You’ve heard it many times: “Don’t miss the forest for the trees.” When it comes to estate planning, trite is right. It’s generally a good idea to develop a smart, overarching plan rather than to focus singularly on a tax-avoidance strategy. After all, a comprehensive estate plan can fund, mitigate or eliminate estate taxes.
Relatively few Americans pay federal estate tax — which is a tax on previously taxed wealth and due within nine months after death. In 2014, only estates valued at more than $5.34 million will be subjected to the tax. This exclusion is indexed yearly with inflation. There’s also a 100 percent marital exemption — so married couples won’t have to worry about federal estate taxes until their combined estate tops $10.6 million. Here at Lighthouse, we routinely work with such high-net-worth individuals.
So, we recognize that estate tax — which stands at a 40 percent rate — can profoundly damage, if not destroy, significant assets. However, we often see factors other than taxes harm an estate’s value — regardless of the estate’s size. Here are just a few of them to consider:
Failure to secure appropriate insurance and risk-management strategies. It’s highly difficult to develop a wise estate plan if a key asset, such as a business, is going to be destroyed before you die. If, for example, your company is centered on you, and you become disabled, the company’s value could take a nosedive, and your estate’s chief asset could wind up being worth no more than its liquidation value.
Poor or no planning for the transference assets. Creating a plan to exit and transfer assets before your death could net far more for your beneficiaries. Why? Because carefully laid plans will help guard against a loss in share value that could happen between the date of death and the distribution to your heirs. The passage of time — whether because of disputes in probate or an executive boardroom — can sink the value of stock.
Too little liquidity. One special challenge for business owners to which we’re especially attuned at Lighthouse Financial is the set aside of sufficient liquidity to carry an estate through to distribution to beneficiaries. Creditors must be paid, promises of benefit plans must be fulfilled, and the funds for a buyout might even be needed. There are many, many reasons why cash is required immediately after a business owner dies — and if it’s not available, the estate might have to liquify assets to cover costs that sharply decrease the value of what is left to pass along to heirs.
We work with our clients to establish estate plans that are appropriately funded with life insurance and an array of other liquidity sources to provide the cash that also gives people time to make smarter business decisions for future generations of owners.
Family disputes. We urge you to have loving and clear discussions with your family members about your wishes for your estate and your plans for post-death transference of your assets. We hope you’ll have a solid estate plan in place to share with them.