So, last week I gave information about keeping records ... but I included no provision for how long to keep your phone records.
But no worries on that front. It seems the NSA has got you (and everyone else) covered.
(Hey, I'm not trying to minimize this issue ... but sometimes gallows humor is the best response. That, and vigilance.)
But speaking of vigilance, I've taken time in the past to encourage my clients and friends to be on top of ensuring their estate (however small or large) is properly arranged for subsequent generations, but there are wrinkles to how this is done, which even some estate-planning lawyers don't always properly handle.
And it could make a huge difference in how much estate tax your estate will pay and how much hassle your heirs will experience when you die.
So it's worth understanding, yes?
I'll use a fictional couple to illustrate what happens ... and because these explanations are somewhat detailed, I'll probably take two weeks to do it.
Here we go...
Tony Khait, CPA, PFS's
"Real World" Personal Strategy Note
Khait, CPA, PFS's Asset and Beneficiary Titling Guide (Part 1 of 2)
For the purposes of our conversation, let's consider the case of Thomas and Martha Wayne. Thomas spent his entire adult life building his business in Gotham to a value of $8 million. (What, you think it was more? Inflation is a bear! And I'm keeping things simple for the sake of illustration. Everyone knows the Waynes were billionaires in today's dollars.)
Then the Waynes were tragically struck down during a mugging gone bad. Thomas was killed instantly, and his wife Martha died four months later from her injuries. Their son, Bruce -- who, for the sake of illustration, we'll say was actually 21 at the time of their death, and was yet to done the batcape -- was left to handle their estate.
Let's look at the different ways the Waynes could have titled their property and the effect of each one. We'll think of Thomas' estate as a baton. The various ways of titling that ownership are alternative ways to hold the baton.
If Thomas was the sole owner of his small business, he was the only one holding the baton. When he died as sole owner, the baton fell to the ground. The required legal process called "probate" would determine the next holder of the baton. If he did not have a will, the laws of the state where he lived at the time of his death in effect would write his will for him, under its laws of intestate succession.
In many states, the law assumes you would leave a third of your estate to your current spouse and two thirds to children, if you have children from a former marriage. If you don't have any children from a former marriage, the law often provides that your entire estate goes to your current spouse.
The probate process can take months, even years. The personal representative must gather together the decedent's assets, pay his debts and taxes, and distribute the estate as directed in the will (if there was one) or as the laws of the state dictate if there was not. We can take a rough average and say that probate fees of about 0.15% of the value of the estate are normal, and are paid to the clerk of the court, and the executor of the estate could charge an additional 3% to 5% of its value. On the Wayne estate, probate costs alone might be well over $200,000.
You don't want to drop an $8 million baton into probate.
Fortunately, no estate taxes apply when a spouse inherits assets. But just as probate has finished transferring assets to Martha, she dies, dropping the baton again and requiring another probate process.
During this second probate, assets are passed to the children, and all of the assets over $5.25 million are subject to 40% estate taxes. So the taxes on a $8 million estate would be $1.1 million. Even though the business is worth $8 million, Bruce doesn't have the money for the estate tax, and is forced to sell rather than inherit the business.
Joint tenancy with rights of survivorship (JTWROS)
In a JTWROS arrangement, two or more people hold the baton, and each one has an equal share. One person can sell his or her share and pass their grip on the baton to someone else. They can also break off their piece of the baton and keep the piece. But if they die, their share is given to those still holding on. The last one holding the baton owns it outright.
JTWROS does not require probate, which would make the transition of ownership from Thomas to Martha easy and straightforward. But it does not protect the estate from legal action. Nor does it help solve the estate tax problem for Bruce.
Joint tenancy titling trumps a will. Even if you have been careful in your estate planning documents, if you are not equally purposeful and intentional in how you title your assets, you can ruin your plan. Financial accounts that use POD (payable-on-death) or TOD (transfer-on-death) arrangements, if sloppily done, can also thwart all your best estate-planning intentions.
Next week, we'll examine what the following could have meant for the Wayne family:
* Tenancy by the entirety (TBE)
* Revocable living trust
* Bypass Trust
Tony Khait, CPA, PFS