Tax planning and estate planning are important–especially for women. Since 80% of married women will outlive their husbands, combined with the possibility of a spouse’s layoff, divorce, or remaining single, chances are high that all women will at some point in their lives become the head of household and sole breadwinner. So it’s important that women develop tax strategies and estate plans that are beneficial to them and their families.
In this final installment of our Women & Money series, black enterprise will answer the 10 most commonly asked questions by women about taxes and estate plans. The answers provide the information and resources needed to make informed decisions and help pass on wealth to future generations.
YOUR ESTATE
1. What happens if I die ​without a will?
Carol Frazer wants to leave something behind. “My will is the financial expression of my legacy,†says the 33-year-old senior partnership marketing manager who lives in New York. “What you have built can only continue and manifest itself–in the way that you would like–with a will. There’s no other way for it to carry on.â€
If you die intestate, or without a valid will, all your assets will be distributed according to the laws of the state in which you reside. But those laws may not reflect your final wishes, says Lori Anne Douglass, partner, primary practice area: trusts and estates at the New York-based law firm Moses & Singer L.L.P. A will is also the only legal document that allows parents with minor children to designate a legal guardian. If you die without a will, then the state where you lived will distribute your assets in accordance with intestate succession. In New York state, for example, the entire estate would be left to the surviving spouse if the deceased had no children. If the deceased had children, then the surviving spouse is entitled to the first $50,000 plus half of the remaining estate; the other half would go to the children. And if there is neither a surviving spouse nor children, the estate passes to the deceased’s parents. That distribution often reflects the state’s best guess as to how you might want your assets to be distributed, according to the American Bar Association.
Because Frazer is divorced and has no children, her parents would automatically inherit any remaining assets. Working with an attorney who specializes in estate planning, she instead chose to leave a sizable share of her assets to her 6-year-old nieces, Reagan and Mariangel, as well as her father, Arturo, and siblings Arturo Jr. and Liza. She is also leaving money to Hogar de Amor, a Honduran orphanage, and her alma mater, Louisiana State University.
A lot of wealth has been lost because people don’t know how to properly transfer it, says Douglass, adding that only a third of African Americans have a will, compared with 50% of Caucasians.
“Everyone should have a will, whether they have $10 or $10 million,†says Wynne Whitman, estate planning attorney and partner with Schenck, Price, Smith & King L.L.P., and author of Smart Women Protect Their Assets (FT Press; $16.99). She goes on to say that people of all ages should have a will and recommends drafting one as early as 18 years of age. “There are horrible things that happen to people every day. No one wants to think about it, but it’s the responsible thing to do,†says Whitman.
Getting organized is the key to getting over any fears or confusion about estate planning. The first step is to make a list of everything you own. Whitman insists there’s nothing too small to list if it has monetary or even sentimental value. When planning your estate, be sure to think carefully about taxes and assets, and about those who will act on your behalf. Details matter. Designate whether or not each beneficiary will pay his or her own taxes, otherwise the state may decide how the taxes are paid.
2. Is it OK if I draft my own will?
The short answer is: probably not. “Every person I know who’s tried to draft their own will or power of attorney failed miserably,†says estate planning attorney Julie Garber. “I don’t recommend it.†This is because each state has different laws regarding wills. For example, Garber once had a client who lived in Baton Rouge, Louisiana, and owned property in the Florida Keys. He drafted a handwritten will called a holographic will–and had it witnessed outside of Baton Rouge; however, it was invalid in Florida. He was able to leave assets to his girlfriend, who lived in Louisiana, but she wasn’t entitled to his Florida property–that went to his daughter.
Even using a book or software has pitfalls, because many use a one-size-fits-all approach. And states have yet to standardize laws regarding estate planning. There’s a uniform code, but not all states have adopted it, though some have adopted parts of it.
Douglass agrees that creating a will shouldn’t be a do-it-yourself project since each state has its own rules. Plus, there’s a lot to consider: taxes, trusts, and beneficiary designations. Still, many people are afraid to plan for death.
