Lesson Three: Avoid Estate Shrinkage

How You Can Save Your Estate from Depletion
Estate depletion may be a serious problem for many American families. We're talking about the lessening of assets that can occur upon a person’s death.

For illustration, let’s look at the estate of actor James Gandolfini. Mr. Gandolfini's gross estate was valued at $70 million. About 80% of his estate was directed by his will, which was unprotected against estate taxes.

Mr. Gandolfini's estate was depleted by 43%.  Not only could heirs lose more than $30 million, the estate also faces the task of finding cash to pay for those expenses.  Such shortfalls in estate liquidity often require the forced sale of estate assets.

Strategies to Avoid Estate Depletion
How can you protect your beneficiaries from losses in your estate?  Some dwindling is inevitable, but you can cushion its impact.

  • Calculate the depletion.  Ask your advisers to figure your estate settlement costs – taxes, administration expenses and debts – as if you were to die today.  Make the same estimate for your spouse’s estate.  Then make two more estimates assuming (1) that you outlive your spouse and (2) that your spouse outlives you.

  • Plan for estate liquidity.  Provide cash (or assets readily convertible to cash) to pay the expenses that will occur.  Many estates have had to sell assets at “fire sale” prices to cover taxes and other costs.  Strategies could involve a savings program, investments, life insurance or a combination of all three.  Your advisers may recommend an irrevocable trust that can make loans to your executor or purchase assets from your estate.

  • Look for ways to reduce depletion.  You can protect your estate (or that of your surviving spouse) against federal or state estate taxes through lifetime gifts to family, trusts designed to reduce taxes and qualification for certain tax breaks available to business owners. See pages two and three for details.

State and Federal Estate Taxes May Be a Concern
Will your estate be faced with a state and federal estate tax liability at your death?  If so, there are many ways that you and your advisers can act now to minimize the impact of this tax.

The state and federal estate tax applies to the fair market value of everything you own at the time of your death.  So let’s start by figuring out what the approximate value of your estate might be.

In filling out the table below, the first step is to value your home, your other real property and all other assets you own at fair market value – the price at which the property could reasonably be sold.

As you continue through the table, you may be surprised to see that the full face value of your life insurance proceeds are generally subject to the state and federal estate tax if you have any ownership rights in the policies.  This is true for all forms of life insurance:  cash-value, term, group insurance provided by your employer, accident or travel insurance, etc.

It may also surprise you that the full value of all property you own jointly with someone other than your spouse (not just a part of that total value) may be included in your gross estate.  For a quick estimate, include the full value; include half if the co-owner is your spouse.

IRAs, deferred compensation and many other employee benefits may also be part of your gross estate.  Personal property includes cars, furniture, stamp and coin collections, paintings, antiques, china, silver, etc.


Computing Your Taxable Estate
Input numbers only.


Your Home

$

Other real estate

$

Life insurance proceeds

$

Jointly owned property

$

Retirement accounts

$

Other employee benefits

$

Stocks and bonds

$

Bank accounts and cash

$

Business interests

$

Personal property

$

Other

$

Total assets (gross estate)

$  

 

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