Holding Down Estate Planning Costs

 

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If you are interested in passing along your business or other possessions at death to individuals or organizations of your choosing, the process of estate planning will give you greater certainty that your wishes will be carried out in a way that maximizes the amounts going to the objects of your bounty and minimizes the amount that will be lost to taxes and estate settlement costs.

This is all well and good, but some of the things that will make sense from a purely estate planning perspective come with a price, such as fees for professionals to set up the arrangement, ongoing fees to keep it in force and updated, and loss of control over property — or the value and income of the property itself — transferred during your lifetime to achieve estate planning goals.

So how much should you give up now in order to benefit your heirs or favorite charities later? Certainly this is a personal decision that only you can make, based on your personal priorities. However, in thinking about the matter, consider these suggestions:

• Don't give away property now that you may possibly need in the future. Even the closest family relationships have sometimes soured when money was involved. Don't put yourself in the position to be dependent on the good will of the persons to whom you give your money. Even if relationships with these heirs remain warm, if you later need some of the property that you transferred, it may be difficult to return the property to you without incurring gift tax liability.
• Remember that the value of money decreases over time, and that money spent today will not be there to generate income for the future. When you think about whether you should spend X dollars now in the hope of saving your heirs 5X dollars in the future, don't forget that the value of those 5X dollars will have been reduced by inflation. The farther off in time the date when savings will be realized, the lesser will be the value of the amount saved.
• When you use planning professionals, don't hesitate to ask them about their fees. You may choose not to go with the planner with the lowest rates, but at least you'll know about the cost of the services before you incur them.
• Think long and hard before you make any irrevocable planning decisions. Life is full of uncertainties: your personal life (including your health and family situation), the profitability of your business and the business sector which it is in, the general economic climate, and the tax law can all change. Although there are irrevocable arrangements that may make sense in your particular situation (such as an irrevocable trust to save taxes), they are not things that you should jump into without careful thought and competent professional advise.
• Some estate planning strategies won't work unless you take another action that will cost you money. For instance, if you decide to create a funded buy/sell agreement for your business (and this normally is a very wise move to make), its implementation may depend on the purchase of one or more life insurance policies. If this is the case, the cost of the policies (reduced by their yearly income and appreciation in value, if any) should be included as a cost of the planning strategy.
• Some actions that you take for one estate planning purpose may also further another worthwhile purpose. For instance, if you decide to transfer income-producing property to a family member with the intention of saving federal estate tax (which has a maximum rate of 45 percent in 2009) on any appreciation in value of the property over time, you may also receive the bonus of reducing your income tax (which can reach a maximum rate of 35 percent through 2010), since the income will no longer be taxed to you.

As you read through the list above, you may find yourself thinking that many of the factors listed lead you to assign an increased cost, or a decreased benefit, to a particular estate planning strategy. Does this mean you should simply keep your money, run your business, and forget about what will happen in the future? Not at all!

As a small business owner, estate planning is likely to be more vital to you than to almost anyone else. If you don't adequately plan for the future, the chances that you will be able to pass along your business as a going concern to your heirs will be slim. Paradoxically, the more successful your business is, and the more it has grown in value, the harder your task will be to transfer it intact to your heirs. The list above is not meant to dissuade you from planning, but only as a spur to think about both the costs and the benefits of planning strategies that may be available.