3. How can I find a reputable estate planning attorney?
The first step is to simply ask those you know, including “family, friends, people you work with, your financial adviser, your accountant, or another attorney you’ve worked with,†says estate planning attorney Garber. You can even contact your local courts. Make sure that estate planning is indeed the attorney’s specialty. “You have attorneys out there who will write a will and won’t know the rules because estate planning isn’t their specialty,†Garber warns.
You can also take your search online. Visit the American College of Trust and Estate Counsel (www.actec.org), which provides referrals for attorneys in all 50 states broken down by city; and WealthCouncil L.L.C. (www.wealthcounsel.com), an organization that facilitates estate planning. An attorney doesn’t need a specific degree to do estate planning, though some states offer board certification. These board certified attorneys can have documents tested, and they know what works and what doesn’t. “There are a lot of resources and forms for attorneys who do not specialize in estate planning that tell them how to put a will together,†says Garber. These forms aren’t usually available to the general public.
Garber insists that estate planning doesn’t have to be complicated, as long as you work with a lawyer you trust. “If you’re not comfortable, you’re going to hold something back,†Garber warns. In
that case, the attorney simply can’t help you. Know that when the estate planning is done, it’s not over. It helps to periodically review the will or power of attorney and update it. Because once you’re gone, it’s going to be too late.4. Am I responsible for my Âhusband’s bills when he dies?
Quite simply, it depends on the level of responsibility you decide to accept. “If you accept responsibility for the estate as the executor, then you have the responsibility,†Whitman says. After your spouse dies, it’s important to gather important documents such as insurance policies, tax returns, and bank statements, among other financial documents, in order to take care of any commitments. If you are the executor, you need to pay off any debt your spouse owes before his beneficiaries can receive any assets. You are also responsible for any debt that you acquired jointly (e.g., credit cards, mortgage payments, etc.). Although you need to accept responsibility once your spouse is deceased, there are a few precautions you can take while he is living, in order to ease the financial burden later.
Above all, Whitman advises against co-signing for any reason. “Be sensible and don’t sign something for a parent or spouse if it’s not your debt.†If you sign on as a guarantor and your spouse passes away, you are responsible for paying their debt. Whitman also says that if you are married but estranged from your husband, be sure that you don’t have any joint assets. Consult a matrimonial attorney for advisement about which assets can and can’t be divided. Whitman says having something in writing is important even if the divorce is mutual.
5. How can I disinherit my children or spouse?
Disinheriting someone in your will means that you are specifically stating that a particular person won’t receive any of your assets. If you are concerned about your will being contested, you can clarify the reasons for your decision.
If you’d prefer to leave your assets to people other than your children, spell it out. “You’re not obligated to leave your children anything,†says Douglass. She explains further that some parents would prefer to give the money to charity or to their grandchildren. So if, for example, your will already includes your children but you now prefer to leave your assets to a new grandchild, you can simply have it updated.
Disinheriting a spouse is more complex because of elective share statutes; most states require the affected spouse to sign a waiver at the time the will is signed stating that he or she is consenting to the disinheritance. If such a waiver hasn’t been signed, then the surviving spouse can file a petition to receive the elective share. “There are sound reasons why someone might not include his or her spouse in a will,†Douglass says. “Many want to give money to their children for tax reasons.†Or, as blended families become increasingly common, some spouses may opt to keep the peace by passing assets to their children rather than to one another.
If you want to provide for your spouse but not give him or her control over your assets, consider putting money into a living trust, says Whitman. The trust allots money for their provision and well being, such as payments for nursing home care, but nothing else. Whitman says this is a wise choice if your spouse is not the parent of your children.
