-- Scarlett O’Hara, in Gone with the Wind
Americans hate death.
Hate to think about it. Hate to talk about. Hate to plan for it.
This reluctance to plan for death is unfortunate, particularly when you stop to consider the reality Benjamin Franklin long ago observed that, "in this world nothing can be said to be certain, except death and taxes."
Particularly taxes. Even in death, Uncle Sam manages to stick his hand into your back pocket and come away with a fistful of your hard-earned wealth.
Considering this notion should immediately change your mindset: your thinking should not center so much on the uncertainties of leaving behind this life so much as the uncertainties your family may face if you fail to leave behind a solid financial foundation on which they can build.
There remains a tremendous difference in the net worth of the average white and black family -- African Americans have an average net worth (their total assets minus liabilities) of $10,651 while the average white American has a net worth of $51,191. Moreover, less than 10 percent of Black households earn more than $50,000 or more annually.
This shortfall often results from a failure to save and plan for the financial future and to control their tax obligation.
That is where estate planning, the process of preparing what is to happen to your assets and children when you die, comes in.
Estate planning?
Isn't that something for folks with million-dollar names like Rockefeller, Onassis, or Trump and million dollar estates to match?
Not only the rich pay estate taxes. The Taxman gleefully visits to the working class.
The working class, more than anyone, should be looking for the best ways to squirrel away cash for their heirs -- short of a numbered Swiss bank account.
Think of it this way: building wealth is a matter of accumulation. Properly protected, wealth, like a snowball at the crest of a hill, rolls through each generation growing as each wave adds something to the original glob.
"You spend a lifetime building your family and your assets. A carefully considered and communicated estate plan can help prevent your family from having unnecessary stress after your death," says Adam Rosier, a certified financial planner with American Express Financial Advisors in Southgate, Mich. "An estate plan is your financial legacy, a way to continue to impact the world and the people you love after you die."
In this important way, African-Americans, at the start of a new millennium, can establish the long desired economic power that continues to slip like sand through our fingers.
In that spirit of funding a better future, we answer 10 common questions about estate planning. Read on for help with one of the most important things you can do in this life -- providing your family with the assets to flourish after you're gone.
As a family with few assets, why should I bother with estate planning?
Estate planning serves a variety of purposes whatever your level of affluence, says Judith F. Layne, an estate-planning attorney in Bloomfield Hills, Mich. "The affluent may be interested in estate planning in order to avoid, minimize and or defer estate tax. Less affluent people may be interested in estate planning just to make sure that their assets (regardless of value) pass to the beneficiaries they choose," she says. Estate planning also protects assets even more priceless than homes and cars. "People with minor children may execute an estate plan with the hopes that if they die before their children reach adulthood, their assets will be used for the benefit of their children -- as they wish it to be used for their children," Layne says.
What can happen if you fail to draw up an airtight estate plan?
Your heirs can be left out in the cold, says Scott Burack, a certified public accountant at Squar, Milner & Reehl in Newport Beach, Calif. "Without an airtight estate plan disaster can strike," he says. If no plan exists, or "if there is a problem with the plan, some may get more than you wanted, others less. A significant amount of tax may be due. Property or the family business may have to be sold to satisfy the taxes owed. If there is uncertainty as to your wishes, your family could be torn apart and be at all-out war in determining who is entitled to what. Needless to say, money changes some people." Also, you have children who are minors and both parents die without leaving instructions on who is to be the children's guardian, a court may be forced to decide how your child will be raised and by whom.
What portion of my estate is sheltered from federal tax?
Estate taxes can claim from 37 to 55 percent of your wealth. Under the 1999 tax laws -- which may be revised in the future -- the figure varies depending on your marital status, says Hamilton Lewis II, a certified financial planner and president of Hamilton Lewis Capital Management Inc. For singles, $600,000 can be sheltered, while married couples can protect $1.2 million. "This should be a huge encouragement and incentive to prepare now," he says.
What is the function of a will? Generally, what happens to your estate if you die without a will?
A will directs how to dispose of any property that has not been labeled for disbursement, such as insurance proceeds, jointly owned property with right of survivorship attached, and retirement death benefits which indicate a beneficiary, says Alan D. Port, an estate planning lawyer and a Fellow of the American College of Trust and Estate Counsel. "Your shirts and probably your brokerage account are not labeled and need the will to provide instructions for disposition on death," he says. If you die without a will, state laws (known as intestacy laws) determine who will inherit your assets. Typically, Port says, the state distributes property to some combination of a person's spouse, children, and sometimes next of kin. A simple may cost anywhere from $300 to $1,200.
What is an executor? What does he do?
