The Nightly Business Report; How to Plan Your Estate (or Inheritance)

<v Paul Kangas>There are 2 things you can do with money during your lifetime: spend it or save it. If you've been very good at the former, then you may not have to worry about estate planning. But if you plan to leave some money behind or if you're in line to receive an inheritance, then this program is for you. <v TV Host>This is a special edition of the Nightly Business Report: How to Plan Your Estate or Inheritance, featuring Paul Kangas and the NBR team. NBR is made possible by digital, an information technology company putting imagination to work. The 90 billion dollar Franklin Templeton Group helping nearly 2 and a half million mutual fund investors reach their financial goals. Franklin and Templeton funds are distributed nationwide by investment professionals. A.G. Edwards, member of the New York Stock Exchange, serving the investment needs of individuals and businesses through more than 400 offices nationwide. And is produced in association with Reuters, world's largest electronic publisher, which provides NBR with news, market data, and communication services worldwide. <v Paul Kangas>Hello, I'm Paul Kangas. It said that only 2 things in life are certain: death and taxes. And because of the former, I can safely say that America is on the verge of the biggest transfer of wealth from 1 generation to another. During the next decade, it's estimated that nearly 7 trillion dollars now in the hands of those over 60 years of age will be passing to members of the baby boom generation. Well, that's the equivalent of a line of dollar bills stretching from earth to the moon and back, plus most of another return trip to the moon. And with that many dollars in transit, you can be sure that a lot of them will never get from point A to point B, especially when their original owner isn't around to see that they make it to their destination. For that reason, it's important to plan your estate in advance, and if you're on the receiving end, to know in advance how to handle your inheritance.

<v Speaker>[music plays] <v Paul Kangas>Regardless of where you live, the road to planning your estate usually begins with this legal document: a will. Yet it's estimated that 70 percent of Americans don't have one. That's surprising, because as writer correspondent Kevin Smith reports from Los Angeles, dying without a will take some very important decisions out of your hands. <v Joey Lipner>What's going on there? What are you thinkin'?

<v Kevin Smith>1-year-old Emma doesn't realize it, but she's the reason parents Abby Yasgur and Joe Lipner have decided to make a will after 2 and a half years of marriage. <v Joey Lipner>Thank you. <v Abby Yasgur>I'm concerned should something happen to me or to Joey, what happens with Emma? I'm concerned mainly with guardian issues. <v Joey Lipner>Because this will cover other children also. <v Paul Frimmer>Well, we do cover it- in a typical will we say [fade out] <v Kevin Smith>Joe and Abby want to control what happens rather than leave it up to state law. If they died without a will, and Emily was still a minor, the court would appoint a guardian and Emma would inherit all her parents' assets when she turned 18. <v Paul Frimmer>Most people think that age 18 is too young. By creating a trust for Emma and other children under the will, Joe and Abby can dictate when Emma receives the property. <v Kevin Smith>Joe and Abby don't have many assets yet, but a will can be important even for people who aren't wealthy. Sometimes even famous people like Reverend Martin Luther King Jr. die without wills, leaving behind unwanted disputes. His widow ended up suing Boston University to try to gain custody of important King papers. <v Coretta Scott King>He never really totally committed these papers in a permanent way.

<v Kevin Smith>Disputes also frequently arise when there are second families. Tim and Nadine Cherney have been married 11 years with no children between them. But they have adult daughters from prior marriages. <v Tim Cherney>One of the issues we're worried about is all 3 children not bickering, so they all get equal shares and as locked up as tightly after I pass away, if I were to go first, that they wouldn't look at her and try to manipulate her. <v Kevin Smith>Each state has its own requirements for a legal will. Do it yourself will kits and computer programs can be low-cost alternatives, but as might be expected, many lawyers are skeptical of forms claiming to be valid everywhere. <v Kathryn Ballsun>The problem with those kinds of wills is that they are simply too general, and more often than not, they do not ask you the question that is going to get the right response so that the property goes where you want it to go. <v Kevin Smith>1 way to add authenticity to a will is to videotape the signing process. Now, in California and many other states, actual videotape wills are invalid. There must be a signed document. But videotaping can help establish the true intentions or mental competence of the maker when there's likely to be some controversy. This actual tape, altered to protect privacy, shows a couple explaining why a daughter's getting only a small share of their estate. <v Anonymous Father>She's been on uh drugs since she's been 17.