Whitman encourages women to see the division of their estate as a personal decision. “If your children are a disappointment, you don’t have to give them anything. An inheritance is a gift, not an entitlement, and you should give your gift to whomever you want.â€
YOUR TAXES
1. Is it better to file a joint or separate tax return?
Washington, D.C., tax adviser Michael Eisenberg recommends that couples married more than six months file joint returns to increase their chances of paying fewer taxes. The six-month time period determines a relationship in tax terminology, be it married or single. “Ninety-nine percent of the time if you’re living with your spouse, you should file a joint return,†he advises. In the case of Cathy McArthur, 56, CEO and sole employee at Upper Marlboro, Maryland-based Child Care and More, who was married for 10 years, filing jointly worked well. Filing separately, though not bad, wasn’t as profitable as when she filed jointly. Not only did she not owe the government, she received a sizable refund. “We put everything together and avoided having to pay back taxes,†says McArthur. Eisenberg says, “Couples and individuals alike have to be realistic about their tax situations and file accordingly. The last thing a hardworking individual, family, or business owner needs is the IRS on their back.â€
2. Are there any tax benefits that will help me save on my children’s college tuition?
One way to help offset the costs of higher education is by reducing the amount of your income tax through tax credits. To determine if you’re within the eligibility guidelines to receive a college tax benefit, check your modified adjusted gross income, or MAGI, which is a measure used by the Internal Revenue Service to determine if a taxpayer is eligible to claim certain deductions and credits. The Website Bankrate.com (www.bankrate.com) has a calculator that can help you figure out your MAGI. Just type in “1040 tax estimator†in the search field.
3. Be mindful of the tax laws and stipulations that tend to change every year.
Those eligible can claim the American Opportunity Tax Credit for tuition and other higher education fees in 2009 and 2010, which is worth up to $2,500 of the cost of qualified tuition during the taxable year. Under The Lifetime Learning Credit, an eligible person can receive a credit of up to $2,000 per return. You can also benefit from student loan interest deductions. The IRS can help you save money for your child’s college education through U.S. Savings bonds, the ESA, and 529 Plans. Go to the financial aid Website (www.finaid.org) for more information.
4. What should I do if I can’t pay my tax bill?
First of all, do not file for bankruptcy under any circumstances. Bankruptcy does not erase some types of debts such as student loans, child support payments, and overdue taxes. Another important note: file on time. There is a failure-to-pay penalty as well as a failure-to-file penalty. The best course of action is to call the IRS and work out a payment plan.
5. What are the first things–taxwise–I should do after getting married?
After the honeymoon, you and your spouse should sit down in front of a computer and get ready to do a little math. Visit www.irs.gov and type “withholding calculator†into the search field. The calculator will walk you through a series of questions to help you determine how you’ll need to adjust the tax the federal government withholds from each of your paychecks now that you’re married. This will apply whether you’re planning to file a joint return with your husband or not. The calculator is only as accurate as the information you provide, so be sure to have the following handy: some recent paychecks–yours and your husband’s–and last year’s tax returns for both of you.
When you return to work, request a new W-4 form from your employer. On the W-4, you’ll use the results from the IRS calculator to adjust your tax withholding. You’ll also use the form to change your name (if you’ve chosen to take a new surname). By adjusting your withholding as soon as possible after your marriage, you’ll avoid paying too much–or too little–in taxes to Uncle Sam.
6. I’m supplementing my income with a home-based side business. What tax issues should I be aware of?
The first and most important step to take when you’re operating a business out of your home is to set up a legitimate office that complies with IRS standards. In order to qualify for home-business tax deductions, the work space you choose should be used exclusively for business and have enough room for all the equipment you need.
From there, the nature of your business determines the extent of your federal tax responsibilities, according to William Perez, a federally authorized tax agent and owner of Perez Tax Associates in San Francisco. He offers the following advice:
–Develop a record-keeping system. This will help you assess how your business is doing and assist you in determining how to more accurately prepare your tax returns. Business expenses such as equipment, employee salaries, fuel taxes, and travel are considered necessary and are therefore deductible.
–Keep separate checking and credit card accounts, and if it is a business expense, report it. Entrepreneurs should steer clear of business expenses that are unrelated to business. If the purchases you make are not necessary to the operation of your business (like office supplies), then avoid creating those liabilities.
–Do your research. For more information about business tax tips, visit www.irs.gov and type “small business†in the search field.
Additional reporting by Tamara Best, Erica Dallas, DeShundra Jefferson, Arlene McKanic, and Donnell Suggs
This article originally appeared in the April 2010 issue of Black Enterprise magazine.