Steven L White

When is the last time you reviewed your will? 
Do you remember your attorney discussing a concept known as the unified credit? 
Did your attorney discuss an amount that was exempt from estate taxes?  Not that long ago, this exemption amount was $1,000,000. 

As a result of various laws within the past 10 years or so, the exemption amount has steadily increased to $3,500,000 today. Many estate planners believe that this exemption amount may be made permanent. And, with a recession, even individuals who formerly were concerned about estate taxes, may no longer be because of a significantly reduced net worth. The problem, however, is that many people believe that if they don’t have a federal estate tax problem, they don’t need to review their wills or estate plan. Unfortunately, that inaction may result in a surviving spouse being disinherited.

Many estate plans for married couples are set up so that when the first spouse dies a certain amount of money and property is allocated to a family trust equal to the exemption amount.  The balance of the estate is usually left outright to the surviving spouse or to a marital trust for his or her benefit.  The purpose of this common estate plan design is for a married couple to shelter as much assets as possible from estate taxes. This was a great estate plan, and hence its popularity, when the exemption amount was $1,000,000 and the economy was growing. 

Now, in a recession, and with an exemption amount of $3,500,000, that estate plan could be disastrous. Let’s take a simple example.  Bill and Mary are married.  Bill has an estate of $3,500,000.  He dies in 2009.  His will was drafted prior to 2002 and directs his executor to fund a
family trust with property equal to the exemption equivalent.  When Bill drafted the will, the exemption amount was $1 million, so he believed his surviving spouse would receive a bequest of $2,500,000.  Upon Bill’s death, assuming that his estate is still worth $3,500,000,
the family trust will receive the entire estate because the exemption amount is now $3,500,000.

Bill probably did not intend to disinherit his surviving spouse.  Mary now only has the assets in her name, and probably an income interest from the assets held in Bill’s family trust.  It is probably safe to say that Mary is not at all happy with this result. To complicate matters, a surviving spouse may have the option of contesting a will or trust if he or she is not provided a certain amount of money. 
States that are considered “separate property” states (as opposed to “community property” states) usually have “right of election” laws that prevent  an individual from disinheriting a spouse – intentionally or unintentionally.   Even with this right of election, however, the result for the surviving spouse may not be what was intended.

Individuals like Bill should review their estate planning documents with their attorneys and financial professionals to determine the impact of the increasing exemption on their estate.  Indeed, estate planning is an evolving process.  In fact, all individuals should have their estate planning documents reviewed periodically and certainly whenever there are tax law changes or major life or economic events.  In this way, your attorney can have the documents updated  to reflect the changes in the tax laws, financial environment, or changes in intent.

Steven L White
Wealth Strategies Group

1) Open and fund a “Savings” or other preferred account – This will provide you with Liquidity, Accessibility, and Safety. It will help prevent the use of credit, and having to liquidate stocks or mutual funds which could be costly, especially if it’s your 401(k) or IRA.
2) Count to ten before making major financial decisions. Think about how making your decision today will affect or undermine decisions made in the future
3) Create an “operating budget” and review quarterly. Every successful business has a budget or multiple budgets to follow. A budget is not meant to be restrictive; it’s to give you a guide as to what your revenue is in relationship to expenses.
4) Question your strategy: Maybe consider reducing your retirement account contributions down to your employer match. Deferring income from a relatively low tax environment to an unknown possible higher tax environment could be a financial ambush.
5) Look for post-tax investment and financial strategies. This will help hedge possible higher income taxes in the future. Roth’s or participating Whole Life insurance may be suitable strategies for you.
6) Evaluate your advisors: Consider firing your financial advisor if he/she is telling you that you will retire in a lower tax bracket. This implies low wealth and less income.
7) Protect your income! Enroll in your group Long Term Disability program that you employer is offering. If you are self-employed consider purchasing an individual LTD policy that covers you in your “own occupation”.
8) Meet with your financial advisors 2 to 3 times a year.
9) Pay off any revolving debt and student loans BEFORE you put your money at risk in the markets.
10) Give back to the community by getting involved with a local mission or charity. This does not have anything to do with money but we all need to give back on a regular basis.

Financial Representative  The Guardian Life Insurance Company of America (Guardian) New York, NY
Steven L. White is a Registered Representative and Financial Advisor of Park Avenue Securities.
Securities Products and services offered through Park Avenue Securities LLC (PAS),   PAS is an indirect, wholly owned subsidiary of Guardian.  Wealth Strategies Group is not an affiliate or subsidiary
of PAS or Guardian.

PAS is a member FINRA SIPC

Steven L. White Jr.,

 Wealth Strategies Group

After taking the summer off and observing the financial markets of late I am writing new material for the fall that will take us into the New Year. If you have any concerns about the melt-down of the financial markets this week please contact me at your earliest convenience. Thanks for your patience and special thanks to you who have responded to my postings!

Steven L. White Jr.

Wealth Strategies Group

 

Interesting enough, many of my clients ask for help with their lack of liquidity in their personal estate or business, sometimes both. These clients come from all levels of the economic scale, not inherent to lower incomes as one might assume. To address the problem, and the solution let’s visit this with macro-economics 101.  Liquidity in this context simply means having enough money for a rainy day, month or year, meet business obligations, taking advantage of an opportunity or simply have a cushion. Might be a good idea to ask ourselves what the consequences are of not having liquidity and savings.  When such liquidity is needed what is the alternative if we don’t have any? Other options might be using credit which means having  to qualify for a loan and pay someone else a fee and interest to use the money, thus transferring your wealth to someone else’s war chest. If you are contributing to a Qualified Retirement Plan and have built up reserves and a nest egg is the use of this money an option? Maybe, but you will pay income taxes and a pay a penalty if you are under age 59 ½. Not to mention the lost opportunity cost of interrupting your accumulation or pulling the money out in a down market. In either case it’s not the most efficient strategy.   Liquidity in this context is principal that you are preserving not looking for rate of return. It is money that is available and relatively safe and usable without negative consequences to your business or estate. When establishing your liquidity war chest, think of “safety” and accessibility. Start off with a basic savings account with smaller deposits and Money Market accounts for larger deposits. Be careful with large accounts. You will get to a point that these accounts generate interest income that is taxable. At this point you will need some advanced strategies to minimize and mitigate income taxes. Not necessarily a bad thing to achieve.  When you achieve adequate liquidity and reserves it is much more comfortable moving into qualified or non-qualified retirement accounts, expanding protection and growth strategies. One of the fatal mistakes that I have made and seen others unknowingly make is to focus entirely on building up qualified retirement accounts and investment portfolios before establishing a liquid savings or other type of liquid account. Believe me when I say this…there is plenty of time for you to begin investing! Smart and efficient strategies begin with building protection and liquidity first.  

Steven L White

PAS and the Representative do not provide legal or tax advice or services