<v Speaker>[background chatter] <v Kevin Smith>For Joe and Abby and Emma, these kinds of concerns may seem far off, but they should be able to sleep easier knowing that where there's a will, there's a way. Kevin Smith of Reuters for NBR, Los Angeles. <v Speaker>[music] <v Paul Kangas>Once you've prepared your will and had it properly witnessed, it's placed on file until your death. At that point, it's activated and the task of making sure that your wishes are carried out is left to a court. The probate court. Correspondent Jack Kahn takes us through the probate process by following a fairly typical case probated in Miami, Florida. <v Jack Kahn>It's Tuesday at the Dade County Courthouse, 1 of 2 days a week when probate proceedings are ordinarily initiated. Attorney Samuel Smith is about to do that with the will of a woman named Alberta Dukes. It's an unusually simple case because the only asset in her estate is this house, which she willed to her only daughter. Attorney Smith's first stop is the probate clerk's office, where he presents the will and a death certificate and pays a filing fee. <v Samuel Smith>The clerk verifies that no one else has filed a will other than yours, or that there is no other proceeding that has been started some- by some other person. Once he verifies that, he takes it, assigns it a number, then blind assigns it to 1 of the 3 judges.

<v Jack Kahn>Because this is an uncontested case, Smith next takes the will to ex parte clerk Frances Sweeney. <v Samuel Smith>This was the only child. <v Frances Sweeney>I don't know if I'll go that route. <v Jack Kahn>Sweeney's job is to screen the will and make sure that it has the proper documentation for its next step, a hearing before probate judge, Robert Newman. <v Samuel Smith>Petition to term a piece of property as homestead. <v Robert Newman>Okay. <v Jack Kahn>Judge Newman agreed to Smith's request and entered the will into probate. [background chatter] Had this estate contained more assets, the judge next would have appointed a personal representative, sometimes known as an executor or our executrix. The will usually specifies a relative, attorney, or friend for this position. And it's a big job because the personal representative is responsible for managing the estate while it's under court review and then dispersing the property. Once the judge has admitted the will into probate, the law requires that a notice be printed in a local newspaper. A notice states that an estate is going through probate and invites anyone with a claim to come forward and present it to the court in the next 90 days. If no challenges arise, the will can emerge from probate in as little as 4 months, clearing the way for an estate sale. But if a will is challenged, the estate can remain in limbo for months or even years as legal proceedings drag on. Ultimately, the probate process culminates with the disbursement of the estate's assets to the heirs and claimants. At that point, the estate is formally closed. And this is the end of the line, some papers on file in the courthouse basement. Jack Kahn NBR, Miami. <v Paul Kangas>As we've seen the process that begins with putting together a will and ends by going through probate can involve varying degrees of complexity and expense. For this reason, some estate planning advisers say there is a better alternative offered by a document that's known as a living trust.

<v Renno Peterson>A living trust is merely a contract with yourself where you have a set of instructions and you say, you know what? During my lifetime, I just want my trust to hold my assets but I have total control over those assets because I made the trust, I put in the instructions, I'm the beneficiary. But upon my death or disability, I have certain instructions in here to take care of my property. The reason that a uh- well, there are many reasons that a trust is ex- is- is superior to will planning. But basically, it avoids probate, not only at death, but during incapacity, which is extremely important. More people are living longer today, but not necessarily better, so we take care of them. And it allows the control to be in the family rather than in the courts and with lawyers and outside people. <v Paul Kangas>However, other authorities say that the extra expense and re-titling of property required by living trusts aren't worthwhile for most people, especially for those with smaller estates.

