By Chris Watkins

Oakland Raiders owner, Al Davis, passed away over the weekend.  Forbes Magazine published an interesting article by Mike Ozanian, discussing the fact that Al Davis’s estate could face hundreds of millions of dollars in estate taxes, based on an estimated valuation of the Raiders at $761 Million.  The article predicts that the Davis family will have to sell its interest in the team in order to pay the taxes.

Although you may not feel too sorry for the family of Al Davis, this story is not uncommon for owners of small family businesses, who are rich on paper, but may not have the cash of other liquid assets with which to pay estate taxes.

By Chris Watkins

Well, in typical Washington fashion, the politicians waited until the very last possible moment to deal with the looming tax crisis that was to occur on January 1, 2011, when the Bush tax cuts were set to expire.  In addition to the multitude of other tax increases that would have hit us, we were facing a dramatic increase in the estate tax rate, along with an equally dramatic decrease in the estate tax exemption.  Also in typical Washington fashion, Congress didn’t enact any legislation that would provide long-term, reliable solutions to our problems.  Rather, they passed very temporary relief, forcing the next Congress to deal with this issue in two years.  However, what they did pass, at least in the short term, was pretty good.  Here is a quick synopsis of the new Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (or TRA 2010) as it pertains to estate taxes.

Estate Tax Exemptions and Rates.  For the years 2011 and 2012, the new law sets the estate tax exemption amount at $5 Million per person, with a maximum estate tax rate of 35%.  If not for the TRA 2010, the exemption amount would be $1 Million, with a maximum rate of 55%, which is the exemption and rate that will apply in 2013 if the law isn’t changed again.

Gift Tax Exemptions.  Like the estate tax exemption, the gift tax exemption is now $5 Million for the next two years, increased from $1 Million.  The annual exclusion amount remains $13,000.  In other words, you can make a gift of up to $13,000 per person per year with no gift tax obligations.  Beyond that, you are allowed to gift up to $5 Million gift tax free ($10 Million per married couple).  This represents a potentially HUGE opportunity for families to transfer significant wealth to future generations, tax free.   Remember, this $5 Million exemption is tied to both the estate and gift tax exemptions.  So if you use some of it up during your life, your exemption at death is reduced by the same amount.  There is some speculation about what will happen if someone makes a large gift now and how it will be treated if the law sunsets to the $1 Million exemption amount.  Will it be recaptured by the estate at death?  It seems unlikely the IRS will do that, but you never know.

Portability of Exemptions.  One very interesting change has to do with the ability of spouses to take advantage of each other’s estate tax exemptions.  At least during 2011 and 2012, to the extent you have not used up all of your $5 Million estate tax exemption, that amount can be utilized by your spouse at his or her subsequent death.  The downside to this is that both spouses must die before 2013.  Furthermore, the executor for the first spouse to die must file an estate tax return with the IRS to preserve his or her unused exemption, even if no estate tax is due.

Conclusion.  While these are all good changes to the estate tax laws, they provide very limited benefit from the planning side.  We think you still have to plan with the assumption that Congress will fail to make these changes permanent.  The biggest potential windfall may be in the ability of people to make very large gifts – at least in the short term.

By Chris Watkins

For several years, we have enjoyed ever-increasing estate tax exemption amounts.  Last year (2009), the exemption was $3.5 Million.  This year, there is no estate tax at all.  But beginning January 1, 2011, when the so-called Bush tax-cuts expire (also known as the Economic Growth and Tax Relief Reconciliation Act of 2001), we are facing the largest tax increase in the history of our country.  For this you can thank Congress, which has had years to deal with this, but chose to go home rather than do their jobs.  This means there is virtually no chance that this will be dealt with this year.

So what does this mean for estate taxes?  On January 1, 2011, the estate tax exemption (also known as the applicable exclusion amount) will drop to $1 Million per person, and the highest estate tax rate will increase from 45% to 55%.  This means that if you (either by yourself or with your spouse) have an estate greater than $1 Million, then your estate WILL owe estate taxes to the IRS.

Most people think, “I’m not worth anything near $1 Million.  What’s the big deal?”  One thing many people don’t realize is that you have to factor in the death benefit of life insurance policies you own on your life.  So if you have a house, some retirement savings, and a life insurance policy, you could easily have an estate tax problem.  Actually, the ones who suffer are your children, who will get a smaller inheritance.

For example, if your taxable estate is $2 Million at your death, the estate taxes will be $435,000.   The tax on a $3 Million estate would be $945,000.  And so on and so on.

