Rethinking your estate plan

A smaller net worth and bigger worries about your kids' finances (not to mention uncertainty about taxes) have major implications for your estate plan.

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By Carolyn Bigda, Money Magazine

Though Les and Anna Glowacz's net worth has fallen, it still tops $3.5 million - making them vulnerable to estate taxes unless they make some smart moves.
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What about my inheritance?
More than a quarter of baby boomers who have at least one parent alive expect to inherit assets, according to a recent MetLife study. But will they? Consider a talk with the folks about where things stand so that you can base your own financial planning on facts rather than assumptions.
Step 1: Broach the subject gently.
Leanna Hamill, an estate-planning attorney in Hingham, Mass., suggests two ways to get the discussion started: Casually mention that you're updating your own estate plan, or mention the death of a friend whose estate wasn't arranged the way he wanted it.
Step 2: Ask questions that focus on your parents' needs rather than yours.
For example: Do you feel comfortable meeting the expenses of your later years? Do you have an up-to-date estate plan that accomplishes what you want it to? Would you like help finding an estate planner?
Step 3: Bring the discussion to their bequests.
Explain that you don't want them to sacrifice their own well-being to pass you an amount that's no longer realistic. Then say that getting a sense of how much (if anything) you might inherit will help you create a better plan for your future. What parent doesn't want that?
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(Money Magazine) -- When Les and Anna Glowacz made an estate plan five years ago, they felt confident they'd be able to pass a sizable chunk of assets to their offspring. But after the economy went south, "everything changed," says Anna, 55, a pharmacist.

Their net worth - mostly tied up in real estate investments in Chicago, where they live - has dropped roughly 15%, to about $4 million, and probably has further to fall. The couple worry that possible tax hikes down the road could take another bite, eroding the legacy started by the grit and sacrifice of Anna's immigrant parents.

"We're nervous," says Les, 56, a building inspector. "That money was not easily earned."

You don't have to be a millionaire to worry about leaving a smaller legacy than you'd hoped - if you can leave one at all. According to estimates by the Federal Reserve, average household net worth dropped nearly 23% from a survey period starting in May 2007 to October 2008. That happened just as many Americans began feeling more pressure to help their kids who are struggling in this rotten economy.

Meanwhile, look for tax rules to change. The federal estate tax was scheduled to vanish in 2010 and reappear in 2011 at 55% on amounts over $1 million. But Congress is likely to extend the current tax - 45% with an exclusion of $3.5 million - for the next year. After that, when lawmakers start looking for ways to chop the deficit, they could lower the exclusion dramatically. Planning amid the uncertainty is a challenge.

Bottom line: Your current estate plan may no longer make sense. And a good one is essential. Because even if you think you'll exhaust your assets by the time you die, you never know when that time will come.

So ask yourself the five questions that follow. The answers will point you to solid strategies for maximizing the amount that goes to the people (and causes) you care about most.

1. Give now or later?

Estate planners used to advise relatively affluent people to give some money or other assets to their intended heirs while everyone was still alive. The reason: taxes. Giving now reduces the size of your taxable estate, beefing up the total amount that goes into your heirs' pockets. (You can give up to $13,000 per recipient per year tax-free, or $26,000 for a couple.)

But because the federal estate-tax exclusion rose to $3.5 million this year - up from $2 million in 2008 - and could be extended for at least another year, taxes probably aren't a pressing concern for you right now. Instead, you should be thinking about whether your diminished assets will be enough to take care of you. Before giving your money away, "you need to make for darn sure your retirement needs will be covered," says Gerald Dorn, an estate-planning attorney in Reno.

How much will you need? If you're a 65-year-old retiree and want to withdraw an inflation-adjusted $60,000 a year from investments (in addition to whatever you'll get from pensions and Social Security), you should have roughly $1.5 million set aside for yourself. For a quick estimate of how much you and your spouse will need in retirement, use the "What you need to save" calculator.

Okay, let's assume you have enough for your retirement needs but less than $3.5 million. Giving while you're alive may still make sense - and not just because your recession-hit kids may need help now.

For example, your state may levy its own estate tax that kicks in at a lower level than the federal one (see the map "Where Dying Really Costs You"). Or you may want to hedge against the very real possibility that Congress will eventually lower the estate-tax exemption back to, say, $1 million, where it was as recently as 2003. Doing some giving now is a kind of insurance policy, says Steve Hartnett, associate director of education at the American Academy of Estate Planning Attorneys.

If you're going to give, now is an ideal time to make a present of assets that have been beaten down but could appreciate significantly in the future. Say you own stock in General Electric. The price at the October 2007 market peak was $38.40; today it's around $12. As a result, you can give three times as many shares without triggering a gift tax today as you could during the bull market.

2. Equal or 'fair'?

How should you split your money among your offspring? In a 2007 Money survey, 69% of respondents said dividing their estate equally was very important to them. Experts agree that equal is generally better, even if one of your kids is a struggling actor and another is a successful software developer. "Anything else is likely to cause conflict," says Victoria Collins, a financial planner in Irvine, Calif., and co-author of "Best Intentions," an estate-planning guide.