<v Paul Lochray>When you transfer property through a will, the cost generally is minimal. Um there are also situations where the probate fees, which were of great concern, especially back in the 1960s when avoiding probate became all the rage in this country, those- those fees have been greatly reduced in many states. There are now a number of state statutes which have been passed which indicate that the fees that an attorney can charge for probating an estate must be reasonable in amount. <v Speaker>[music] <v Paul Kangas>Who will get the property that's being passed on as just 1 consideration in estate planning. Another important consideration is taxes. That's because the tax man comes into play during any major transfer of property, during life or death. At the federal level, there are 3 types of transfer taxes: the estate tax, the gift tax, and the generation-skipping transfer tax known as the GST for short. For now, let's look at the estate tax. It applies to property that's transferred at death and payment is generally due 9 months after death. Like the income tax, the estate tax is a graduated tax that goes up with the size of the estate. It currently ranges from 37 percent to a maximum of 50 percent. As it now stands, the federal estate tax is applied to the amount of the estate that exceeds 600 thousand dollars. If your estate is smaller than that, you're generally exempt from federal estate tax, although state taxes may kick in at a lower level. If your estate is subject to federal estate tax, there is 1 important deduction to keep in mind. This is known as the unlimited marital deduction. For married couples, it allows an unlimited amount of property to be passed tax-free to the surviving spouse. Let's look at this example. A husband dies, leaving a 1 million dollar estate to his wife, who has a 1 million dollar estate of her own. At this point, no taxes are imposed. But when the wife dies, the combined 2 million dollar estate then becomes subject to taxes. Because only the first 600 thousand dollars of property in the wife's estate is exempt, the remaining 1.4 million dollars is taxed at an effective rate of 42 percent. That leaves the couple's heirs with just over 1.4 million dollars of the original 2 million. There are ways to cut the estate tax bill in cases like this, and we'll be discussing them later. But estate taxes can pose special problems for closely held family businesses, which are included in any calculation of personal estate values. Correspondent Rodney Ward found one example of this in Asheville, North Carolina. <v Rodney Ward>Built in 1895 on 125 thousand acres in the western North Carolina mountains near Asheville, George Vanderbilt's 255 room mansion stands majestically as a symbol to the Gilded Age of American history. Today, although Biltmore Estate is no longer a home to the Vanderbilts, it's still owned by the family, which runs it as a major tourist attraction with more than 700000 visitors annually.

<v Biltmore Employee>Here are your tickets. They are good for everything: the house, the grounds, the conservatory, and the winery, including a wine tasting. <v Rodney Ward>Turning the estate into a successful business operation is the only way William Cecil, a grandson of George Vanderbilt, has been able to maintain the property as a national landmark, restore much of it to its turn of the century grandeur, and keep it in the family. <v John Stevens>If Bill Cecil had wanted to, he could have sold it a long time ago. But he has chosen to keep and preserve it. And he's paying a price for that. The price he's paying is the specter of being unable to meet the death taxes. <v Rodney Ward>At Cecil's death, estate taxes will call for payment of at least 50 percent of the valuation of the house, its contents, and surrounding property, a tax bill that is certain to run into the millions.

<v William Cecil>They'd look at this house as they have in the past, and say "My God Almighty." It's got a quarter acre of floor space, uh Indiana limestone, you gotta bring that from Indiana. There is no way that funds are generated at the end of one's career, one's life to pay 55 percent in cash over a period of time even. <v Rodney Ward>There are certainly few families that will run into the kind of inheritance problems faced by the Vanderbilt heirs at the Biltmore Estate. But that doesn't mean it's only the very wealthy who have to worry about estate taxes. <v Rodney Ward>It's not very difficult these days for family or closely held businesses to reach the 600 thousand dollar threshold for estate taxes take effect. And while a majority of family business owners say they would like to keep their businesses in the family. A recent survey found that only 27 percent had a succession plan in place. Tax experts cite a number of strategies that family businesses can use to minimize estate taxes, including issuing minority shares to members of the next generation. <v Lloyd Leva Plaine>What you're giving someone is not worth the pro-rate amount of the company. It's a minority interest. They can't control what happens to it. So you have a minority discount and a lack of marketability discount.