An executor is the person named in your will who is charged with the responsibility of collecting assets, paying debts and expenses, meeting with professionals, filing probate inventories, federal and state inheritance returns, says Jerry W. Guillott, a certified public account. He works with estates and trusts at Mann Frankfort Stein & Lipp, P.C. Certified Public Accountants in Houston, Texas. The executor generally follows the wishes of distributing the assets according to the will. Your executor will bear great responsibility and need intimate knowledge of your financial and personal matters, so "it is very important that a competent and trusted person or institution be named to this position," he says.
What are the basic elements of estate planning?
A thorough estate plan, says Rosier of American Express Financial Advisors, incorporates the following elements:
Draw up a will. A will provides the instructions that the executor or personal representative can use to distribute an estate. In addition, the will can also appoint a guardian for any minor children.
Establish beneficiaries where appropriate. With most financial assets, you can indicate a beneficiary. Doing so will allow assets to pass to heirs outside the will, without requiring probate court.
Provide appropriate ownership for accounts. Joint ownership may allow assets to pass to heirs without requiring probate court.
Provide durable and medical powers of attorney. These documents appoint someone to help with medical and financial decisions in the event a person is incapacitated, unable and or unwilling to make these decisions for themselves.
Determine the taxability of the assets. Qualified assets such as individual retirement accounts (IRAs) and non-qualified assets, such as stock, may be subject to different rates of tax when inherited. Consider how ownership of the specific asset will affect the beneficiary’s tax situation.
Determine the complexity of the estate. Decide whether each heir should receive an equal portion of the estate -- regardless of his or her financial or life situation.
Long-term care and disability needs. While not considered a part of estate planning, it is important to make sure that you have enough money to take care of yourself before distributing remaining assets to heirs.
I'm an entrepreneur. What do I need to consider when it comes to estate planning?
It is difficult at best to pass a business to your family without sophisticated estate planning, says Patrick Smith, director of advanced markets for Hartford Life Insurance Company in Simsbury, Conn. Business owners, he says, face the greatest penalties from estate taxes. "Since many businesses are worth well in excess of $650,000, their assets are typically subject to estate taxes," he says. "Because the IRS requires payment within nine months, heirs are often forced to sell inherited businesses quickly, losing a huge percentage of the company's value." Business owners face other issues apart from taxes. "If your business partner were to die, would you want to be in business with his or her spouse or other family members? Would your partner want to be in business with your spouse?" Smith says. You can arrange a buy-out funded with life insurance to ensure the orderly transfer of ownership as part of your overall estate planning strategy.
What are trusts? How would a trust protect my heirs and shield my estate from taxes, and what's it going to cost to draw up a trust?
Trusts are legal instruments that own assets for the benefit of the beneficiaries named in the trust, says Patrick Smith, director of advanced markets for Hartford Life Insurance Company in Simsbury, Conn. Trusts can be used by anyone who wants to direct assets for the benefit of someone else. Trusts are often used to set aside assets to benefit minors or adults who need help managing their affairs, Smith says. There are two types: revocable, which means you can continue to exercise control of the assets placed within them; or irrevocable, in which you relinquish all control over the assets placed within the trust. Each are treated differently as far as income and taxes. "How you use either depends on these types of trusts depend upon your financial goals and objectives," Burack says. You can expect to pay from $750 to $1,500 for a simple trust. The more extensive the planning required in establishing and administering the trust, the more it will cost.
Should I leave a liquid estate?
In certain circumstances it may be important to plan to leave your estate liquid (readily convertible into cash). "Hardship may be imposed upon an estate with illiquid assets [since] estate taxes are typically due nine months after the date of death, and if the estate has no liquid assets, difficulty may arise in disposing of enough assets to pay the estate taxes," says Guillott, In those instances, assets are disposed of in a less than orderly fashion, and are sold at less favorable values. In addition, the increased costs of "dealing with these assets also reduces the assets left to distribute to heirs," he says.
OK. I'm sold on this estate planning strategy. What type of professionals do I need on my estate planning Dream Team?
Lewis says you should consider these professionals: your pastor, certified public accountant, your fee-based certified financial planner, your fee-based money manager, your financial analyst -- who will have access to economists, your insurance agent, your lawyer, and estate lawyer.
SIDEBAR: Get Your Estate in Order
To start the process, ask yourself a few questions:
Have you properly allocated your assets?
Do you understand estate tax laws?
Have you updated your will? If so, when?
Do you own assets in several states?
Are you currently the beneficiary of a trust?
Source: Salomon Smith Barney brochure, The Journey to Financial Empowerment: Acquiring, Building & Preserving Wealth.