Fortunately, with a little advance planning, you can prevent a huge amount of your estate being lost to estate taxes.  One common technique is called the “credit shelter trust.”  This allows a married couple to preserve both of their unified credits.  Another technique is called the “Irrevocable Life Insurance Trust” or ILIT.  This involves having an irrevocable trust own life insurance on your life, thus taking it out of your taxable estate.

Unless you are of the mindset that the government SHOULD get more of your money, then you owe it to yourself and to your loved ones to explore your options and do some estate tax planning.  If you would like more information on these or other techniques for reducing your estate, contact us for a consultation.

By Greg Jones
You are bound to have seen a number of companies with software and self-help online products allowing you to create your own Will.  First, let us thank these companies for highlighting that nearly every adult should have a Will — and, possibly, other estate planning documents.  We agree!  We also admit that the initial cost of using a “do-it-yourself” piece of software or an online service is less than the initial cost of utilizing the services of a licensed attorney — though usually not as much as they might lead you to believe.  With a background in economics, I understand that attorneys better add value to the process to justify the price difference.  I believe we do this in a number of ways:

1)    We are here in your community.  Discussion with one of us, someone who will come to know and care about you and your family, is only a phone call (or short drive) away.

2)    We have a full understanding of the terminology used in Wills, Trusts and Powers of Attorney, and we can explain the implications of including and excluding certain provisions.  After learning more about your family and your goals, we advise you on what we believe are the right choices for your family.  The do-it-yourself software and services are very clear in their disclaimers that they are “not a substitute for an attorney,” and that they are further “prohibited from providing any kind of advice, explanation, opinion, or recommendation to a consumer about possible legal rights, remedies, defenses, options, selection of forms or strategies.”  (Click here for an example of where competent legal advice could have made a huge difference.)

3)    While no family is the same, we have likely dealt with family situations similar to yours.  Provisions that sound good while you are creating your own documents might have serious complications down the road—including family conflict, accidental disinheritance of a loved one, taxes unnecessarily being incurred, and friends & relatives contesting the validity of your Will.  Often times we can suggest alternative ways to help you accomplish your estate planning goals, yet avoid the potentially negative consequences.

4)    We drive the process to completion.  Many people buy estate planning software or intend to complete the online Wills, but get intimidated by the process or put it off until “tomorrow,” and it never gets done.  And, in those situations where the completion of your estate plan is an urgent matter due to an upcoming trip or surgery, we can often hold the meeting to sign your documents within a few days of our initial meeting.

5)    When/if something happens to you, we will already know your estate plan and be able to help your surviving spouse or other loved ones in carrying out the plan.

6)    We are constantly monitoring the changes in the law that could impact your estate planning, and we are available to answer any questions that you have as those laws or your personal/financial situation changes.

7)    We are with you at the time you sign the documents to ensure that all requisite formalities are followed.  These vary from state to state.

8)    We are accountable.  As the do-it-yourself services state, you are on your own when you use them. If you make an error in creating your documents that results in an unintended consequence, you and/or your loved ones will have no recourse against them—or anyone.

At Jones & Watkins, we offer an initial one hour consultation at no cost to discuss and assess your situation and advise you on your options.  At the end of that session, we will viagra you a flat fee to draft and implement an estate plan that is appropriate for you.  We believe that the value we add to the process is well worth it.

Call us at 573.234.1130 or use our Contact Form to make an appointment or get our complimentary informational packet.

With few exceptions, almost everyone we meet with to discuss estate planning has one overriding goal if they should pass away unexpectedly – to make sure their children will be cared for. Oftentimes, we hear how people have taken their own “informal” measures to accomplish this goal. Unfortunately, such informal” measures can have unwanted and unexpected consequences.

One example is when a parent with young children names a sibling or other relative as the beneficiary of a life insurance policy, with the expectation that he or she will use the money to take care of the children. The reason for doing this is valid – children are not able to manage their own finances, particularly the large sums of money that are usually paid out under life insurance policies. However, although the intent is good, there are all kinds of reasons not to do this type of planning. Here are just a few examples:

1. There is no assurance that the life insurance beneficiary (the relative) will use the money for the child’s benefit in the manner that the parents envisioned. In fact, there is nothing to prevent the sibling from keeping the money all for himself or herself – he or she has no legal obligation to spend it on the child. If the relative wants to go blow it all at the gambling boat, there’s nothing to stop him.

2. The funds are subject to the debts and liabilities of the relative. If he or she has significant debts or gets sued for some reason, then the life insurance money could all be lost.

3. Since the funds are legally the property of the relative, the income that is generated from the funds (assuming they are invested) is taxable income to the relative, and could potentially push the relative into a higher tax bracket.

