The biggest obstacle to smart estate planning is the fear of losing control
By Alan G. Orlowsky, J.D., C.P.A.
On the advice of his financial and legal advisers, Stan set up a special needs trust for the benefit of his disabled son Dan. Not only would the trust help reduce estate taxes – because it held assets outside of Stan´s estate for tax purposes – but it provided a professionally managed fund for Dan, the beneficiary, after Stan´s death.
The same year he set up the trust, Stan (not his real name) gave $15,000 gifts to each of his other children, so they wouldn’t feel slighted. Doing so also reduced the value of his estate for tax purposes, without incurring gift tax consequences, thanks to the annual gift tax exclusion.
Unfortunately, Stan made one of the most common estate-planning mistakes. He neglected to transfer to the trust valuable assets that he acquired years later, and so the trust was inadequately funded – and those assets ended up in probate when he died. He had worried that once he transferred assets to the trust he would lose access to them in case of emergency – which is true because the trust was irrevocable. He also stopped giving annual exclusion gifts. His advisers assured Stan that he had enough wealth, as well as insurance coverage, to survive just about any emergency, and still give generously to his loved ones. But he still couldn´t let go.
Luckily, after Stan´s death, one of his well-to-do children helped to take care of Dan – otherwise, Dan (not his real name either) would have had to rely on the state for support.
The fear of letting go is a common affliction among people who are planning their estate, especially those who are accustomed to being in charge. The irony is, gifting and transferring assets can actually make you feel more secure rather than less. Advisers often have a hard time persuading people that giving up control of their money, or giving it away or move from being active investors to passive investors, is in their best interests. Knowing that you have provided for your loved ones in the event of your death can give you more peace of mind than mountains of wealth. It can also improve family relationships and let you enjoy the gratitude you earn during your lifetime from your beneficiaries.
It´s important to understand how estate planning can enhance, rather than destroy, your financial security. Here´s a brief guide to the basic estate planning tools and their benefits:
Assets that you transfer into a living trust will pass to your heirs outside of probate, sparing your heirs delays and extra costs. You have access to all trust funds at any time, and you can amend, terminate, or revoke the trust as well.
You can´t revise or revoke it, but you can rest assured that your estate will not pay estate tax on the assets that you transfer to it. You can use irrevocable trusts to accomplish various goals aside from minimizing estate taxes, like Stan´s special needs trust. Other kinds include incentive trusts, irrevocable life insurance trusts, trusts for minor children from a previous marriage (which keeps the funds out of the ex-spouse´s control), and trusts for spendthrift beneficiaries or others who are not ready or able to manage an outright inheritance. Knowing that the trust beneficiary is going to be well cared for, and/or the funds will be managed by a competent trustee after your death, can help you sleep better at night.
You can give away $15,000 ($30,000 for married couples) to any recipient – and to as many recipients as you wish – free of gift tax consequences. Gifting also reduces the value of your taxable estate. At the same time, you can help your loved ones make a down payment on a home, pay college tuition, take a nice vacation, or simply pull through a rough period. Of course, you would not give money away if you really need it for your own survival and comfort. But you should consult your financial adviser before the end of each year to decide whether you are in a position to make exclusion gifts.
A durable power of attorney gives your agent the authority to manage your financial affairs if you become incapacitated. As long as you are competent (as determined by your own physician and/or a judge), you do not give up control. But if you do become unable to make sound decisions, the person who takes over is the person you selected. If you do not have a durable power of attorney and become incapacitated, a judge will appoint an agent to make decisions on your behalf.
You will probably derive greater satisfaction sharing your wealth now, while you´re able to enjoy the gratitude of your loved ones, rather than after your death. If you have not created an estate plan, or have neglected to transfer assets to your living trust or irrevocable trust, now is the time to take action. Your options only narrow as you age.
Alan G. Orlowsky, President of Orlowsky & Wilson, Ltd. in Lincolnshire, Illinois, has been counseling people on estate planning for over 30 years. He previously worked for the IRS in its Estate and Gift Tax Division. He also worked for the Deloitte & Touche accounting firm, and he has taught taxation and accounting at Loyola University of Chicago, School of Business.
Al is a contributing author of the book 21st Century Wealth (Esperti Peterson Institute, Denver), and has written numerous articles on the subject of estate planning. Contact Alan Orlowsky by email or call 847-325-5559.
Updated September, 2019