Estate of Affairs

Don't play beneficiary roulette when it comes to your estate plan.
Magazine Contributor
3 min read

This story appears in the June 2004 issue of Entrepreneur. Subscribe »

Is your beneficiary house in order? Selecting beneficiaries in an estate plan can save a bundle in taxes, if you do it correctly. But all too often, according to estate planning experts, taxpayers make costly mistakes.

While married individuals are allowed to leave all of their financial holdings to their spouse free of any estate tax, when the surviving spouse dies, his or her heirs could face a huge tax bill if a well-thought-out estate plan is not in place. In 2004, estates valued at more than $1.5 million are taxed at a federal rate of 48 percent.

If you own a closely held business with a partner and your surviving spouse doesn't want to continue owning the company after your death, it's smart to establish a buy-sell agreement with a business partner to take care of the transfer of the business.

Bryan Howard at law firm Waller Landsen Dortch & Davis in Nashville, Tennessee, mentions one client whose business partner recently died. Fortunately, there was a buy-sell agreement in place. Says Howard, "The partner is buying out the [deceased] partner's wife for $1 million, thanks to the proceeds from an insurance policy that was set up in a buy-sell agreement."

Don't skip the important step of naming secondary beneficiaries for your IRAs, 401(k) and other holdings. If your children are 18 or older, you can name them as secondary beneficiaries. Your assets will pass to them, but estate taxes must still be paid on the holdings, unless your estate is worth less than the federal and state estate tax exemption amounts.

Generally, insurance companies, pension plans and retirement accounts will not pay death benefits to children under 18. Benefits are held until a court-approved guardian or trustee is appointed.

If you have children who are minors, it makes sense to name a trust as the beneficiary. If you fail to do that and your spouse dies before you do, or both you and your spouse die at the same time, all of your holdings will go to your estate. According to Howard, "That [situation] is about the worst of all worlds."

In addition, an estate is open to claims from creditors, and in some cases, your retirement money may have to be liquidated quickly because federal and state estate taxes will have to be paid over a relatively short time period.

Clearly, there are numerous tax ramifications if you don't do the proper planning for your estate. So take the time to do it right while you still have the chance.

Great Falls, Virginia, writer Joan Szabo has reported on tax issues for 17 years.

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