“ARE YOU HAVING A BAD HEIR DAY?”

As Benjamin Franklin once said, “You may delay, but time may not.” No truer are these words than in the case of estate planning. The average person allows 10-to-15 years to elapse before revising his or her estate plan. Life’s ups and downs, and the impending estate tax law changes, present the opportunity to protect your legacy.

Beginning in 2011, the tax rates in effect prior to 2010 return in force. Although in 2009, the rate was a flat 45 percent on taxable estates in excess of $3.5 million, in 2011, the top marginal rate will be 55 percent, and the exemption rate will decrease to $1 million. For example, if your estate were worth $1.5 million, in 2009, you would not have paid federal estate tax; whereas, in 2011, you will pay federal estate tax because of the decreased exemption. With the potential impact of this in mind, don’t let the heir day of your loved one turn out to be a bad heir day.

How could that happen, you ask? Well, in 2006, 46 percent of the general public had a will; however, in 2007, that percentage dropped to 37.

Actually, estate planning is about more than having a will.  Four basic documents encompass a good estate plan:  a Last Will and Testament, a General Durable Power of Attorney, a Healthcare Power of Attorney, and a Living Will. 

Each of us needs an updated Living Will 

The recent celebrity case involving Gary Coleman provides a clear example of the ills that can occur without an updated estate plan. In 2006, Coleman created a healthcare directive that gave his then-wife power to make medical decisions if he became incapacitated. It apparently included a statement to prolong his life for as long as possible. After divorcing and failing to revise his healthcare directive, Coleman suffered a head injury and was admitted to the hospital, diagnosed with a brain hemorrhage.  Coleman’s ex-wife decided to take Coleman off life support only one day after he was admitted.

In some states, divorce fails to nullify a healthcare directive.  If you have been through a divorce, it is wise to review your estate documents to ensure they continue to reflect your wishes.  

Form your own dynasty

Although problems can arise due to neglecting to update healthcare directives, preserving wealth is perhaps the greatest concern. Too often, we underestimate the size of our estate, not realizing the problems this can cause after we have gone.  Trusts provide a viable option for ensuring that your heirs do not pay excessive estate taxes upon your death.  Different types of trusts are available to meet your needs and the needs of your loved ones.

A dynasty trust is one way wealth preservation can be achieved.  Despite its name, the term has nothing to do with aristocracy.  With a dynasty trust, you transfer the assets of a business, real estate, or other income-producing property to the trust. Depending on the exact terms, the income accumulates or is paid out on behalf of the trust’s beneficiaries: children, grandchildren, or even remote descendants. Assuming the assets remain in the dynasty trust, they will not be included in a beneficiary’s estate when he or she dies.  Thus, the asset values can continue to compound over several generations without any erosion due to estate taxes.  Further, because the beneficiaries do not own the assets, there is protection against loss from creditors or divorce proceedings. Wealth is preserved and remains in the hands of family–with little or no tax consequences.

Create a “heir” style that works for you 

When is a good time to update your estate plan?  While it is always good to maintain a current estate plan, significant life events mandate a revision.  If you’ve recently started a business, you may need to update your estate plan.  Crucial aspects, such as business succession planning, guarantee that the wealth you’ve worked so hard to build is passed on to those you love or designate. Additionally, our changing economy can result in loss of a job or early retirement, both invoking the need for a review.  Similarly, a spouse that is re-entering the work force or changing from full- to part-time status, necessitates re-evaluating your assets.

Changes in family may dictate a change in your estate plan. If a son or daughter should marry someone you would prefer not to include as an heir, inevitably, you would want to take a second look at your estate planning. You would find it important to avoid the risk that your wealth could end up in the hands of a former son- or daughter-in-law.

Indeed, even if you like your in-laws, other life events can trigger an update to your estate plan.  Have you recently moved into Pennsylvania? Or, are you planning a move to another state?  If so, it is good advice to learn about the laws of your new locale to make sure that your plans are protected. Even marriages, births, and other happy events in our lives should awaken the notion that our estate plans need to be re-examined.

Perhaps you have a domestic partner who you would wish to one day become your heir. Pennsylvania does not recognize same sex or common law marriages. Thus, in this Commonwealth, a same sex or opposite sex non-related individual inheriting from you will be taxed at a rate of 15 percent. Don’t let him or her experience a bad heir day. Trusts and other estate planning, such as beneficiary designations on financial accounts, can play an important role in preserving the assets of your domestic partnership.

Most of us put estate planning on the back burner. It’s easier to choose to wait for tomorrow. By contrast, we go to the barber or beauty salon on a regular basis because we defy being caught having a bad hair day! Applying mousse, gel and spray guarantees we will have a good hair day.  Similar protection in the form of a good estate plan can be applied so that a bad heir day is likewise avoided.

Have your estate plan updated today, and do wonders for your heir!

Are You Having a Bad Heir Day? was last modified: November 17th, 2022 by Phil Sanders