Estate Planning For Women
By Kluger, Kaplan, Silverman, Katzen & Levine, P.L. September 9, 2011
This article from Forbes.com is a reminder that everyone should make sure things are in order. Especially women: “Estate planning affects women more profoundly, so they should take charge of this process, or at least be equal participants.”
Are you able to answer all the questions? Read the full article here.
Estate Planning For Women (And the Men Who Love Them)
Deborah L. Jacobs
05.19.11, 6:00 PM ET
Recently, a woman who had attended a lecture I gave at Barnard College on estate planning as a women’s issue, sent me a follow-up e-mail declaring: “I’m single but if I ever find my soul mate and marry, I’ll remember the ‘tax dowry.'”
That comment showed that she not only understood a complex new tax concept I had explained, but was determined not to simply acquiesce in any estate planning arrangements her soul mate (or his lawyers) came up with. Several other women who came up to me after that lecture expressed a similar determination. Bravo!
Gallery: Nine Things Women Should Know About Estate Planning
In a field still dominated by men, there’s a lingering tradition of paternalistic tools and techniques–such as locking inheritances up in trusts for widows who presumably can’t even balance a checkbook, let alone manage hundreds of thousands or millions in assets, or who might fall prey to financial predators. The December estate tax overhaul poses another, very different risk, namely, that women will capitulate to strategies that put them at financial disadvantage.
Estate planning affects women more profoundly, so they should take charge of this process, or at least be equal participants. Among Americans 65 and older, 42% of women, but just 14% of men, are widowed. Women’s longer life expectancy, combined with their tendency to marry older mates and their lower lifetime earnings means they are far more likely to see their living standards compromised in retirement if proper estate planning isn’t done. And since it is women who are most often widowed, they usually have the last word about which of a couple’s assets ultimately go to family, charity or the taxman.
Here are the questions every financially savvy woman should be able to answer:
What key deadlines apply when a spouse dies?
Starting in 2011, a surviving spouse can add any unused estate tax exclusion of the just deceased spouse to her own $5 million exclusion–this is called portability. So a widow can pass on as much as $10 million, untaxed, through either lifetime gifts or her will. But portability is not automatic. To get it, the executor of the estate of the first spouse to die must file an estate tax return, even if no tax is due. Surviving spouses should see to it that the form is filed even if they have nowhere near $5 million of their own, because who knows what the future holds?
Nine months is also the deadline if you plan to disclaim (turn down) any portion of what you inherited from a spouse so that it can go directly to your children or other family members or into a trust for their benefit. The new tax law makes it more likely that spouses will leave everything to each other outright. Other couples may want to give the survivor the right to disclaim at least some money and have it go into a family trust or bypass trust, as it is also called. This allows the survivor to make an informed decision based on her own financial resources and federal and state estate laws at that time. If you want to use this postmortem tax planning strategy, you need to keep an eye on the calendar.
What’s a tax dowry?
Starting in 2011, the tax-free amounts you can give to no-spousal heirs during life and at death are combined into a single $5 million exclusion. So, for example, if you have used $1 million of the exclusion to make lifetime gifts, the unused exclusion when you die will be $4 million, rather than $5 million.
Married couples get a new, special break: They can share each partner’s $5 million exclusion during life (this process is called gift-splitting) and give more to the kids now, tax-free. But of course this also reduces how much of the tax-free amount will be available when they die, either for their own use or to be carried over by the survivor.
This can pose some tricky issues when at least one member of a couple is wealthier than the other and has been married before. Soon after the new tax law passed, I heard about a situation in which the poorer spouse (a woman) with an unneeded $5 million exclusion agreed to combine the two exclusion amounts for lifetime gifts so that her husband could give more to his kids from a previous marriage, tax-free. Warning: Don’t give up your tax dowry without legal advice, and make sure it comes from your own lawyer–not one your spouse hired.
Gallery: Nine Things Women Should Know About Estate Planning
What’s the difference between a will and a living trust?
There is widespread confusion about the differences between these two documents, and when you need one rather than the other. A common misconception is that living (revocable) trusts avoid estate taxes, which is not true. Both a will and a living trust can be used to transfer assets, but each has unique uses. For example, a living trust can hold assets for your benefit while you are alive–say, in case you are suffering from dementia. Only a will can be used to appoint a guardian for a child.
In some states, living trusts are also used to avoid or limit the cost of probate–the process through which a court determines that a will is legally valid and approves the distribution of assets covered by that will. Whether probate is costly or burdensome will depend on the state. Still, there are times when you might want to use a revocable trust to limit how much of your estate goes through probate or to avoid it altogether. For example, if you are concerned about publicity over your net worth or the identity of your beneficiaries, you might transfer assets through a trust–which, unlike a will, is not a public document. Someone leaving assets to a domestic partner might use a revocable trust, because it is harder for family members to challenge a trust than a will.
A living trust is also useful if you own real estate in a state that is not your primary residence. Real estate is governed by the probate rules of the state in which it is situated. Unless the property is in a living trust, an Illinois resident who has a home in Florida, for instance, would need to probate the property separately there.
Whom can you trust?
