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Posts from the ‘Estate Planning’ Category

Will I Owe Estate or Inheritance Tax When I Die?

mneEstate planning isn’t a common topic in pop culture, but John Oliver discussed the federal estate tax (the tax on a person’s wealth at his or her death) on last Sunday’s segment of Last Week Tonight (the estate tax commentary begins around 7:15—beware there is course language, only some of which is bleeped out). Many clients come to me with concerns about minimizing taxes at their deaths, so let’s answer a common question: to whom does the estate tax actually apply?

The federal estate tax only applies to the richest 0.14% of estates, so there is a good chance you are in the 99.86% of the population that the tax will not affect.  Under this year’s federal tax rules, your heirs will not pay tax on the first $5.34 million of your wealth. If you are married, this means you and your spouse can pass along $10.68 million of your wealth without giving a dime to the IRS. Any amount of wealth over the exemption amount is taxed at 40% at your death (but the tax can be avoided by giving assets to your surviving spouse or to charity). This amount that is exempt from estate tax is tied to inflation, so it is increasing every year. Basically, as John Oliver points out (in much more colorful language), if you don’t think the sum of everything you own is appropriately called an “estate” (think Downton Abbey for context), you likely don’t need to lose sleep over paying estate taxes.

In addition to the federal tax, some states impose estate or inheritance taxes of their own – find yours in this useful chart. In Illinois, you can pass along the first $4 million ($8 million for a married couple) of your wealth tax-free. Any amount over the exemption is taxed up to a maximum rate of 16%.

Several things to note: first, even if the estate tax does apply to you, talk to your estate planning attorney about techniques that can be used to reduce your estate tax bill at your death. Second, the exemption amount has become much more generous in recent years—in 2001, the amount exempt from the federal estate tax was only $675,000 per person.  In fact, the 2014 budget proposal proposes to decrease the estate tax exemption to $3.5 million and increase the tax rate to 45%. This may be a difficult provision to push through Congress, as a large portion of the American public favors repeal of the estate tax altogether even though it only applies to a small fraction of the population.

Remember that there are numerous other reasons to have an estate plan in place, so just because your assets won’t be subject to estate tax doesn’t mean you shouldn’t have an estate plan. And if the estate tax doesn’t apply to you, you can sleep easy knowing that, as John Oliver so eloquently puts it, you will avoid “the government literally taking your money over your dead body.”

Swedish Court Rules Text Messages Do Not Constitute a Last Will and Testament

hndtxtAnother day, another attempt at a DIY will. If you recall, I’ve written about wills typed into an iPhone (Australia) or written on a tablet with a stylus (Ohio) being upheld, but have cautioned against relying on such outlier cases until the laws catch up to technology. Case in point: a decision out of Sweden, where, before committing suicide, the deceased sent text messages to his friends and family purporting to leave his assets to them after his death. The Swedish appellate court ruled that the text messages did not constitute a valid will.

This case is undeniably a tragedy, but does raise questions about other hypothetical scenarios. Let’s imagine you have a friend named Ben. What if he texted you and other friends and family several days before being killed in a car accident? Would such text messages be upheld as a valid last will in Illinois? Not a chance.

Recall that in Illinois, signing a will is a formal ceremony that must be done in front of two witnesses. These witnesses help establish the validity of a will once the person who created it is deceased and obviously can no longer speak to the circumstances under which the will was signed. Without witnesses, there is less certainty as to the deceased’s intent. In Ben’s case, was he in his right mind when he sent the texts, or was he under the influence of any substances (legal or not)? Did someone gain unauthorized access to his cell phone and send the texts? Did autocorrect change “I give you my ABBA albums” to “I give you my IKEA armchairs”? An unwitnessed will simply leaves too many questions unanswered.

But what if Ben devised a scheme whereby he texted his wishes, then had two witnesses text the same friends to confirm the “will” was witnessed, thereby complying with the witness requirement and outsmarting the sometimes archaic law of wills? Who’s to know if it would stand up in court, but estate planning attorneys would likely appreciate such creativity due to the mountain of work it would create to sort out such a mess.

The easiest route is to simply follow all of the statutory requirements when signing your will. Be creative at your own risk. At best, it could be awkward when an estate planning attorney blogs about your unique situation. At worst, a court may refuse to recognize your purported last will and distribute your assets in a manner you did not intend.

Celebrity Estate Planning Lessons: Paul Walker

lwandtThis month Forbes published a great article on Five Estate Planning Lessons From the Paul Walker Estate. Paul Walker died in a car accident on November 30, 2013. His last will was prepared in 2001, the same year as the release of the first movie in the Fast and the Furious franchise. He left behind a 15-year old daughter and an estate worth an estimated $25 million. The Forbes article explains the lessons well, but I wanted to expand on a couple of them.

First, kudos to Paul Walker for having an estate plan. Forbes listed this as lesson #4, but I think this is one of the most important takeaways from this tragic incident. He was 40 years old and in good health when he unexpectedly died. If he had procrastinated, or believed that estate planning was something that should be done later in life, it would have been too late. Mr. Walker gets extra credit because he prepared an estate plan in 2001 when he was only 28 years old. A 2011 study found that only 8% of Americans under the age of 35 have a last will, and that over 50% of Americans of all ages do not have a last will.

Second, Paul Walker left his assets in trust. One advantage of leaving assets in trust is that the deceased can dictate the terms under which the beneficiaries receive such assets. Many people do this to ensure their children won’t irresponsibly manage their inheritance if a parent dies when the children are still young. For example, the trust may state that one’s children may receive reasonable amounts from the trust for their health, maintenance, support, and education, and then the children may withdraw amounts from the trust at certain ages (for example, 1/3 of the trust at age 25, 1/3 at age 30, and the balance at age 35). We don’t know the terms of Mr. Walker’s trust because it’s not public record, however, imagine the alternative: his will could have left the remainder of his estate outright to his daughter. The result would have been that his daughter would inherit what was left of the $25 million after taxes and expenses on her 18th birthday. Working with a qualified estate planning attorney is immensely helpful in situations such as this as the attorney will assist you in tailoring a plan according to your circumstances and wishes.

Bottom line: don’t procrastinate, because you never know what life has in store.