Estate planning is much more than planning to reduce estate
taxes. With high exemptions from estate
tax (currently $5,430,000), only a very small percentage of people are subject
to the tax. So, for the vast majority of
people, estate planning really focuses on the most important issues to
families: providing for how your
property passes to your heirs, who your heirs are, what they will receive, and
when they will receive it. You know the
strengths and weaknesses of your heirs, and the responsibility is yours to make
a plan so that their inheritance is a blessing to their lives rather than something
that could be squandered or otherwise harmful.
Estate planning also involves providing for your own personal care in
the event of disability or incompetency.
It is important to use an attorney who specializes in estate planning
and who is familiar with the laws of the state in which you reside. Some important tools to consider as part of
your estate plan include the following:
·
Will. A will is used to name the personal
representative of your estate, name guardians of minor children, and declare
how and to whom your assets are to pass.
·
Living
Trust. Not everyone needs a trust,
but if you have substantial assets, a trust can be useful. When a living trust is used, the Will
typically “pours over” your assets to the trust where your estate plan is
implemented. The word “living” means
that the trust is established while you are alive. A trust can also be set up by your will and
in that case, it is called a “testamentary” trust. A trust avoids probate, can keep your estate
plans private from public inspection, names trustees and successors who are to
manage your properties in your best interest and in the best interest of your
trust beneficiaries. A trust may be
designed to hold property for the benefit of heirs who would benefit from such
oversight and management rather than having the property pass outright. A trust can protect your assets that pass to
your heirs from loss due to divorce and lawsuits. A trust may also provide for the management
of your property if you become incapacitated, or simply choose to have someone
else take on the management role.
·
Power of
Attorney (POA). A POA enables a
trusted person to act in your stead in managing and directing the use of your
property. A POA is very useful in the
event of your incapacity such as when you are ill or suffer an accident. A POA can be very broad or very narrow in the
scope of powers granted to the agent. A
POA can “spring” into effect when you are incapacitated, or it can have current
effect.
·
Health
Care Directives, HIPAA Disclosure, and Health Care Power of Attorney. These documents will guide your agent and
medical providers in observing your wishes for end-of-life medical care. These are important documents and will
require your careful consideration and clear instructions.
For those subject to the estate tax, some basic estate
tax reduction strategies that are sometimes overlooked include the following:
·
Annual Gifting. Currently $14,000 can be gifted to
another person each calendar year without gift tax. This limit is known as the annual
exclusion. The exclusion is a “use it or
lose it” tax benefit. Unused exclusions
do not carryover to the next year. A
married couple can give up to $28,000 annually to any one person without gift
tax. If the gift exceeds the annual
exclusion, the excess will consume and reduce the lifetime exemption from
estate tax, which is also available for gift tax. Once the estate/gift exemption is used up,
then a 40% gift tax applies to excess gifts.
·
Directly
Pay Medical Bills or School Tuition. Directly
paying medical providers and school tuition for expenses incurred by your loved
ones do not count against the annual gift exclusion. In fact, there is no limit on the amount of
such expenses that you can pay and avoid taxable gifts.
·
Establish
an Irrevocable Life Insurance Trust (ILIT).
If an ILIT applies for and obtains life insurance on your life, then when
you die, the death benefits will not be subject to estate tax. If you are the owner of your own life
insurance policy and if your estate is large enough to be subject to estate
tax, then the U.S. government is a 40% beneficiary of your death benefits! There are ways to move your current policies
to an ILIT, but in some circumstances, there will be a three-year period that
you must outlive in order to exempt the death benefits from estate tax.
·
Make a
Substantial Gift of Appreciating Property.
Successful entrepreneurs may start businesses that will be worth a
lot of money in the future. Giving a
portion of the ownership to loved ones (e.g. in trust for their benefit) while
the value is low will enable the appreciation to occur outside of your estate
and it will avoid future gift or estate tax.
·
Name
Charities as Beneficiaries of Your Traditional IRA. If you want a portion of your estate to pass
to charity, and if you also have a traditional IRA, consider naming the charity
as the beneficiary of your IRA. Traditional
IRA distributions are subject to ordinary income tax when received. Such tax also applies to distributions
received by IRA beneficiaries.
Therefore, there is a double tax that applies to the IRA: a 40% estate tax on the value of the IRA and
ordinary income tax on distributions of up to 44.6%, counting top Federal and
Utah income tax rates. There is a
special income tax deduction for a portion of the Federal estate tax attributable
to the distribution received, but the deduction doesn’t perfectly eliminate the
double tax. A charity is not subject to
income tax on IRA distributions. There
is also a deduction for estate tax purposes for assets left to charity. Therefore, naming a charity as a beneficiary
of your traditional IRA is very tax efficient as opposed to using other assets
to fund your charitable bequest.
Estate planning requires careful coordination with how
you own your assets and whether beneficiaries have been named on financial
accounts. Form of ownership and
beneficiary designations override the provisions in your will and trust. For example, if you own a mutual fund as
joint tenants with your child, at your death your child will obtain complete
ownership of the mutual fund and it will not pass according to the terms of
your will or trust. As part of your
estate planning you should carefully make a list of your assets, their current
values and tax basis, form of ownership, and any named beneficiaries. With such information you will become aware
of any necessary changes required to be made in order to follow your intended
estate plan.
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