paid will be taxed as being part of your estate. However, if there is a policy that covers you but that you don't own, the benefits shouldn't be subject to your estate taxes.

Enter the irrevocable life insurance trust. You set it up and the benefits are paid to the trust, free of estate taxes. There are some big caveats, however. For one, after the trust is established, you can't change the beneficiaries. This is part of the reason it's called irrevocable.

Estate planning tips for bear markets

There are a couple of estate planning "benefits" that you can get in bear markets and low interest rate environments. The first one is pretty trivial. Give away your assets that have lost value to your heirs. If an asset has fallen in value by 50%, you can now gift twice as much of it, up to the annual $13,000 limit, before having to pay taxes on the gift. Then, if the asset comes back in value, your heir should only have to pay the regular capital gains rates on the gain. If instead you held on to the asset and it came back to full value, when you shed this mortal coil, the asset could potentially be subject to the 45% estate tax, which is greater than the current capital gains rates.

Another tip is to use a grantor retained annuity trust, as described:

A GRAT is an irrevocable trust designed to transfer the appreciation on assets contributed to it with minimal or no gift-tax consequences. It's a popular strategy for transferring wealth in a low-rate environment. That's because of the current IRS-mandated interest rate of 2.4%. Here how it works: Let's say you set up a GRAT and fund it with $1 million in badly depressed stock. Assuming the simplest scenario and a trust term of two years (it could be longer), the GRAT would make annuity payments to you valued at $518,081 in each of those two years. (That includes a calculation of present value you don't want to do at home; those payments can be made in cash or stock.) If the asset appreciates more than those payments—and the odds of that seem good, with a low "hurdle" rate of 2.4%—the excess goes to your beneficiaries tax-free.

If it turns out the asset has appreciated less than those $518,081 payments, the trust fails. The asset returns to you, and you can start another GRAT and try again. A rolling GRAT strategy allows multiple possibilities of catching the asset's rise at a valuable moment. GRATs have a standard structure, so setting up the second or third one is less expensive than the first. (A simple GRAT might cost about $5,000.)

Now, those five grand fees can add up, so you wouldn't want to have too many failed GRATs.

Finally, the story points out that the IRS rate for intra-family lending is now %0.81. Try getting that rate from your local bank.

Finding an estate planning lawyer

I'm searching for an estate planning attorney. I recently stumbled on a blurb in Business Week about avvo.com, which rates lawyers. So I decided to try the site out.

I started with the 'Find Lawyers By Location' links on the right side of the home page, and selected my city (the service isn't available for all cities). That gave me too broad a list, so I clicked on 'Browse lawyers by legal practice area', which took me to the 'Lawyer Search' page.

On the 'Lawyer Search' page, I clicked on the 'View All' link next to 'Browse by practice area', to give me the site's canonical list of all practice areas. Conveniently, 'Estate Planning' and 'Trusts' are in the list, so I did a search on 'Estate Planning' in my area. It returned 640 results. Only 3 of them were reviewed, so the search didn't help me narrow down my choices much.

The next thing I did was to look at the 'Answers and Advice' section of the site, and look at all the estate planning questions and answers. Some of the attorneys posted answers to estate planning questions, so I'll probably at least contact those attorneys that have posted in the forums. It looks like word of mouth is still going to be my best bet to finding an estate planning attorney, at least until avvo.com gets more attorney reviews.

The site also provides some guides to estate planning.

Vanguard's estate planning terms you need to know

Vanguard's site is a great source of financial information. They recently had a story on the 5 estate planning terms you need to know.

Living trust

A living trust is established while you are alive. At your death, any assets in the living trust do not have to go through probate, but pass as you've stated in your trust document.

Common misconception: A trust's primary purpose is to reduce taxes.

"People mistakenly think this, but the trust's most important role is to control your assets," says Ms. Smith.

The story also links to their estate planning brochure.

Avoiding probate as a reason to use a trust

A post on one of the blogs I read, Estate Planning as a Career, gives another reason besides avoiding estate taxes to use a trust; avoiding probate:

Probate is expensive. In Florida, the law requires that the personal representative (or executor in other states) hire an attorney to help administer the probate estate. This same law suggests that a reasonable fee for that attorney is three percent of the total gross value of the property passing through probate. Add to that another three percent for the personal representative’s fee and you can begin to see how expensive probate can be.

If you own a $400,000 home and have $200,000 in investments, the six percent of fees can total $36,000. That’s money that your loved ones and heirs will not receive.

Very informative. I don't live in Florida, but I'll be researching the probate process in my own state.

Dividing non-financial assets in inheritances

Here's a story chock full of good anecdotes and advice on dividing up physical assets for heirs. The lead 'graf sums it up.

Several years before Jeannie Stevens' parents passed away, they invited their three children to an unusual Thanksgiving gathering. The engraved invitation informed the heirs of their right to divvy up more than $1 million of "worldly belongings," including a $90,000 painting by Hudson River School painter Asher Durand, a Heppelwhite sideboard, and a 17th century silver kettle. The siblings drew straws to determine who would pick first and reversed order in successive rounds until everything was spoken for. All of the items were earmarked "for future delivery." At first, Stevens recalls, she and her siblings were "very uncomfortable" with the experience, in part because it forced them to confront their parents' mortality. But when their parents did die, "it made life simple at a very tough time," she says.

Shopping at an estate sale

Have you ever shopped at an estate sale? Do you want to? Estate sales are a nice way for the mass affluent to obtain classic artwork or classic antique furniiture. Just do some homework before you drive the van an hour hoping to load up on bargain luxury goods.

For sale listings, look at newspaper classifieds and sites like EstateSales.net. But you can also type your city and "estate sale services" or "estate sale liquidation" into a search engine to find local firms. At these companies' websites you'll find info on coming events and may be able to sign up for e-mail alerts.

I've found that Craigslist also occasionally has the skinny on an estate sale. The N.Y. Estate Sales homepage has links to estate and tag sale directories. Scroll to "Search for estate & tag sales throughout the entire United States".

If the estate sale is held on a weekend, the best bargains will be had at the very end of Saturday and Sunday. You risk missing out on some pieces if you wait until the end though.

All about wills

Bankrate has run a good introduction to wills, with answers to many common questions. Here's the most important one - who needs a will?

Experts advise that anyone with significant assets or minor children should have a will.

In the event that you're young, single and without children, think about whether you have significant assets that you want particular people to inherit upon your death. If you want to leave your extensive gold jewelry collection to your best friend instead of your parents, you'd need a will for that.

Tips for estate planning

Here's a link to an article on MSN filled with tips for estate planning. The article also has many links to other useful articles on estate planning. A few that were useful to me:

[...]

Most important? Providing for minor children. Your will should name both a guardian and a financial trustee for your kids in case you and your spouse die.

[...]

• A simultaneous death clause will pass your estate to your children if your spouse dies shortly after you do.
• Many states require that a third or half of your estate goes to your spouse, even if your will specifies a smaller share.

[...]

• If you want to disinherit a child, spell that out in the will.

[...]

Hope my parents don't read the last one. Ha!