Estate Planning Misconceptions
Knowing the facts about estate planning will help you make better decisions about the future of your business.

By Elvin Knight

There is no one right way to transfer the family business to the next generation. But there are wrong ways. Several misconceptions about estate planning continually plague people trying to protect their wealth. Fortunately, you can use the answers to common estate-planning questions to avoid these problems:

Q:    I’ve had an estate plan in place for years, so I don’t have to worry about estate planning anymore, right?
A:    Wrong. The beneficiaries you designated with your old plan may no longer be appropriate, and your asset allocations may significantly distort your current intentions. In addition, the people you chose as guardians for your minor children may no longer be suitable to act in such a capacity. Similarly, the trusted brother-in-law you designated as an executor or trustee under your old plan may no longer be your brother-in-law, or you may no longer trust him.

You also may find that you’ve unintentionally disinherited your spouse or significantly reduced the amount of your estate he or she should receive because of the increases in the estate tax exclusion beginning in 1997 and accelerating this year. For example, from 1987 to 1997, the estate tax exclusion was $600,000, and many people in their estate plans allocated that amount to their children and the balance of the estate to their surviving spouses. But under the new tax law, the estate tax exclusion is $1.5 million this year and increases until it reaches $3.5 million in 2009. If your old plan allocates all of this exclusion to your children, will it result in leaving your children too much and your spouse too little?

Q:    I have all my assets in joint tenancy, so I don’t need an estate plan, do I?
A:    You still need an estate plan. The joint tenancy property will pass to your spouse and it will avoid probate and estate taxes. But with all your property in joint tenancy, you can’t take full advantage of the estate tax exclusion. For example, let’s say $2 million of your family’s assets is held in joint tenancy. If you die in 2004, your assets will pass to your spouse estate tax free and will qualify for the marital deduction. If your spouse dies in 2005, when the estate tax exclusion is $1.5 million, his or her estate will be worth $2 million and will pay $225,000 in estate tax. On the other hand, if you split the joint tenancy property into separate property with you owning $1 million and your spouse owning $1 million, you and your spouse each can take advantage of the $1.5 million estate tax exclusion. Plus, neither you nor your spouse would owe estate tax regardless of which one of you predeceased the other. This results in savings of $225,000 for your children.

Q:    All of my family’s assets are in my name. This is a good strategy, isn’t it?
A:    Probably not. This may be effective if you predecease your spouse because, under current tax laws, assets held by a decedent will receive a step-up in tax basis when they pass to the decedent’s beneficiary. Accordingly, all of your family’s assets will have an adjusted tax basis.
But, of course, there is no assurance that you will predecease your spouse. If your spouse dies first and doesn’t have his or her own estate, then your family will not be able to take advantage of your spouse’s estate tax exclusion. To take advantage of the estate tax exclusion, both spouses should share the assets. If you’re uncomfortable transferring assets to your spouse outright, consider using a lifetime marital trust.

Q:    I own a significant amount of life insurance. Because the proceeds are tax free, I don’t need to worry about insurance in my estate plan, do I?
A:    Actually, you do. Although life insurance proceeds generally are not subject to income tax, they are includable in your estate for federal estate tax purposes. As a result, on your and your spouse’s death, the remaining proceeds are subject to estate tax with a maximum rate up to 48 percent. You can use an irrevocable life insurance trust (ILIT) to keep life insurance proceeds out of your estate for estate tax purposes.

Q:    I handle all of my family’s financial matters. There’s no reason to bother my spouse with the details of my estate plan, is there?
A:    Yes, there is, particularly when there is a family business. The estate planning process works better when it’s built on trust and communication. Consider involving your spouse when forming your plan, because lack of knowledge and surprise may lead your spouse to mistrust your designated executors, trustees and professional advisors. In fact, you should communicate your estate plan and family holdings to not only your spouse at an appropriate time, but also your adult children.

Estate planning is not just death planning, but also lifetime planning for managing your wealth and how it will be used during your lifetime and distributed at your death. A solid estate plan will help you achieve your financial goals during your lifetime and protect and preserve property you leave for your spouse, children and grandchildren, disabled heirs or your charitable interests.

Elvin Knight is the Chair of the Tax and Estate Planning Practice Group and is a member in the Kansas City, Mo., office of Husch & Eppenberger, LLC. He can be reached at (816)421-4800.