4. Even if the relative fully intends to spend the money on the children, he/she would have complete discretion as to how and when the money is spent, and this may not be what the parents would want. What’s to prevent the relative from buying the child a Ferrari when he turns 16, rather than spending it on college?

5. What if the relative has his own children? He may think it unfair that he be expected to spend the money on your children, but not his children. And of course, there’s nothing to stop him from spending it on his own family.

6. What if the relative gets a divorce? The insurance funds might be deemed marital property and end up in the hands of the ex-husband or ex-wife.

What’s A Better Solution?

As you can see, this kind of “informal” planning can lead to all kinds of unintended problems. Fortunately, there is a fairly simple way to accomplish your goal of making sure that the insurance funds are held for your kids benefit without all of the problems listed above – CREATE A TRUST AND MAKE IT THE BENEFICIARY OF YOUR LIFE INSURANCE.

You can create a trust for the benefit of your kids, which contains specific instructions as to how the trust funds will be managed and spent. You have practically unlimited say in how you want the money spent. Upon your death, your life insurance proceeds will be paid to the trust, and the trustee (whomever you designate to manage the trust) will have a fiduciary duty to the beneficiaries (your children) and will be legally obligated to follow the terms of the trust. Furthermore, if properly drafted, then as long as those funds are held in the trust, they will be protected from your children’s creditors.

By Chris Watkins

Many people put off preparing a Will, or think they have no need for one, because they think they are not wealthy enough, or that their assets will ultimately end up in the right hands if they do nothing.  The problem with this thinking is that such people are giving up the right to control what happens to their estate.  As explained below in more detail, this can lead to unintended consequences.

When a person dies without having a Last Will and Testament, it is known as dying “intestate.”  Every state has its own intestacy laws.  Missouri’s intestacy laws are found in Chapter 474 of the Missouri Revised Statutes.  What happens to the estate of a person who has died (this person is referred to as the “decedent”) depends upon whether there is a surviving spouse and/or children.  The basic rule is as follows (it gets more complicated if, for example, the decedent had a child who died before the decedent, but left grandchildren):
The surviving spouse gets:

• If there is a surviving spouse, but no surviving descendants (children, grandchildren, great-grandchildren, etc.), then the spouse receives the entire estate.
• If there are surviving descendants of the decedent, and they are also descendants of the surviving spouse, then the spouse receives the first $20,000 of the estate, plus one-half of the rest of the estate.
• If there are surviving descendants of the decedent who are not the surviving spouse’s descendants (for example, children from a prior marriage), then the surviving spouse receives one-half of the estate.

Whatever does not get distributed to the surviving spouse (or the entire estate if there is no surviving spouse) is distributed as follows:

• To the decedent’s children (or their descendants), in equal parts.
• If there are no surviving children (or other descendants), then the estate is divided equally among the decedent’s mother, father, brothers, and sisters.
• If none of the above people survive the decedent, then the estate is divided equally among the decedent’s grandparents, uncles and aunts (or their descendants).
• If none of the above people survive the decedent, then the estate goes to the decedent’s great-grandparents, and so on (obviously it is very rare to get this far).
• Ultimately, if there is no one alive to inherit the estate, then it will go to the State.

Missouri’s intestacy laws may work fine for some people.  But in a great many cases, the default rules are not what people would want.  The problem most often encountered involves families with minor children.  In the vast majority of cases, if a married couple has children, the desire is that if one of the spouses dies, then the other spouse would inherit the entire estate, and would then have those funds and other assets to take care of the children, as well as take care of him or herself.  However, if there is no Will providing for this, then the Probate Court would be forced to distribute half of the estate to the children.  If the children were minors, then a conservator would have to be appointed to receive the funds.  This is rarely ideal.  Furthermore, when the children reach age 18, then the funds would have to be distributed directly to the children.  It is very rare for young adults to have the maturity or ability to handle large sums of money.

Another issue has to do with who would be appointed take care of the children in the event that both parents died. The Probate Court is responsible for appointing this person (known as a “Guardian”), and must follow the wishes of the child’s parents as set forth in their Will, unless the Court finds that the person(s) designated to serve as Guardian(s) are unfit to do so.  In other words, if you do not have a Will designating who you would want to take care of your children, then the Probate Court will choose for you, and it may not be who you would want.

Summary:
In conclusion, do not assume you don’t need a Will just because you are not wealthy.  As explained above, failing to have a Will can result in unexpected and undesirable consequences to your surviving family members.

If you would like a complimentary consultation on the benefits and importance of attorney representation in the creation of a Will or Trust and of Jones & Watkins LLC to serve as Legal Counsel for your Will or Trust call (573) 234-1130 or email us through our Contact Form.