Monthly Archives: June 2017
In the world of college financial aid, good estate planning strategies often result in less financial aid for your child or grandchild. For instance, a strategy included in many estate plans involves making annual tax-free monetary gifts to children. Annual gifts can be made, up to $14,000 or $28,000 if the gift is split with your spouse, to any number of individuals with no gift-tax consequences (unchanged from 2016). Once the gift is made, the assets are removed from your taxable estate and any income on the gifts is taxable to the recipient.
The problem results from how assets are treated for financial aid purposes. To determine a financial aid amount, a college takes the cost of attending that school and subtracts your expected family contribution (EFC).
When calculating the EFC, a college generally considers your income and assets, as well as your child’s income and assets. A maximum of 5.6% of the parents’ assets and up to 47% of the parents’ income are included in the EFC, while 35% of the child’s assets and up to 50% of the child’s income are included.
The difference between 35% of the child’s assets and 5.6% of the parents’ assets can make a big difference in a financial aid award. For example, suppose you and your spouse have been making $10,000 gifts to your child for the past five years, so your child now has $50,000 of assets. For financial aid purposes, your child will be expected to use $17,500 of those assets towards first-year college expenses. On the other hand, if you still owned the $50,000 in assets, you would only be expected to use a maximum of $2,800 toward first-year college costs, which means your child would be much more likely to receive financial aid.
So before starting an annual gifting program, consider the possible impact on financial aid calculations. Become familiar with financial aid formulas, roughly calculating what you could expect in terms of financial aid. You should also consider which college your child or grandchild is likely to attend. Nearly 30 elite colleges have decided to only consider 5.6% of both the parents’ and student’s assets in financial aid calculations. While the federal financial aid formula and other colleges have not yet followed, the calculations may change in the future.
If, after going through the calculations, you find you probably won’t be eligible for financial aid, you may decide to make annual gifts to your child. However, if the calculation indicates you may receive financial aid, you might want to hold off on an annual gifting program.
If you’re a business owner and a high-net-worth individual, you may want to gather your family members together to discuss the details of your estate plan. This can be especially important if you own a business that employs family members. These meetings are a little like the Scottish clan gatherings held hundreds of years ago by clan chiefs to discuss their succession and inheritance plans.
The Purpose of Gatherings
For centuries, some Scottish clans had a tradition of getting together periodically. When communication and travel were difficult, these gatherings provided a way to prepare for the future. Estate planning was simple then, with inheritances usually going to the eldest male in the family.
Of course, estates aren’t so simple today. After your death, your assets will be distributed under instructions from your will, trust and beneficiary account designations — unless some of your assets aren’t covered by such documents, in which case those assets will be distributed through the intestacy laws of your state. You can help your heirs accept the details of your estate plan by preparing them.
Barnett & Leuty, P.C., will take care of your legal needs when a family member dies. We handle various probate proceedings ranging from simple probating of a decedent’s will, to assisting with independent or dependent administration of an estate where there was no will, to determination of heirship and muniment of title proceedings.
The (Private) Reading of a Will
How many times have you seen a movie or a TV show that includes a dramatic “reading of the will,” where the heirs find out what they receive from the estate? These fictional postmortem readings don’t generally happen today. Instead, state law determines who receives copies of a will to read privately.
In some cases, beneficiaries learn about how an estate is to be distributed only after the death of the “clan chief,” or senior family member who owns the business. This often has negative consequences. Here are a couple of examples:
- It can be stressful for heirs to discover — for the first time after a family member dies — how they fit into the distribution of an estate. The family business can suffer if relatives learn about its continuation or disposition in the deceased person’s will or trust.
- There can be hurt feelings and questions about why the deceased individual made certain decisions. At a time of grief, family members can be unwittingly set off against one another as a result of the way assets are passed down. And of course, the estate holder is no longer available to explain the thought process that went into the distributions.
Details of the Estate Plan Meeting
Holding a family meeting to clarify your plans can help prevent angst and intra-family squabbling. After your attorney and business succession team have completed your estate plan, and you’re comfortable with it, you can ask your estate advisers to prepare summaries to distribute to family members. These documents can explain the estate plan in layman’s terms and with current values.
Once the family summaries have been prepared to your satisfaction, it’s time to call the family meeting and invite interested parties. Before the gathering, meet with the key stakeholders. This might include the person named as the executor or personal representative, those taking over the family business and perhaps any family members who may expect to take over. Hopefully, any issues with them will be resolved before the family meeting.
In addition to the family members, you may want to have your attorney or a CPA from your business succession planning team at the meeting. This person should be a trusted advisor to the family who has full knowledge of the legal, financial and tax issues in the estate plan.
As the senior family member, you (and, if you’re married, perhaps your spouse) should lead the meeting. But you can call on your attorney or CPA to assist in explaining your estate plan.
The written summaries that are handed out should be labeled “draft” because issues might arise that cause the plan to be revised. However, make it clear to all attending that you (along with your spouse) will make all final decisions. The meeting should be open to discussion and questions.
The result of this meeting is that family members can participate in the estate plan and be fully informed as to the reasoning that went into it. A second meeting might be necessary to finalize everything. In addition, the meeting might bring to the forefront issues among family members that may need to be resolved in smaller meetings with just those involved.
In the end, an estate planning get-together can help your family be better prepared after your death and help avert misunderstandings and hurt feelings. It can also help sustain the business that you have spent years building.