Advancements in medical science and care may enable us to live fuller, longer lives. But that also means more women are likely to suffer from a diminished mental state–a harsh reality that’s difficult to accept. In case that happens, you should have a durable power of attorney, appointing a family member, friend or adviser as an agent to act on your behalf in financial and legal matters. Also make sure you have a health-care proxy, a separate document that authorizes an agent to make medical decisions on your behalf.
Choose carefully: A power of attorney, though necessary for all of us, is unfortunately also a license to steal. The best person to put in charge is a close family member–preferably one who lives nearby. Most financial advisers do not want this responsibility, nor is it cost effective to pay their hourly fee to handle routine tasks like paying bills. Naming joint agents, which is allowed only in some states, is one way to provide checks and balances. Or you can appoint another person, like an attorney, an accountant or a family friend, to supervise the arrangement. Before selecting an agent, it is important to determine whether that person is willing to take on the duties.
If you’re nervous about giving the signed document to your designated agent right away, you could leave it with your lawyer with instructions on when to turn it over. In that case, remember to tell your agent whom to contact.
Or, instead of making the power of attorney effective from the moment you sign it, you can specify that it be activated by a specific event, for instance, if you become incompetent. The problem with this approach, known as a springing power, is that someone must decide when you have reached that state. Traditionally, this has required a medical opinion.
Who would raise your children?
Few prospects are more wrenching than the possibility that young children will be orphaned. Often, parents put off writing a will because this particular thought is unbearable or couples cannot agree on a potential guardian. Some assume–incorrectly–that it is enough just to ask a relative or trusted friend to step in if the need arises.
But not formalizing the arrangements and doing some estate planning along the way could leave your children in a vacuum. For example, let’s say you are a single or surviving parent–in this group too, women predominate. If you do not have a written document outlining your wishes, a court usually decides who will fill your shoes. A custody battle might erupt or, awful as it sounds, no one may want your children. And without financial planning, there may not be enough money for your child’s support.
When choosing a guardian, people typically look first to relatives, starting with their own siblings–the child’s aunts and uncles. A second choice for some people is their own parents, if they are young enough. Even if certain family members seem like obvious candidates, take into account all the factors involved. Key questions to ask: Am I comfortable with the individual’s lifestyle and values? Would my child have to relocate? Can the prospective guardian incorporate my children into his or her household? If I have more than one child, would the guardian be able to keep them together? Does my child already have a relationship and a good rapport with the person?
Here too, you can build in checks and balances–by putting a different person in charge of the money you leave for your child’s support. You can name a guardian for the funds, or put them into a trust and designate a trustee to spend the money on your child’s behalf. While financial guardianships are a matter of state law and require court supervision in some states, trusts are a private matter. A trust also gives you much more say over how the money is spent.
Is there money in the bank?
In the process of dividing assets into “yours,” “mine” and “ours,” couples should make sure there is enough money to cover immediate expenses if one of them suddenly passes away. These reserve funds can be held in each of your separate accounts or in a joint one. Just be aware that when you die, your spouse or partner will probably not have access to your individual account right away, and you will each need the discipline to keep the fund flush. A better approach is to maintain a joint account designated for emergencies that can also be available for this purpose.
With bank and brokerage accounts, the most frequent form of joint ownership is joint tenancy with rights of survivorship. It is available to any two people who want to own assets together. Both owners have access to the assets during life, and when one joint tenant dies, the survivor immediately becomes the sole owner of the whole property, regardless of what the will says, or whether there is a will. These features make this type of ownership appealing both to spouses and other couples.
Despite these advantages, joint tenancy has a serious drawback: it exposes each owner to the other’s potential liabilities. Unmarried couples also need to be aware that state laws on joint tenancy for non-spouses may vary. Consult a lawyer who is familiar with the rules of the state where you live.
Should you give away assets now to save taxes?
Now that the estate tax exclusion has gone to $5 million per person ($10 million per couple), this issue concerns very few people. Still, a popular new refrain from estate tax experts is that you should rush to give to family members before the tax-free amount is scheduled to drop to a measly $1 million in 2012–even though that change isn’t likely to take effect. Of course many of the transactions they recommend for making gifts now generate high legal fees for them.
Keep in mind, too, that most methods of saving estate taxes require you to totally give up ownership and control over assets, whether you are giving them to people directly or putting them in a trust. A threshold question for anyone contemplating this strategy: Can I afford it? Be sure you are leaving yourself enough, and to be on the safe side, you should assume you will live to an advanced age.
You can give anyone $13,000 a year (a couple can give $26,000) without eating into your $5 million exclusion. If you want to give away more than that, you can either count your gift against the $5 million exclusion amount or, if you have used up the tax-free amount, pay gift tax of 35%. Remember that each dollar of the exclusion used during life shaves a dollar off what is available for your estate to use after your death.
So before you dip into the lifetime exemption, consider some simple, tax-free ways to prune your estate. They include paying tuition and medical expenses for another person (such as a grandchild) directly, funding 529 college savings accounts and converting a traditional IRA to a Roth.
Deborah L. Jacobs, a lawyer and journalist, is the author of Estate Planning Smarts: A Practical, User-Friendly, Action-Oriented Guide, available at estateplanningsmarts.com.