Tuesday, October 20, 2015

Tips for National Estate Planning Awareness Week

The U.S. Congress has designated the third week in October (this year, the 19th through the 25th) as National Estate Planning Awareness Week.  Commentators estimate that 70% of Americans do not have an estate plan.  Without your own estate plan, your property will pass according to the laws of the state in which you reside, and the state’s plan may not be how you would like your property to pass.  Below are a few estate planning tips for you to consider. 

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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