<v Rodney Ward>And because their assets are often not easily convertible to cash, Plaine says owners of closely-held businesses must make provisions for the day when the estate tax bill is due. The future of Biltmore Estate may well rest on whether William Cecil is successful in getting the estate laws changed to allow exemptions for historic landmarks. The Cecils say the exemptions they are calling for will not only help protect their family heritage, but the future of other national landmarks that help preserve a part of America's history. Rodney Ward, NBR, Asheville, North Carolina. <v Paul Kangas>As we noted earlier, the unlimited marital deduction makes it possible for a husband or wife to pass along any amount to a spouse free of estate taxes. But since spouses don't live forever, that loophole is only temporary. The tax-man is standing by to levy the tax upon the spouse's death. But although only 600 thousand dollars of an estate is exempt from federal estate taxes, there is a widely used way to effectively shelter 1.2 million dollars. That is, to structure a couple's holdings so that half belongs to each spouse and then to allow each estate to be taxed separately. That way, the six hundred thousand dollar exemption can be used twice. But what about larger estates? Is there anything that can be done to minimize the tax bite? One way is for a person to make gifts while he or she is still alive. Currently, an individual can give up to $10000 a year to any 1 person without incurring federal gift taxes and by giving over the course of several years to several children, well, that's one way to keep a substantial amount of money out of one's estate. Another way is by setting up an irrevocable trust. This is a legal setup where you place property in trust for the benefit of a particular individual or group known as the beneficiary. Unlike a living trust, once this trust is in place, you no longer control the property. Because of that, it's not considered part of your estate and is taxed separately. This could result in some tax savings if the trust is set up while you are still alive and is properly structured. <v Benjamin White>Estate planning almost always involves gifts, and there are usually 2 ways to make a gift. You can make a gift of property outright to a spouse, a child, or other family member, or you can make a gift of property to a trust, uh an irrevocable trust for the benefit of other family members. By transferring property into an irrevocable trust, you have gotten that property out of your estate uh for estate tax purposes. You've also gotten all future appreciation that may occur in that property and of course, all income that that property might earn in the future out of your estate.

<v Speaker>[music] <v Paul Kangas>When you set up a trust, you generally name a trustee, someone to oversee the property and give instructions as to how it should be distributed. And the day-to-day management tasks are often delegated to the trust department of a bank or brokerage house or trust company. But all trust departments or companies are not created equal. Correspondent Karen Ryan reports on what trust customers may want to consider when they're shopping around. <v Karen Ryan>There are more than 4000 public and private trust institutions in the U.S., holding more than 2 trillion dollars in assets. And since trust business usually involves large sums of money and is profitable, more and more banks and brokerage companies are setting up trust departments.

<v Trust Department Receptionist>Thank you for calling Sun Bank Trust Department, how may I help you? <v Karen Ryan>With more choices available, experts say the potential customer should invest some time and research to find the right trust company. A good place to start is by checking the Yellow Pages of the phonebook or listings in business publications. After narrowing your search, experts advise gathering all the information possible about that particular company. <v Samuel Barr, Jr.>I would want to know that whether it was a trust company or the trust department of a bank or a brokerage firm, that they had, 1, been in business long enough that they were going to be serious about it, that it wasn't just a service that the bank provided in order to be a full service bank. I would want to know the caliber, quality, and time in the job of the people that we're going to be involved in managing my trust. <v Karen Ryan>Most of that information can be obtained from the bank or trust company's annual report. However, a personal interview should also be set up with a trust officer. Experts advise that you discuss course at that meeting. Although most institutions have a fixed set of fees for services, they can usually be negotiated depending on how complicated the trust is. Also worth asking about is the trust department's investment management team. Potential customers can ask to see the trust department's performance records. Especially valuable are the records of common trust funds, which are like mutual funds run by banks for their trust assets. Trust officers also note that they don't make investment decisions with an entirely free hand. Besides meeting the requirements of their own department, the officers are required to make investments based on specific instructions of the trust.

