California Insurance Continuing Education - Objectives of Estate Planning
California Insurance Continuing Education - Objectives of Estate Planning
There are four distinct objectives of a proper estate plan. Many times a plan is perceived as only having one, or possibly two, of those objectives. Since there may be different specialists involved in the Estate Planning process, such as Attorneys or Accountants, an individual should be sure to not only realize such shortcomings in a plan, but to safeguard against it. A truly comprehensive estate plan will address all four of these objectives:
1. CREATE LIQUIDITY
Liquidity means the ability to convert assets to cash without giving up value. Because of death and it's related costs that must be paid within a short time following death, one must be absolutely certain that the estate has sufficient liquid assets to cover such costs. Realistically it would seem that the annual increase in the cost of dying has exceeded the annual increase in the cost of living. Costs of burial plots, cemetery monuments, funeral director's fee and attorney fees have risen. Thus, if an individual's estate presently lacks liquidity, it can be assumed that the liquidity problem would continue to increase in the future.
The need for liquidity arises because of four general grouping of expenses materialize upon death. These expenses generally must be paid within one year of death.
A. Administration expenses - these are the expenses of opening, administering and closing the decedent's estate. Executor's fees and fees for the Executor's attorney represent the majority of expenses. Other expenses will include Court costs; costs of appraising estate property; costs of insuring estate property while estate is opened; maintenance or repair of estate property; expenses of defending a Will contested by disgruntled heirs; auction fees; and the cost of administration. Studies of I.R.S. statistics reveal that these expenses will shrink the estate by 4-5%.
B. Indebtedness of the decedent - mortgages are usually the most significant debt. Many families will want to retire the mortgage at the death of the first spouse so that the surviving widower and children are not burdened with this debt.
Other debts would include automobile loan balances, credit card accounts and other installment credit, and final expenses of the decedent's last illness. Accrued taxes would also be considered debt. This would include accrued but unpaid income taxes, (federal, state, local), property taxes and any other taxes which the decedent had incurred but not paid. It should be noted creditors have a limited period of time in which to file claims against the estate. The Executor then has a period of time, usually the first six months after death, in which to decide the validity of such claims and settle or pay them. Debts will vary according to the estate but they (generally) average 5-6% of the total estate.
C. Funeral expenses and related costs are a major cause of shrinkage. Expenses paid to funeral homes, burial expenses, tombstone, monument or mausoleum expresses, the cost of a burial plot, the cost of transportation of the body, florist's fees and prepaid expenses for future care of the burial site are all included.
D. Death taxes, federal and state, are another cause of estate shrinkage. Such taxes are important in the large, unplanned (or poorly planned) estate. The federal estate tax rates are progressive, so a higher percentage of the larger estate is forfeited to taxes unless steps are taken to minimize this. If an estate is subject to the federal estate tax, it will be taxed at a marginal rate between 27-55%. This tax must be paid within nine months of death. This tax presents a serious treat to individuals but there are several techniques to minimize them.
In summary an estate that is not liquid, may have to borrow in order to provide living allowances for spouse and children and to pay estate obligations. Sometimes the value of estate assets rises or falls dramatically due simply to the owner's death. Thus, the death of an artist, author or entertainer often increases the values of his/her work. On the other hand, the death of a business owner has the opposite effect.
california insurance continuing education
insurance continuing education
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