Flight Plan for Retirement

By the time we shuffle off of this mortal coil, most of us will have accumulated some things.  Much of those things will be what your heirs (and others as well) will likely categorize as "junk."  Maybe it was your favorite collection of soda bottle caps, or your collection of empty paint buckets, but to them it will likely just be junk.  Along with that junk, you will likely have accumulated an assortment of other assets; perhaps bit of real estate (think the family home), maybe an insurance policy or two, a 401k somewhere, and a few other financial assets.  If it falls your lot to leave us this year, the threshold where the federal estate tax becomes an issue is when what you leave totals 3.5 million dollars.  If you have the good sense to wait until next year, 2010, to leave, that threshold becomes unlimited, as there is no federal estate tax scheduled for next year.  For 2011, the threshold amount for a taxable estate reverts back to 1.0 million dollars, the amount it was in the early 90's.  Of course everyone, and I do mean everyone in Washington, expects the Congress to take action to change that prior to next year.  President Obama is pushing to keep the federal estate tax at 45% on estate amounts over 3.5 million dollars, and I suspect that that is very close to where the estate tax will ultimately end up.  At that level only about one of every 400 deaths would leave a taxable estate.  So, most of us do not have to concern ourselves with the estate tax.  This does not mean that we should not concern ourselves with estate planning.  Everyone should have a will so that your heirs will know who gets what of your estate.  A will is important for a number of reasons beyond the scope here; so make sure you have a will!

If you find yourself in the enviable position of knowing that you will eventually have a taxable estate, there are a number of things that you can do to mitigate the effects of that pesky federal (there is also a state estate tax in Tennessee) estate tax.  One important aspect of the federal estate tax is that a person can transfer ANY amount to his/her spouse tax-free.  At the death of the second-to-die spouse however, the federal government comes calling for its portion.  The services of a good estate attorney, and the use of various trusts, can prove useful in minimizing and delaying the taxing of one's estate.  Eventually though, Uncle Sam is expecting to get his share.  The only way to ultimately avoid or minimize estate taxes is to minimize the estate.  This means transferring ownership of portions of your estate while you are still among the living; i. e., you  need to give some of it away!  

In 2009 the IRS allows individuals to give away up to $13,000 tax free each year.  One can give away more, but giving away more than $13,000 triggers the requirement to file form 709, the federal gift tax reporting form.  Each and everyone of us has a lifetime exemption of $1,000,000 that we can give away tax free.  Once we pass this threshold, we have to pay gift tax, which is taxed at the same rate as estates.  Now the good news is that that $13,000 per person per year does not impact your lifetime exclusion of $1,000,000.  It is only when one gives more than $13,000 to one person that the lifetime exclusion is reduced by a like amount.  For example, a husband and his wife could each give $13,000 to their son and daughter-in-law, as well as their two grandchildren ( a total of $104,000) tax free and with no impact on their $1,000,000 lifetime gift tax exclusion.  They could do this year after year, as long as the tax laws are not changed to disallow it.  Of course, this also has the effect of lowering the giftors' estate, and ultimately transferring more to those whom they would prefer to have their estate, rather than to the federal government.

There is also a way of transferring a closely held family business prior to death that will greatly lower estate taxes.  Granted, there are some provisions in the tax code that mitigate the effects of estate taxes on closely held (family owned) businesses and farms.  The taxing gurus have recognized that onerous estate taxes can literally spell doom for family businesses or family farms, where much of the wealth is tied up in land.  Thus, there are provisions in the tax code, that if applied properly, mitigates some of the tax problems.  But a better way may be to form a family limited partnership, and take advantage of the yearly gift exclusion amount.  It works something like this:

An owner (or owners) of a business transfers the business (or property) to a limited partnership.  The initial owner becomes the general partner and retains full managerial control of the business, as well as the liability associated with the business.  The limited partnership will then value the business and issue an appropriate number of shares (which will likely be non-voting shares) in the business.  This is accomplished with the help of an attorney and an accountant who are familiar with this aspect of the tax code.  (One wants to make sure all of the t's are crossed and the i's are dotted when doing this.)  Over the course of the next few years, the original owner will take advantage of the gift tax exclusion amount and transfer an amount of stock to his heirs that equals the exclusion amount in value.  This allows the original owner to continue to control the company and draw a salary while transferring a significant portion of the ownership to his heirs over the course of a few years.  Of course, the big thing it accomplishes is that it transfers value from his estate before it is taxable, and it allows the owner to see that his business ends up with those that he would prefer to have it prior to his death.  This has been challenged by the IRS in court, and when set up properly, has always withstood the challenge.

It is certainly pleasant to have accumulated enough assets that one anticipates having a taxable estate, but it is true that a larger estate brings with it more concerns.  It also brings with it the need for more planning.  One can still enjoy what they have, while helping others (be they family members or various deserving charities) and take steps to lessen the effects of the federal estate tax.  Give some of it away while you're still alive; see how much fun that can be!

