CHAPTER 1

What Is Estate Planning?

It's More Than Money

Estate planning is people: spouses, children, grandchildren, favorite familymembers, charities, and close friends; their security and prosperity withoutyou. It is state and federal taxes: income, death, and gift. It is lawyers,accountants, insurance people, banks, and financial planners. It is society'srules along with the red tape and courts of law that accompany those rules. Itis a world of advisors busily accomplishing things that most people do notunderstand. It is time and money. It is protecting and enhancing your estatefrom an uncertain future.

Estate planning takes time: a little now or a lot later; time to identify andaccomplish goals that are personally important; or time to react to a host ofexternal forces that may have their own interests rather than those of yourloved ones.

Estate planning involves money, business, and finance. It involves dollars, lotsof dollars, to create and maintain a lifestyle for you and your family while youare alive, and for your loved ones after your death. It involves the sacrificeof dollars to purchase life insurance or to invest in a portfolio, in lieu ofpersonal indulgences, with the sincere belief that you are creating security foryou and the people and causes that matter to you.

Estate planning is human ambition and the fulfillment of that ambition byacquiring and holding property. It is a life statement of commitment to others,while maintaining a lifestyle that is comfortable for you.

Estate planning is living planning. It is your attempt to use your resources tocreate an environment for yourself and others that will be sufficient for youand extend beyond your life. It is the ability to share and control your successduring life and after death.

We always ask our clients, "What do you want done with your property and lifeinsurance after you're gone?" The responses have been different, but they allcontained thoughts that could be summarized as follows:

I would like to give my property to whom I want, in precisely the way I want.Further, I wish my beneficiaries to receive my property when I wish them toreceive it.

But, and this is very important to me, I want to save every last tax dollar,both state and federal, in accomplishing my objectives. Oh yes, I also want toavoid, or at the least reduce, attorneys' fees and court costs.

Finally, I don't want myself or my family involved in a lot of red tape thatprevents my objectives from being accomplished quickly.

You probably know what you want to do with your property both during life and ondeath. You are sensitive to the red tape imposed by society's rules. You needprofessional help in accomplishing your planning objectives.

You are unique; therefore, planning for your estate must be unique. Planning, tobe good, must fit you; it must be comfortable, like a favorite pair of shoes.You must understand the estate planning process, for without understanding therecan be no comfort. Planning without understanding results more often than not inuncertainty and anxiety.

Our main objective is to assist you in understanding the rules, take the voodooout of planning, and replace it with knowledge and comfort. In short, we hope toexpand your planning horizons.

Your understanding is our mandate. With the comfort of knowledge, you should beable to confidently seek out the professional advisors and products and servicesyou need. You should have the ability to communicate your goals and objectivesto your advisors. On completing this book you should have a good grasp of theestate planning process and the techniques it utilizes. You should be able todiscern between the knowledgeable professional and the not-so-knowledgeableprofessional. We hope to give you enough understanding of the estate planningprocess to enable you to participate in a meaningful dialogue with your advisorsin accomplishing your estate planning objectives.

We have heard the question many times: "Why do today what I can put off untiltomorrow?" In estate planning, tomorrow may instantly become today. None of uscan predict the timing of our own deaths with certainty. Death sneaks up on mostof us and respects no time parameter. Statistically, there may be a tomorrow,but don't plan on it! Planning now is mandatory.

Estate planning is a process that begins within your life and can continue farafter death. It is not unique or indigenous to any economic class. Its audienceis America, and its players are Americans. How often we have heard, "Estateplanning for me? Heavens, I don't need an estate plan! I have so little."Really? No loved ones, no disposition toward a favorite family member, closefriend, or institution (charitable or otherwise)? No property, no insurance orpension plan? No personal possessions, mementos, family heirlooms that require aloving pass on? No debts?

Estate planning is virtually for everyone, and it is getting more complex everyday. When this book was first written in 1981, the Economic Recovery Tax Act of1981, which was given the acronym ERTA, had just been passed. It revolutionizedfederal gift and estate tax laws. Since the passage of ERTA, there have beenwell over 150 tax laws passed, culminating with the Tax Relief, UnemploymentInsurance Reauthorization, and Job Creation Act of 2010. Each time a new actpassed, the new laws were intended to reform, simplify, or reduce taxation. Eachtime, the laws became more complicated and more people were affected.

The good news is that these laws have led to the ability to reduce gift, income,and estate taxes. The bad news is that "death taxes" have become a politicalfootball kicked around so many times that there is far less certainty in estateplanning now than there has been over the last 65 years. The Act of 2010 has alife of two years, one year of which is gone. There is absolutely nocertainty what the federal estate, gift, and generation-skipping laws will be in2013. The Tax Relief, Unemployment Insurance Reauthorization, and JobCreation Act of 2010 was passed on December 17, 2010, because the estate, gift,and generation-skipping tax laws were to revert to the laws of early 2001,allegedly ending the uncertainty introduced by that law.

