Finance: Planners Review Insurance,
Trusts as Options
Small-business owners need to plan their estates carefully since President Bill Clinton’s veto last month of a Republican bill repealing the federal inheritance tax, two local financial planners said. Otherwise, their heirs could face a hefty tax bill.
“Very few of the wealthiest Americans pay any federal estate taxes,” said Lance Pelky, principal of Lance Pelky & Associates Inc., a University Towne Centre financial planning firm. “The estates that end up paying are those of farmers, which are twice as likely as the average estate to pay inheritance tax, and those of small-business owners, which are three times as likely to pay.”
That’s because many farmers and small-business owners have more than $675,000 equity in a business or farm. That’s the current amount above which estates are subject to a 37 percent to 55 percent inheritance tax, Pelky said.
Some things won’t change, however.
“Business owners will continue to have a need for life insurance even if the estate tax is repealed,” said Kent Thompson, a financial planner with the San Diego office of American Express Financial Advisors. “For example, they may want to pass on the family business to a designated heir while using life insurance to compensate the other heirs.”
Both financial planners said trusts are a good way to shelter assets from federal estate tax up to a limit of $1.35 million.
“It’s true that some types of trusts might disappear, or at least lose their principal usefulness if estate taxes were repealed, but they still help avoid the expense and hassle of probate,” Thompson said.
Thompson said while 98 percent of the people who die each year don’t have estates big enough to trigger the inheritance tax, some estate planning needs to be done so that money will go to those people and organizations it is intended to go to.
A will is a basic element in estate planning, he added. Wills and accompanying letters of instruction can make sure personal property goes to the right heirs, he said.
Pelky said the Internal Revenue Service frequently audits estates of more than $1 million when a Form 760 is filed. Consequently, heirs should be prepared for the expense associated with an audit.
Many of the baby boom generation, those between 40 and 55 years of age, are now experiencing the transfer of wealth from their parents, Pelky said.
“The children don’t know how their parents have structured their estates, or whether they have done so at all,” Pelky said, adding that they shouldn’t be shy about asking.
Another thing to remember is individual retirement accounts were not intended to be tax-free vehicles for the transfer of wealth between generations, he added. It may sometimes be better to withdraw money from an IRA and pay the usual tax on it, than allow money to accumulate so that more taxes are owed when an heir receives it, Pelky said.
He also suggested anyone involved in planning their estate consult with a certified public accountant knowledgeable in the area of estate planning as well as talking to a financial planner.
