Ron Papa talks about navigating in volatile markets

February, 2011

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http://legacyadvisors.com/wp-content/uploads/2011/04/Legacy Advisors Economic Update 1Q2011.pdf

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http://legacyadvisors.com/wp-content/uploads/2011/01/Legacy Advisors Economic Update 4Q2010.pdf

Congress is always tinkering with the idea that they know better than you about where your money should go.  Estate tax laws have changed 13 times in 25 years.  Overhauls and tightening have created headaches for everybody, and 2011 appears to be no different.

When our “wills mature” (when we die), the government has a plan for our nest egg.  However, we have to decide if we want the one that happens to us (the government’s plan); or the one that happens for us (our plan).
There is an old adage that says the two best times to plant an oak tree are 30 years ago, and today.  In other words, the best time to start drafting a plan is when there is no pressure to implement it.  Drafting an effective estate plan is not an easy task; it takes time and effort.  The place to begin is with your (and your spouse’s) goals; especially those that involve the legacy you intend on leaving.  So, we must give consideration to your heirs, their age’s abilities, and needs. Is charitable giving a possibility?

Estate tax is a tax on your possessions on the date of your death; a tax which could be more than half of your estate’s value.   Many people have a larger estate than they realize.  The inventory of what is subject to this tax is exhausting: retirement plans, IRA’s, loans to others, cash, savings, checking, CDs, stocks, mutual funds, bonds, treasuries, tax-free municipal’s, jewelry, cars, stamps, boats, paintings, and even life insurance.  And, let’s not forget your real estate: your primary residence, vacation homes, timeshares and limited partnerships.  Even income that you expect to receive from others can be included in your estate.

Estate and inheritance tax is based upon the fair market cash value of your property at the time of your death, not what you originally paid for it.  State probate and death taxes are based on the location of your property.  Thus, if you own property in different states, each state has to be probated and each will want their fair share.
The only real alternative to a will arrangement is to set up a trust structure during your lifetime which, with careful planning, can operate to remove the delays, publicity, court costs and contestability issues; not to mention exorbitant taxes.

The problem is that many Americans have no estate plan.  They incorrectly assume that joint ownership of their assets takes care of things, or they believe that their property is not worth enough to be concerned about legal documents and potential estate issues.   These beliefs can be shortsighted and costly, and ultimately they raise unexpected and unnecessary problems.  A will is not a substitute for a trust. It does not avoid probate.

Many individuals believe, or are advised to believe, that the way to put their legal affairs in order is by making a comprehensive will.   Under this arrangement the executors named in the will would apply for a grant of probate; take physical possession of the assets of the deceased; and then distribute those assets according to the terms of the will.

What’s more, many people believe that with the higher exemption amounts ($1-3.5 millions) from estate valuations, assets can pass tax-free to where they want them to go.   However, this type of thinking is fundamentally flawed.  With property that spouses own jointly, half the value is included in the estate of the first spouse to die; but, the full value is counted when the survivor dies.   This obviously results in a much bigger estate tax.

Here are some issues that you should be concerned about:

• The death benefit proceeds from life insurance are income tax free.  They are not, however, estate tax free.  They can be taxed in your estate if you had any incidental ownership at death.  This occurs if you own or control the policy and can name new beneficiaries; or you have the power to borrow against policies; or take out cash value.

• Life insurance that you give away (as owner) can come back as taxable to your estate, even after you (the donor) die and leave it to others.

• You also have incidents of ownership when you’re involved in paying the life insurance premiums even on your own life, and this death benefit can be includable in your taxable estate.

• Pensions and IRAs are taxable; except for pensions fixed before 1985.

• Large gifts that exceed $13,000 (or $12,000 beginning in 2006) can also be added into your estate.

• Also overlooked is property that’s been partially given away where you retain the right to use it. For instance a house you give away, but, live in it rent free could be put back into your estate. Likewise for securities and stocks that you give away, but keep voting rights to.

• Even when you may control the property of others over which you have certain rights, such as a power granted to you under another’s will could be kicked into your taxable estate.

• We have to decide if we want the one that happens to us (the government’s plan); or the one that happens for us (our plan).

Remember, there is a plan in place for our nest egg: we need only to choose between the one that happens to us (the govt’s plan); or the one that happens for us (our plan).

We, at Legacy Advisors Wealth Management, are available to discuss the benefits of this and other valuable retirement planning strategies.  Learn why our guidance is based upon a dual maxim: “enriching today…ensuring tomorrow.”  To learn more about how to protect and preserve all that you worked so hard to achieve, you may call us at (781) 556-1038; email us at rpapa@legacyadvisors.com; or visit our website: www.legacyadvisors.com.

By: Ronald A. Papa, MBA

On December 4, 2010 Legacy Advisors Wealth Management held their annual holiday brunch at the Blackrock Golf Club in Hingham.  Ron and Sharyn Papa wish to thank all the guests who came this year to help make the event a joyful and festive one!  Click on the link below to see some photo highlights: