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Proper Estate Planning Documents May Be Worth Millions
By Ray Chodos and Adam Chodos, Esq., CPA
Wills, trusts, and the like are unpleasant subject matter that is usually considered shortly before departing on vacation. Many of us do not have a good understanding of what our documents call for, yet these documents represent all that we possess for those we love the most. Often, when wills are drawn the environment is uncomfortable and time inadequate to consider how the world of our family would function without us. Unfortunately some attorneys draw wills while not being tax expert, or specialized in estates or trusts. When our attorney asks questions, we answer, often without a full understanding of the ramification of our reply, or alternative strategies. When we are given a draft to review, there is little other than check the spelling of appointed persons that we are fully qualified to review. The scope of this article seeks only to disturb and provoke action that might otherwise have gone undone toward realizing ones objectives through planning.

This document merely expresses our stated wishes at the time of death. The probate process which includes the court's examination and "processing" (probate) of our will determines if it is enforceable, legal, and subject to challenge by heirs, disinherited family, creditors or predators. This public process is not without cost, generally 5% or so. This percentage is of the gross estate (not reduced for mortgages and such). On a three million dollar estate, probate costs can translate to $150,000. Essentially what happens is that the assets we owned during life become transferred after our death to the heirs we or the court have selected. That is where the probate expense for lawyers, appraisers, accountants, and administration is consumed. What would happen if little or no property needed to be transferred by will at death? Well, the probate process would cost little to nothing, privacy would be maintained, will contestability would be largely removed, and the cost of probate would be saved for heirs to enjoy. In order to achieve such a desirable result, we may wish to transfer title of our important assets while we are among the living. The instrument we use is a "Revocable Living Trust". A trust is simply an entity that contains assets to be held for the benefit of beneficiaries. The rev trust will be designed to have a manager called the trustee. We may be our own trustee while living and competent to do so, when we are not able or alive, we have appointed a replacement for ourselves. Our replacement trustee may dispose of the assets at our passing in accordance with our wishes and mindful of the circumstances of that period in time. We select the "pool" of beneficiaries as well. While the probate process is no longer needed since little or nothing will pass by our will, we should still have a will in case any asset failed to be transferred by us to our rev trust. In the event of our mental or physical incapacity the replacement trustee will act according to our prescribed wishes and their own best judgment to keep all we started going while we are not able. This step eliminates the cost and discomfort of the family taking legal steps to appoint a conservator and have a relative declared incompetent. It seems so sensible, unfortunately most people don't know about revocable trusts or use them. 

Estate Transfer Tax
The federal government, as well as many states, levy estate taxes when assets succeed to a second generation. The federal rate of tax on assets above $675,000 is 37% rising to 55% on amounts over 3 million. This is no doubt, the largest tax any of us will ever have the privilege of paying. 

Since the first $675,000 is not taxed, why not gift it to children (or even grandchildren) if you can do without it and avoid the estate tax as well as the tax on the growth while younger generations hold it? A gift of $675,000 during life could be worth an astounding $4,500,000 at 10% compound twenty-five years later. In fact the scenario can be leveraged with a gift of life insurance to reach $10,000,000. All this is possible with no estate tax. Why don't more people who can afford to do so use gifting?

Since estate tax is measured by the "fair market value" of an asset at the time of death, why not see to it that the market value is discounted by techniques allowed by law? Creating an entity, which has two forms of ownership, one with a vote, the other without would reduce the market value of the interest without a vote. Such an instrument is a "Limited Partnership". By placing our business assets in a family limited partnership (FLP) we can reduce the taxable value of our assets by as much as 40% (varies with type of asset). This reduction in market value saves us the tax in direct proportion to the discount. This may be worth millions in saved taxes, and even more since our children will have the funds to grow during their lifetimes rather than losing them to tax. 

Life Insurance
This unique product is poorly understood as a tax tool and planning device. Many of us think of life insurance to protect our dependants while they are young and vulnerable. That of course is a basic and vital application of life insurance. As we age and accumulate more assets, we tend to think we can "self insure" for our income replacement needs. Of course we can, but what about the estate tax? If we use our own money to settle the estate tax, we need to create a fund to pay the tax on the fund we set aside for tax. Simply put, the tax is taxable. A one million dollar tax may cost our estate $1.5 million. How much could one million of life insurance cost? A well-designed policy should cost less than 40 cents on the dollar total. Additionally, the policy will pay in cash; how many of us keep 50% of our net worth in cash? The policy may be owned by a special life insurance trust to avoid estate taxation, or our children may own it. Once again we wonder why more families don't use the obvious advantage over forced selling of businesses and other assets. 

Not every attorney, accountant, or life insurance professional is skilled and knowledgeable in advanced estate planning. For those fortunate enough to have significant assets, locating and assembling such a team may reap very large family benefits.
Ray Chodos and Adam Chodos, Esq., CPA are members of the Wealth Preservation Group LLC, a Greenwich, Connecticut based planning organization specializing in wealth preservation, business succession, executive benefits, interacting with the legal and accounting communities. Find more information at www.WealthPreserve.com.
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