Working Together to Assist Clients

Today’s blog begins a series focused how attorneys and financial planners can work together to assist clients following the death of a loved one. Over the coming month we will address a variety of areas where clients benefit when their advisors work together as a team to make a very difficult time in their lives a little easier. We invite and encourage our readers to send us their thoughts on these issues so that we can take them into account as we tackle this complex subject.

     The loss of a loved one is one of the most emotionally difficult experiences a person will ever face. Sadly, during our careers as planners and advisors, we face the loss of a client, with unfortunate regularity. When those clients leave behind a surviving spouse or children, it is important to be prepared to assist those survivors while being mindful of their grief over their own loss. This is a perfect opportunity for the attorney and the financial planner to work together for the maximum benefit of their client.

     There are a wide variety of issues that arise after a death, including the administration of the decedent’s estate and trust, updating estate planning documents for surviving spouses, and making financial decisions that take into account their changed circumstances. Some of these decisions must take priority over others and it falls to attorney and planners, who handle these matters with more regularity, to keep clients from becoming overwhelmed by the decisions that must be made, even as the client still grieves for their loved one. 

     Immediately following a death it is important to quickly determine if there are any documents showing the deceased client wished to make anatomical gifts, had a prepaid funeral, or left specific instructions for funeral or memorial services, as well as a specific burial request. This is important first because such instructions elevate the need for survivors to make certain decision, but also because discovering these instructions after the survivors take other contrary actions can be devastating. 

     After addressing matters related to the disposition of the decedent’s remains, the personal feelings of the client are paramount and their mourning should take precedence over meetings with planners and advisors, but when they are able, it is important to begin the process of administering the estate and trust. A first step in the process is to determine a list of assets and values held in the estate of, or a living trust of, the deceased spouse. The client's planner often as this information and is the best person to assist in developing a list of assets. Documents should be reviewed to determine ownership of assets and beneficiaries of any insurance policies or IRAs. A review of estate planning documents will indicate whom beneficiaries are, what are the terms of distribution, and who are the persons chosen to help administer the estate, the personal representative and the successor Trustee.

     In this stage of the process, the attorney can assist the client in determining whether any probate of assets is necessary and whether it is necessary to file a federal estate tax return. If a business was part of the deceased's estate, it is important that the surviving spouse and successor Trustee continue to handle the management of that business appropriately. It is also important to determine if any Buy-Sell Agreements exist to govern the transfer of the business to surviving partners. Finally, if there are any assets outside of the state of Michigan these will also have to be administered. 

     With their more complete knowledge of the assets, the planner is invaluable at this point in the process for determining what assets remain available for the spouse, revising  the surviving spouse’s investment plan and providing a strategy for cash flow for both the short-term and long-term to assist the client in maintaining his or her lifestyle.

     This only begins to scratch the surface of the choices that face clients at this difficult time in their lives. Over the coming weeks we will address a variety of issues in greater detail, paying special attention to how attorneys and financial planners can work together to assist clients in managing these issues. As we continue to explore this topic we must remind ourselves that as important as this planning is to our clients, we must always balance the need to make decisions with the client’s need to mourn their loved ones.

Federal Estate Tax: Onerous & Unfair or Much Ado About Nothing?

     A common worry for nearly every adult is the impact of taxes on their lives. This is especially true for estate planning, where clients worry about the taxes their beneficiaries will be liable for at their death. The good news for all of these clients is that their beneficiaries generally are not liable for any amount of taxes on their inheritance, because the tax liability is the primary responsibility of the estate prior to distributions, and not the beneficiary. In addition, clients are relieved to learn that because of the most recent estate tax changes, they are unlikely to have any estate tax liability at all. 

     The estate tax, is a tax on the transfer of assets from one person to another at death. People tend to understand the requirement of paying income taxes or sales tax, but feel differently about the estate tax because of the perception that taxes already been paid on the assets to be transferred at death and should not be taxed again with the estate tax. While this is a common belief today, estate taxes have existed in various forms around the world for hundreds of years. Only recently has the perception that such transactions are different from other exchanges gained popularity. 

     A reason for this change of perception can be traced back to as early as the 1940s when opponents of the tax began to refer to it as a "death tax," but the most recent push against the tax began during the late 1990s when Newt Gingrich served as Speaker of the House. Since that time, rarely has a federal legislative session passed without someone proposing a complete repeal of the estate tax. In the current Congress, Senator John Thune recently proposed such a repeal. Like many others who attempt to raise the population’s ire towards the estate tax, Sen. Thune takes liberties with the facts about the law. In his most recent statements on the proposed legislation, Sen. Thune attempted to garner support from small business owners and farmers by stating that one-third of businesses who owe estate tax will owe more in taxes than the assets of the business. Unfortunately for Sen. Thune is incorrect, based on the law as it stands today. The Senator’s office later confirmed that Sen. Thune was quoting from a more than decade old report from a time when the estate tax exemption threshold was $675,000, and also omitted the fact that the statistics he cited only referred to liquid assets of the business and not the total value of the business. These sorts of distortions are precisely the reason that a tax that affects so few people presents such a common concern for clients.

     The truth is that the estate tax has almost no impact on the vast majority of people. This is because there are two major exemptions to the estate tax that result in almost no one paying any tax. The first major exemption is the Marital Exemption, which allows the spouse of a deceased individual to inherit any amount of money without paying any estate tax. This means that no matter how large an estate may be, if it passes to the decedent’s spouse there will be no tax liability. With the Supreme Court's 2014 Windsor decision, this exemption applies to both legally married opposite sex and same-sex couples.

     The second major exemption, known simply as the Estate Tax Exemption, creates a threshold under which an estate will not have any tax liability. Currently that threshold is $5,430,000 for a single individual and the decedents surviving spouse may roll over any unused portion of the exemption at their death. This means that a married couple must have an estate larger than $11,860,000 before they will pay even one dollar of estate tax. As a matter of fact, in 2013, 2.6 million people died in this country and only 4,700 of them had to pay any estate taxes, less than .2%. 

     A benefit of this very high threshold for taxation is once clients understand that their estate is not subject to the estate tax it frees them up to focus on what is really important in estate planning--. designing a plan to distribute their assets to their loved ones in a manner that is in the beneficiaries' best interests without requiring any complex legal maneuvering to mitigate taxes.