| Sargent & Lundy Savings Investment Plan |
| YOUR FAMILY'S FUTURE |
| The following excerpts are from the October 1997 issue
of "Money" magazine. The opinions of the author, Galina Espinoza,
may or may not reflect those of the SIP Committee.
Unless you take steps now to safeguard your family's financial future after your death, your hard work of saving and investing may turn out to be as permanent as piling up leaves in autumn: It won't take much - a gust of wind, a frisky black Lab - to blow your stash apart. Fortunately, you can easily protect your family against the unforeseen forces that threaten their security. You simply need an estate plan, and while that quaint term may conjure up images of the latest Merchant-Ivory production, the truth is that everyone - including you - already has one. The only problem is, if you don't have a will, the state in which you live has drawn up the plan for you: When you die, your property will be divided among your heirs - and your minor children will be assigned to guardians - according to the state's laws. Your wishes, assuming anybody knows them, will be ignored. "Most people think of estate planning as trying to reduce estate taxes," says Sanford J. Schlesinger, a New York City estate lawyer. "But it's a very broad concept that helps you achieve many of the goals you've set for your family and their finances." MYTH NO. 1: I'm not old enough - and don't have enough property - to need a will. Your age and net worth have nothing to do with why you must have a will. You need one to make sure your assets go to the people you want to get them. In particular, you need a will if you have minor children, because it's the only way you can nominate guardians to raise them and to manage their inheritances if they're orphaned. True, a judge can overturn your nominations, but that usually happens only if the people you've chosen are unfit or unwilling to serve. Without a will, however, you run an even bigger risk - namely, that a judge will appoint someone you don't want to have raising your kids (for example, your disaffected sister or your aging parents). A will is vital even if only one spouse dies an untimely death. That's because without a will, all of his or her assets that don't have named beneficiaries or aren't owned jointly must be divvied up according to state laws governing the estates of people who die without wills. In most states, your separately owned property would be split fifty-fifty between your spouse and your kids. That could leave your spouse without enough flexibility to manage the assets you leave behind or enough money to live comfortably in his or her old age. Got no kids? If you're married, your spouse will probably end up sharing your property with your parents; and if you're single, your parents - and perhaps your siblings - will get virtually everything. You may think of your live-in lover as family, but your state does not: Nonrelatives inherit nothing, unless your bequeath your assets to them in your will. Finally, a will protects your family from disgruntled relatives who might try to lay claim to some of your possessions. When you die, the court will notify all the relatives who would have had a legal right to your property if you had died without a will. To head off spurious claims, estate-planning attorneys routinely advise clients to leave something to all potential heirs. Your attorney can tell you how big these legacies must be. Important note: Resist the temptation to draft your will with a self-help guide or software. You risk making a mistake that could invalidate your wishes or winding up with a one-size-fits-all document that doesn't address your family's special needs. So hire a lawyer; on average, he or she will charge $75 for a simple will, according to the National Resource Center for Consumers of Legal Services in Gloucester, VA. MYTH NO. 2: Trusts are only for rich people. As important as a will is, it may not be enough to ease your spouse's child-rearing burdens and to safeguard your kids' inheritances. Assume, for example, that you die and your wife becomes guardian of the assets you leave to your minor children. Every year or so, she must submit a budget and an investment strategy to the court for a judge's approval. And if she needs to exceed the budget or wants to change the investing strategy, she must also get court approval. State laws require these steps to prevent a guardian from squandering minors' property. The drawback, of course, is that this is an inefficient way to manage money and make investment decisions. Even worse, your children can take control of assets you leave to them in your will when they reach the age of majority - 18 in most states. "Clearly, giving a large amount of money to someone just out of high school could be a big problem," says Schlesinger. You can escape these pitfalls by leaving inheritances in trust for your children. A trust is a legal device that holds property you put in it for the sake of one or more beneficiaries. In the legal document that establishes the trust, you spell out how you want the assets to be managed and distributed and also appoint a trustee to carry out your wishes. Court oversight is minimal, and you can decide at what age the money will go to your heirs. In choosing the type of trust that's best for your family, be guided by your attorney. Also, be practical: To have a lawyer draft a will with testamentary trusts could cost $250 to $500; a revocable living trust and a pour-over will that disposes of property you don't put in the trust could cost about $500 to $1,000. MYTH NO. 3: I'll never be worth enough to have a taxable estate. The tax law signed by President Clinton in August gradually raises the amount of property you can leave to heirs estate-tax-free from $600,000 this year to $1 million in 2006. Don't mistakenly think that this means you'll never have to worry about federal estate tax, which currently starts at 37% and tops out at 55% on anything above $3 million. "I know $1 million sounds like a lot," says Kevin Flatley, director of estate planning at Bank Boston's Private Bank. "But when my clients start looking at what they own, they're usually amazed at how quickly it adds up." MYTH NO. 4: I'll escape estate taxes by leaving everything to my spouse. You can leave as much as you wish to your spouse tax-free, provided he or she is a U.S. citizen. (If your spouse is not a citizen, run - don't walk - to your attorney; your estate risks a big tax if you don't make special provisions.) But leaving everything to a spouse who is a U.S. citizen is known sarcastically to lawyers as an "I love you" will for good reason: Doing so merely postpones the tax bill until he or she dies. A better strategy is to state in your will that everything will pass to your spouse except for an amount of property equal in value to the estate-tax exemption, currently $600.000 Your will should direct that this amount go into a credit-shelter trust, also known as a bypass trust, which will pay income to your spouse for life. Upon his or her death, the principal will go to your ultimate heirs, usually your kids. The upshot: The amount that you bequeath to your spouse outright will escape tax, since anything left to a spouse is tax-free. The portion that goes into the credit-shelter trust will also avoid tax, thanks to the estate-tax exemption. And since the trust assets won't be included in your spouse's estate, they'll pass to your kids tax-free. MYTH NO. 5: I'll escape estate taxes by giving my assets away before I die. Making gifts while you're alive is one of the easiest ways to reduce the size of your taxable estate. But for maximum tax cutting, you must follow a well-thought-out strategy. That's because the amount of any gift exceeding $10,000 in a year is taxable to the giver. Married couples can jointly give up to $20,000 a year tax-free to each of as many people as they wish; under the new tax law, tax-free limits for gifts will be indexed for inflation starting in 1999. (The tax doesn't apply in two situation: You can give a spouse who is a U.S. citizen any amount tax-free, and you can pay any amount of tuition and medical bills for as many people as you want tax-free, as long as you make the payments directly to the school or health-care provider.) The kind of property you give away can have a big impact of your estate's tax bill. In general, lawyers recommend that you give away assets that haven't yet grown much in value but have excellent prospects for appreciating. That way, you remove the current value of the asset from your estate as well as all subsequent growth. If you own highly appreciated stock shares and equity mutual fund shares, you might want to keep them. Reason: If you give away the shares, the recipient will owe capital-gains tax on all the appreciation since you bought them. In contrast, if you bequeath the stock, your heir will usually owe tax only on the appreciation from the date of your death to the date of the sale - a potentially humongous tax saver known in tax law as step-up in basis. |
This page updated on 11/17/97