Do You Need an Estate Plan? (Part 2 of 2)

To recap last week, unless you want a judge deciding what happens to your kids (and your stuff) if you're gone, then you need an estate plan.

But where do you start? There's 3 steps:

1. Decide:

a. Who will take care of your kids?

b. Who will take care of the money for your kids?

c. What can they use your money for?

2. Talk: Discuss your decisions with those you've designated. Make sure they are up to the task.

3. Draft: Make your decisions official (and legal) by creating an estate plan with an estate attorney.

Pretty simple, right?

You'd think. Just wait until you try to do it. On average it takes our Financial Zen members 3-6 months to make the decisions and talk to their people.

We're not estate attorneys, but we quarterback our Financial Zen members through the process. So if you want some help getting pointed in the right direction, schedule a few minutes with us.

BONUS TIP: A will is NOT an estate plan. This is a common source of confusion. Even if you have a will, your kids (and your stuff) will go through probate court.

DISCLAIMER:  This publication is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

Do You Need an Estate Plan?

I don't know. Do you have a kid?

Yes? Then absolutely.

Why?

If you and your spouse get hit by a bus tomorrow, guess who decides who takes care of your little one?

Grandma? Your sister?

Nope. The State of California (or wherever you live).

There's something called the probate court. It's the court that decides what happens to your children (and stuff) if you're gone…

…unless you have an estate plan.

If you have an estate plan, then the probate court doesn't make any decisions for you. YOU decide what happens to your kids and stuff if you're gone.

So do you need an estate plan? Only if you don't want some judge making those decisions for you.

But where do you start? What decisions do you need to make? What do other people like us do?

…more on that next week.

DISCLAIMER:  This publication is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified for illustration purposes.  Consult your financial planner or tax advisor for help with your specific situation.

But What About That $14,000?

$5,490,000

Last week we learned that's how much Uncle Sam gives us to pay our gift (and estate) taxes.

If you give away $5,490,001, then you owe Uncle Sam 40 cents.  Simple enough, right?

But what about the $14,000 a year that everyone talks about?  How's that fit in?

It's very simple.  You can give $14,000 away each year and it won't count against your $5,490,000.

The cool (is that a stretch?) part is that you can give $14,000 to everyone you know and it still won't count against your $5,490,000.

It gets better.  Your spouse can give $14,000 to everyone THEY know and it won't count against their $5,490,000. 

So if you and your spouse want to give your kid $28,000 every year for the rest of his life, then you'll still have $10,980,000 left to give away.

 

Disclosure: This blog is for educational purposes only and should not be considered financial, tax or legal advice.  These statements have been simplified to illustrate the concept.  Consult your Financial Planner or Estate Attorney for help with your specific situation.

Pop Quiz: Test Your Financial Literacy

Pop Quiz:

Your very generous parents give you the down payment to buy a house.  

Who pays the gift tax?

a) You
b) Your parents
c) Both of you
d) Neither of you

Did you answer a) You?  Congratulations!  You are in good company.  Unfortunately, you are also wrong.  Thanks for playing.

(Anecdotaly, I've never spoken to anyone except estate attorneys or very, very smart financial planners ;-) who understand how this works.  In fact, the inspiration for this blog came from 3 very smart people asking me about it recently.) 

The correct answer is b) your parents.   The person gifting money is the one who also pays the gift tax.  

How much will the gift tax be? 

a) 40%
b) 25%
c) 10%
d) 0%

The correct answer is: d) 0%….well, not technically.

Technically, you pay as much as 40%.   

HOWEVER, the federal government gives you a bucket of money - $5,490,000 to be exact - to pay your gift taxes.    Woohoo! 

Everyone has $5,490,000 to use towards paying gift tax.  If you give away more than that in your lifetime (lucky you), THEN you're paying for gift tax out of your pocket.

So a married couple has $10,980,000 to give away before they actually write a check to Uncle Sam.

Currently, that number is adjusted upward each year for inflation.  (I say "currently" because this number pretty much changes with every new presidential administration.)

"But wait," you say.  "I've heard that you can only give away $14,000 a year tax-free.  What about that, Rick?"

Tune in next week and I'll explain how the $14,000 per year fits in to all of this.  

 

Disclosure: This blog is for educational purposes only and should not be considered financial or legal advice.  These statements have been simplified to illustrate the concept.  Consult your Financial Planner or Estate Attorney for help with your specific situation.