Estate Planning To Die For
Today's comment is by Bob Bauman, our Legal Counsel and Senior Writer.
Dear A-Letter Reader,
Someone once observed: "Death is more universal than life. Everyone dies but not everyone lives."
Living a full life means different things to different people. But if you're even modestly wealthy, an important component of a successful life is planning what happens to your wealth when you "shuffle off this mortal coil," as Shakespeare wrote in Hamlet.
A senior U.S. Federal Reserve economist estimates that by 2050, the so-called U.S. "baby boom" generation will pass some US$41 trillion in assets on to their heirs. That's the largest potential intergenerational wealth transfer in world history.
Forbes magazine estimates that in 2007 there are 482 billionaires in America. A record nine million U.S. households had a net worth of US$1 million or more in 2006. That number rose by 800,000 millionaires or 11% from the previous year.
But in contrast to these impressive statistics, many wealthy people I meet seem unprepared to pass on their wealth to their heirs. Perhaps the prospect of acknowledging their mortality blocks needed action.
Don't Be Like Jack and Anna!
Jack Kent Cooke was a leading U.S. businessman in the 20th century. He grew rich in life, but created financial chaos in death.
The Wall Street Journal reported that when "...he died of a heart attack in April 1997, the 84 year old Mr. Cooke...had amassed a US$1.3 billion collection of media companies, sports teams and real estate. But he also left a convoluted will, amended eight times, that named seven executors..."
The dust finally settled seven years later, after numerous lawsuits and US$64 million in lawyers' fees.
If ever there was another convincing case for prior estate planning, Anna Nicole Smith's notorious death should be the clincher. She left behind a poorly drafted "last will and testament" for her young daughter, Dannielynn Hope. It's a classic example why all of us should act now to avoid such a legal swamp.
A recent study examined travelers' attitudes and behavior. The study concentrated on individuals from the top 5% of U.S. households with annual incomes of over US$150,000. The study listed these wealthy individuals' tastes and meticulous demands. According to their findings, these wealthy travelers seem to know exactly what they want when it comes to service and comfort.
So you have to wonder why these same wealthy people are not so meticulous when it comes to their personal estate planning.
How to Avoid Life-Changing Death Taxes
There are many good reasons why you should pay close attention to your estate planning.
Reducing taxes is a major consideration.
The IRS's latest figures (2005) reveal the top earning 1% of U.S. taxpayers earned 21.20% of the overall income. But they still are forced to pay 39.38% of the taxes collected. In other words, the rich paid almost double their share, based upon the income they earned.
Both "wealthy" and the "middle class" Americans get socked with high taxes - taxes that may be lowered with smart estate planning. Indeed, you can reduce one of the highest taxes of all - the death tax - just by using trusts or gifts during your lifetime.
Keep in mind that the present U.S. estate taxes are in a political muddle. By law, estate taxes are declining now. But estate taxes could be snapping back to the highest rates in 2010, especially if Democrats take the White House and Congress in 2008.
After 2011, the taxable estate tax minimum will drop down to US$1 million from the present US$2 million exemption. These days, you don't have to be considered "wealthy" to have an entire estate (including real property) worth US$1 million. That's just one more reason to start planning your estate now.
Act Now - Before It's Too Late
All of this calls for good estate planning advice and prompt action. After all, you've worked hard all your life. Why not devote that same energy to making sure your wishes are followed after you're gone?
At the very least, you should have a will or other means to transfer property to protect your loved ones. A "means of transferring property" could be a trust, family foundation or jointly title property or financial accounts. (If you're the young one in the family, talk to your aging parents!)
Otherwise, assuming your business and other assets are worth more than US$2 million; your family could be stuck with a considerable estate tax burden. In fact, your heirs could be forced to hand 80% of your total estate over to the IRS just to pay income and estate taxes.
Greater Protection for the Long Run - Offshore
By all means, when you create your estate plan, consider an offshore solution.
By taking part of your estate offshore, you protect those assets from domestic U.S. creditors and lawsuits. Your estate can grow safely offshore for your heirs to use later in life. More importantly, your assets can remain highly confidential offshore. This means you can avoid the glare and hassle of the American probate process.
If you set up an offshore vehicle like an annuity or life insurance, you can easily pass the title of those vehicles onto your heirs at your death. Best of all, both of these vehicles allow you to defer taxes during your lifetime.
An offshore asset protection trust (APT) is another device that both protects assets during life, and provides for heirs afterwards.
Another "Poor Little Rich Girl"
With the sordid cast of characters surrounding Anna Nicole Smith's infant daughter, Dannielynn, my guess is she may face the same sad fate of the "poor little rich girl," as the late Barbara Hutton.
Hutton inherited the Woolworth-E.F. Hutton millions when she turned 18. At an early age, she lost her mother to suicide and her father to alcoholism. Raised by a governess, she married seven times and died a relative recluse, alone surrounded by what was left of her great wealth.
Moral of this story: Money does not guarantee happiness. But a well drafted will and a sound estate plan at least guarantees that your heirs - not the IRS - will get your money.
BOB BAUMAN, Legal Counsel
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