Our greatest fear is that you will be lulled into a sense of false security,believing you and your family do not have enough assets to be subject to thesetaxes on the very wealthy. Congress can change the definition of who is wealthyat any time. Under our new tax law, in 2013 the federal death tax laws couldrevert to those in existence at the beginning of 2001. That means that if yourestate is over $1 million, it will be subject to federal estate tax!

We want you to understand why you should plan now and protect your estate fromthe vagaries of Congress and an economy that is as uncertain as the tax laws.Estate and wealth planning today is far more about risk management than aboutanything else. No one knows what the economy will be like and what taxes will beimposed when you die. Taxes could be low and the economy could be booming, inwhich case your family will likely do well if you have planned properly. Butwhat if when you die the economy is not so good and taxes are high? Will yourplanning result in taking care of your loved ones or charities the way youwanted to? Planning is not assuming that things will work out for the best. Thatis wishful thinking. Our mantra has always been, "Plan for the worst, and youwill never be unpleasantly surprised."

On the bright side, our federal gift and estate taxes are in many waysvoluntary. Those with the knowledge of and access to expert professionals canescape most of these taxes. Creative lawyers, accountants, and other plannershave developed very effective strategies for estate planning in light of bothnew and long-existing laws. In fact, the planning landscape has changed soradically that we and our colleagues now refer to estate planning as wealthstrategies planning. Why? Because estate planning encompasses so many differentdisciplines and so many different techniques.

This book includes discussions of important planning techniques and how they canwork for you and your family. It is designed to get you thinking about theincredible opportunities for planning: planning to make your life moreenjoyable, planning to escape some of the economic problems of disability, andplanning to reduce or eliminate federal estate and gift taxes. It is our hopethat this book will motivate you to plan the right way, and right away. Moreimportant, we hope this book will make you understand that wealth planningencompasses huge doses of risk management, and that while you and those you careabout hope for the best, you'll institute risk management planning to protectyour estate from the worst, and enhance it as well.

CHAPTER 2

Title

How Do You Own It?

"I don't know how I own it" is an answer we frequently hear from our clientswhen we ask in whose names their various assets are held. One of the majorproblems confronting estate planners is that people frequently buy and sellassets without the foggiest idea of how those assets should properly be held.

Not understanding how property should be owned makes estate planning afrustrating and impossible exercise. You cannot plan for property that you donot own; and if for some reason you do attempt to do planning with what you donot own (and this does happen), your attempt will be to no avail.

There are three often-used methods by which an adult takes ownership ofproperty: fee simple, tenancy in common, and joint tenancy with right ofsurvivorship. We will explain each method.

The concept of fee simple ownership is easy. It means to completely ownsomething by yourself. The fee simple owner is a sole and absolute owner.

To own property in tenancy in common is to own it with one or more other people.As a tenant in common, you cannot be a fee simple owner of the entire asset. Anexample of this form of ownership is if you and a friend own a 100-page book.You own the book as tenants in common. Each of you owns 50 percent of the book;that is, each of you owns 50 pages. Each of you would be able to leave half, 50pages, on death to anyone. Each of you while alive could give your 50 pages awayto anyone. Each of you owns absolutely 50 percent of that book. Each of you is atenant in common with the other.

There is no limit to the number of tenants who can own something with others ina tenancy in common; 100 people could be tenants in common in the ownership of a100-page book. Each would then own one hundredth, or one page, of the book.

The only real issue occasioned by tenancy in common is if one of the tenantswants to sell his or her interest and the buyer wants to know what he or she ispurchasing, the selling tenant in common does not know which of the 100 pages isowned. All the seller knows is that he or she owns one hundredth of the book.

Of course, we very seldom see 100 tenants in common. Generally, we see two,three, or four people who have bought something together, with each owning ahalf, third, or quarter of the property. Should a proposed sale by one of thetenants pose a problem as to what pages that tenant actually owns, the localcourt will have to become involved. The court's solution is calledpartition. The court takes the asset and makes an actual, physicaldivision based on each tenant's percentage of ownership.

That technique does not always work well. Does one tenant get every other pageof the book? The front half? The rear half? Generally, it is better for thequarreling tenants to sell the book to a third person and divide the cashaccording to their percentage of ownership.

All in all, tenancy in common is a frequently used method of owning property.The important thing to understand is that if you are a tenant in common, youabsolutely own your percentage share in the property. Your percentage share canbe sold or given away during your lifetime and can be left to your chosenbeneficiaries at your death.