Another reason to keep things even-steven: You don't know what the future holds. Your single son marries and has five kids; your techie daughter loses her job and becomes a teacher. Unless you're willing to constantly tinker with your will - and explain every change to your kids - parceling out different amounts can back-fire bigtime.

A better solution: Bequeath your children an equal amount upon your death, but make gifts as needed to them while you are alive if you can afford it. Want to help your daughter with your grandchildren's education? Contribute to their 529 college savings plans. (The IRS allows you to make the equivalent of five years' worth of gifts to a 529 all at once - that's $65,000 a child, or $130,000 if given by a couple.) The struggling actor is trying to buy a home? Help him with the down payment.

There are exceptions to the "equal" rule, however. A disabled child who is dependent on you will probably require a bigger share of your assets, which you can provide through a so-called special-needs trust. (Ask your lawyer for details; you can also get information at A child who works in the family business may deserve a larger share of it than one who doesn't. No matter what you decide, explain your thinking so that your kids won't have wrenching and potentially costly disputes later, suggests Collins.

3. Simple or complicated?

Most people need only a simple will or living trust (which helps you avoid the cost of probate). But if you want to put conditions on your bequests, you definitely need a trust.

Take the example of a woman who had kids, divorced, and remarried. Through a qualified terminable interest property trust, she can make sure her spouse has enough income if she dies first but preserve the bulk of her assets for her kids. A lawyer who specializes in estate planning (find one at might charge $2,000 for such a trust vs. as little as $1,000 for a will.

And if your estate is large enough that you face taxes (either federal or state), your lawyer may recommend one of these popular options:

A bypass trust, also known as a credit-shelter trust. It lets a couple essentially double their estate-tax exemption. Let's say you're the husband and you die first. Your assets fund an irrevocable trust for the kids, up to the estate-tax exemption level (we'll assume it's the current $3.5 million). Any remaining assets go to your widow in a separate trust. To make sure she won't run out of money, set up the trust so she can receive income from the kids' trust and tap the principal for needs such as medical costs.

The big payout: When she dies, she can pass on $3.5 million in assets tax-free, on top of the $3.5 million you passed to the kids in the bypass trust. And this arrangement ensures that your kids - rather than some guy your widow winds up marrying later - get the money. Cost to set up a bypass trust: $1,000 to $1,500 on top of the cost of a regular estate plan.

A grantor-retained annuity trust (grat). It works like an annuity: You put money in and receive an annual payout based on the IRS-assumed interest rate at the time you set up the trust (it's currently 2.4%). At maturity any appreciation above that goes to designated beneficiaries, such as your children, tax-free.

Now that both interest rates and asset values are low, guess what? There's a good chance that the contents of the trust will grow more quickly than 2.4%, with plenty of money left over. "That makes this the perfect time to set one up," says Tony Perrelli, an estate-planning attorney in Lincolnshire, Ill. Cost: $3,000 to $4,000.

4. Want to give to charity?

If you'd like to donate some of your estate, one of the smartest ways is through a traditional IRA. Say you named your niece as the beneficiary of your IRA. She'd owe income tax on withdrawals, and the value of the IRA would be included in your estate for tax purposes.

But if you name a qualified charity instead, it would owe no tax on withdrawals and you could reduce the taxes your estate would pay. (This strategy makes less sense with Roth IRAs; because they're funded with after-tax money, whoever withdraws the dough won't owe income tax on it.)

Prefer to give the money now? Through the end of 2009 you can transfer up to $100,000 directly from a traditional IRA to a charity as long as you're 70 or older. You won't be able to claim a tax deduction for the contribution, but you won't owe income tax on the withdrawal either.

Another option you may want to ask your lawyer about: a charitable remainder trust. You put assets into the trust, which then pays you an income for a specified number of years or the rest of your life. After the trust matures, the assets go to the charity you've chosen. (At least 10% of the amount you put into the trust must go to the charity.)

This trust has several advantages. When you fund it, you can take a tax deduction right away based on the present value of the gift that the charity will ultimately receive. You can get a reliable stream of income (you must draw down at least 5% of the trust's value each year). And you can shift into the trust assets that have appreciated quite a bit - such as shares of Exxon Mobil that you've held for decades - and sell them in the trust without incurring capital gains right away.

Dave Hodgman, an estate-planning attorney in Chicago, advises such a trust only if you can afford to put at least $250,000 into it. Less than that, and the legal fees ($2,000 to $5,000 to set up) may be prohibitive.

5. When should you revisit your plan?

So you've constructed your estate plan. Congratulations! Now you can forget all about it and get back to watching the Cubs game, right?

Not exactly. If we have learned anything from the past year, it is how drastically things can change. New tax laws get passed; fortunes get steam-rollered; grandchildren are born. Such changes can quickly render even the best estate plan obsolete.

So be sure to contact your attorney every three years or so and ask whether your plan needs updating. Always call when you hear of estate tax changes that may affect you. That way, when the inevitable happens, you really can rest in peace.

This is part of a series of stories called The New Path, which focuses on strategies you can use to achieve your financial goals amid today's challenges.

Additional reporting by Alexis Jeffries contributed to this article. To top of page

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