<v Samuel Barr, Jr.>It should have definite guidelines in it, but within those guidelines create as much flexibility as possible. <v Karen Ryan>The reason is that the same trust can run a lifetime plus 21 years. That means that the assets of a trust can go through a few generations and a few economic cycles. While it's comforting to entrust your money to a trust department, financial advisers say it's a good idea to periodically check up on its performance. And they add if your trust isn't at least staying ahead of inflation, it may be time to start looking for a new trust company. Karen Ryan, NBR, Miami. <v Speaker>[music]

<v Paul Kangas>Of course, most of those in line for an inheritance will be receiving it directly rather than through any trust. And if you're in that fortunate predicament, how should you handle the money you're coming into? To find out, I asked nationally known certified financial planner Harold Evensky. <v Harold Evensky>Well, the first answer's a surprise. You tell 'em spend some of it and have a good time. Not too much. <v Paul Kangas>That's very uh-. <v Harold Evensky>A little bit. Get started on it. <v Paul Kangas>That's a nice idea. <v Harold Evensky>Uh change your phone number to an unlisted number. Put together a team, accountant, attorney investment advisor. Don't promise everyone you're gonna give them everything they always wanted and then sit back, start doing some planning. <v Speaker>[music] <v Paul Kangas>As we noted earlier, there is a strategy to minimize estate taxes that can provide benefits to you while you're still alive, while helping a worthwhile organization of your choice. I'm talking about charitable contributions. These are useful in estate planning because no matter how you give or what you give, you reduce the size of your taxable estate. And if you give while you're still alive, you get a deduction that can be used to lower your income taxes. 1 way to maximize this deduction is to donate appreciated property. <v Jamie Jaffee>Most of the time, when you give a contribution to a charity, you can get a deduction that's based on the fair market value of the gift at the time that you make it. So giving gifts of appreciated stock um is a wonderful way to give so that you can get the deduction based on the value of the stock that it is today and not necessarily what it was- the low-cost basis that you might have purchased it for.

<v Paul Kangas>Another way to give is by making a deferred gift which involves donating a future interest in property you own. This usually gives you a smaller income tax deduction than an outright gift, but because you still hold the present interest in the property, you continue to collect interest or derive other benefits during your lifetime. When you die, the remainder of the property goes to charity leading this arrangement to be known as a charitable remainder trust. <v Speaker>[music] <v Paul Kangas>As most anyone who's been involved in the death of a loved one is aware, anything that can be done in advance to ease the financial transition can be especially helpful. So besides putting together a will, what written instructions should an individual prepare to help his or her heirs? I asked Jonathan Pond, author of The New Century Family Money Book and well-known financial planning commentator. <v Jonathan Pond>Well, 3 additional documents: 1 is a durable power of attorney in which you state that, should you become incapacitated, you designate who you want to take care of you. And incapacity is very common these days. If you don't have a durable power, or a living trust can also accomplish this end, the courts are going to have to decide who will take care of you, and that might not be the person you want. The next item is a living will and most people want a living will. There you state that under circumstances that you predetermine, you do not want to be kept alive by artificial means. And finally, although you don't need an attorney to draw up a letter of instructions, a letter of instructions is a very thoughtful document. Here you state a variety of important matters that need to be attended to immediately after your death: your funeral wishes, where important documents are located, who should be informed. This is a way to keep your records in order and to provide a smooth transition immediately after your death. It's very helpful for your survivors.

<v Paul Kangas>As we conclude a few words of caution: while we've given you some general guideposts, everyone's situation is different and often laws and procedures vary greatly from state to state. So before you take any action in the estate planning area, we strongly urge that you consult with a qualified attorney or financial planner who can take your personal circumstances into account. I'm Paul Kangas. For all of us on Nightly Business Report, good night.

<v TV Host>NBR is produced in association with Reuters, the world's largest electronics publisher, which provides NBR with news, market data, and communications services worldwide and is made possible by A.G. Edwards, providing personalized financial services and investment advice to individuals and businesses. A.G. Edwards, a century-old tradition of service to investors. The Franklin Templeton Group's mutual funds include tax-free municipal securities funds, U.S. government securities funds, international growth funds, and money market funds. Digital, an information technology company putting imagination to work. And by the financial support of viewers like you. An expanded version of this broadcast is available on videotape featuring in-depth interviews with many of the experts seen tonight. To order by credit card, call 1 800 5 3 5 5 8 6 4.