Fly/Drive Safely

4 July, 2009

As Father's Day is again approaching, I have been thinking about my father and what I learned from him.  My father was born in 1912, and was somewhat different from today's typical father.  He was from an era where dads were not so much into hugs and kisses.  Fathers from his era were content to let their actions speak of their love.  I cannot remember my dad ever initiating a hug, and if he ever kissed me it was when I was too young to remember.  But he worked hard, physically hard, providing for us, and I cannot remember ever wanting for anything for very long.  More importantly, I never doubted that he was proud to be my father.

Dad was not given to having long, "how you doing" types of discussions with me; that was the role my mother played.  Undoubtedly he relied on the experiences that he had had with his father, and that simply was not my grandfather's style either.  Because of this, I did not feel very close to my dad while I was a child.  In fact, I did not particularly care to be alone with my father at that age.  If I was with him when he was around his friends, I was pretty much expected to be seen and not heard.  That was the way children were expected to act at that time and place, and I did not especially appreciate that attitude.  He wasn't given to small talk with children and did not seem to know how to relate to small children especially well.  He just did not know how to "play" with a child.  Thus, I preferred to let him do his thing and I would do mine.

Dad never tried to be my "buddy;" that was a role best left to my friends.  He was, however, determined to be my dad.  As such he was there to correct me when he thought that was what I needed; he was there to challenge me to do my best, whatever pursuit I was undertaking; and he was there to point out right from wrong.  According to him, some things were wrong yesterday, they were wrong today, and they would still be wrong tomorrow.  He was there to be the dad, but we did share many happy times together through the years hunting, fishing, or playing catch, but I never mistook him for a buddy.  Buddies would overlook your faults and mistakes; dads did not.

Dad did provide a wonderful example and taught me many things by his actions.  He showed me what it meant to be a reliable friend and neighbor.  Many times I saw him leave the house after a hard day's work in the field to go to a neighbor's home to help with some need.  He personified reliable.  He demonstrated over and over how to sacrifice for your family, and he showed me what it meant to have faith in a higher power.  He demonstrated that there was honor in hard work, and he demonstrated what it meant to give an honest day's work for a day's pay.  He insisted that I too honor this principle as I grew older and began to have summer jobs.  He showed me that some things were not worth a fight, and that others were.  He believed that sometimes you folded your cards and walked away, and knowing when to do so was very important.  He also demonstrated that grumbling was generally a loosing game; you often simply had to play the hand that you were dealt.  And, very importantly, he taught me the importance of frugality and saving for the future.  One of the worst things he could say about someone was that "he must spend every cent he makes."  Over and over he stressed the importance of saving.  He was a child of the depression and this experience left its mark on him, and thus on me. 

As I grew older, we grew closer.  I suppose we began to understand one another a bit better.  I grew to appreciate that he had been the best father he could be with the talents he had, and he began to understand that I had grown up in a totally different generation.  We came to the point where we could sit and talk with one another and enjoy it.  I came to realize that he really had a wonderful sense of humor, and he proved to be a wonderful grandfather for mine and my sister's children.  Somewhere along the line he learned to talk with little children.  And as he grew older he took pains to insure that I understood that he was proud of the adults that my sister and I had become.  Though I had felt distant from my father for much of my early life, I felt quite close with him for the last several years of his life.  We never agreed on everything, but we were close; we both knew the love of a dad and his son.

 Dad was a physically strong man well into his later years.  He could walk me down hunting when he was eighty, and could do a day's work in his huge garden as well.  He had a wonderful retirement.  He seemed to enjoy life more and more as he aged.  I remember remarking once that I hoped that I would at some point enjoy retirement as much as he did.  He could easily spend an entire day tinkering around the farm and garden, going from one little project to the next.  He and my mom were extremely close; they practically defined the word "devoted," and this surely contributed to their success in retirement.  But then cancer took one of his eyes when he was about eighty; and then it returned and took his life at eighty-three.  

I was fortunate that I got to spend at least every other weekend with him during the last year of his life, and he continued to teach me important lessons during that last year.  He taught me what faith can mean at such a time; he taught me how to bear pain and indignity at such a time; and as my sister observed, he taught us how to die.  It was a painful lesson for me; by the time he left us I loved him dearly and appreciated him more than at any time of my life.  By then he had given me so much through the years.  He gave me a motor bike when I was about thirteen after I had hounded him for months, explaining over and over what a wonderful addition it would be for our entire family; and he gave me a spanking new car when I graduated from high school (much to my amazement)  He had given us gifts of money for many Christmases; and then when I was grown and had separated from the Air Force, he helped us buy a house with his rather meager nest egg and then spent days helping me with various projects around that house.  But I suppose of all the things he gave me and of all of the lessons he taught me, the lessons he taught me the last year of his life will be the ones that will stay with me the longest.  We had more than one heart-to-heart during that year, and I came to fully appreciate the man that he was.  I was indeed blessed to have such a father.  So, heres to you Dad, Happy Father's Day; we love you still!

Fly/Drive Safely

10 June 2009