A potential drawback of this form of ownership is that the other tenants may notparticularly like the person to whom the deceased tenant has left the percentageshare in the property. We commonly refer to this problem as the "breaks of thegame." If an individual chooses this form of ownership, that person's co-ownersand beneficiaries may face co-owners they do not like.

The third form of ownership commonly used in the marketplace is joint tenancywith right of survivorship. In our experience, this method of taking title isgreatly misunderstood by the public. In fact, it is an extremely confusing formof ownership.

Joint tenancy with right of survivorship is a great deal like tenancy in common,yet totally different in its results. For example, we again have two people,each of whom owns 50 percent of that 100-page book; now, however, they own it asjoint tenants with right of survivorship. Unlike tenancy in common, this methodof ownership does not mean that each of them owns 50 percent of the book, or 50pages. If they own the book in joint tenancy with right of survivorship, theyeach own 100 percent of the book for purposes of title holding. Both ofthem own the whole thing? Yes, that is correct.

Joint ownership—or joint property, as it is commonly called—is afictional form of ownership created by English common law heritage. Itis fictional in that two or more people can own the whole thing. What occurs tobreathe realism into this fictional method of owning property is the addedsurvivorship feature. Remember the proper name of this method of ownership:joint tenancy with right of survivorship. The survivorship feature means that aseach individual joint tenant dies, that person simply falls off the ownershipcharts. Upon death, title is in the hands of the surviving joint tenants. Eachof the survivors now owns a greater percentage of the property. Specifically, ifthere were three tenants and one died, the remaining two would own the asset. Itis almost as if the deceased tenant never owned the property in the first place.

"My word," you say, "do you mean to tell me that if I own a mountain cabin withmy brother in joint tenancy with right of survivorship, upon my death my spouseand children have absolutely no right to that cabin? That it all belongs to mybrother? That once I die, I am removed from ownership, and since my brothersurvived, it is all his? That my family has absolutely no rights to that cabin?"Yes, that is exactly what we mean. Surprised? Many of our clients certainly havebeen.

Joint tenancy with right of survivorship is an automatic method of planning forproperty because taking title functions as a mini estate plan. It automaticallypasses ownership by law to the surviving tenants. In this case, there is noreason to plan your jointly held interest in your will or trust. As long asthere is a joint tenant who survives you, the passage of the asset is alreadyplanned. So, if you have the opportunity to buy into a 100-page book as a jointtenant with 99 other people for the price of $1,000, and the total value of thatbook is $100,000, it might not be a good bargain. On the other hand, if the 99other people are all 80 years of age or older and you are only 21, that mightsuggest a good deal. As each joint owner passes away, the remaining joint ownersthen own the book as 99 joint tenants with right of survivorship; 98 jointowners with right of survivorship; 97, and so on, right down to the last one tosurvive, which, in this example, might be you. What a deal. What a crazy form ofownership!

On the other hand, from a living point of view, let us assume that you are ajoint tenant who wishes to sell your interest to someone else. You certainlycould, and in most states you would not have to receive permission from theother joint owners; but what if you, as a joint tenant, wanted to carve out yourinterest for your sole and personal use? You would have to go to the localcourthouse and ask the judge to apply that old legal remedy of partition. Youwould have to ask the judge to divide the property; or you could hire a lawyerto come up with a complicated and technical solution. Amazingly enough, jointlyheld assets, when viewed from a living point of view (without the survivorshipfeature), function just like assets held in tenancy in common. It is thesurvivorship feature that distinguishes the two.

There is another offshoot to joint ownership, a special kind of joint ownershipcalled tenancy by the entirety. It is used in some states by a husbandand wife to hold real estate. For most practical reasons, it works the same asjoint tenancy. The major difference is that generally, under tenancy by theentirety there is no right to split the property during marriage unless bothspouses consent. For our purposes, think of tenancy by the entirety as jointtenancy, except it is only available for spouses. As we will see in Chapter34, "Protecting Your Assets," tenancy by the entirety is a method that canbe used for asset protection. If you do own assets in tenancy by the entirety,consult your attorney, because your state's laws are probably unique.

Often a client will ask, "What if I just put my name and someone else's name ona piece of property and don't specify whether it is owned in tenancy in commonor joint tenancy; which method have I elected, if any?" In our jurisdiction,that property would be held in tenancy in common. In others, it would be held injoint tenancy with right of survivorship. The answer, therefore, depends on thelaw of your state. Each state has its own laws. Do not assume anything; find outthe correct answer from your advisors.

Always know how you wish to take title to assets and properly communicate thatintent to others. Is it fee simple, tenancy in common, or join tenancy withright of survivorship? Know what you are doing in this area, because takingproper title to property is a very serious business, as you will see throughoutthis book.

(Continues...)