Keeping in mind that a significant change is looming in the Estate Tax Area, consider reviewing the following 10 Estate Planning tips.
Top Ten Estate Planning Tips
By Kevin E. Hines, CPA, MST, CVA, CSEP
Partner
Meyers Brothers Kalicka, P. C.
Caution, keep your ear to the ground …. in anticipation of a potential big change in the Estate and Gift tax laws. It has not happened yet, but change is imminent. That is because, if nothing happens, our current and more favorable Federal Estate and Gift tax laws will revert back to the laws of December 2000.
Guessing the fate of the estate tax law is next to impossible and every commentator has their own thoughts. The best avenue is to work with what is known and because these ideas have withstood the test of time. Here are ten estate planning tips for you to consider.
1) Create a Family Trust (a.k.a. Credit Shelter Trust) to fully utilize the Increasing Estate and Gift Tax Credits:Consideration should be given to establishing a trust to hold assets if your individual and/or combined marital assets exceed the applicable exclusion amount (as of 1/1/2009 it is $3.5 million of value per individual). The formation of this type of trust is usually one of the first steps in estate planning. It is usually prepared in conjunction with the drafting of the will. On the first spouse’s death, the family trust is funded with an amount of cash or property equal to the applicable exclusion amount and the balance of the estate is placed in the marital trust. The family trust is free of estate tax because of the unified credit; the marital trust is free of tax because of the unlimited marital deduction. On the death of the surviving spouse, the family trust, no matter what its value, will pass free of federal estate tax to the beneficiaries because it was outside the control of the surviving spouse. The family trust can still benefit the surviving spouse with proper drafting of the trust document. This technique may also work in non-traditional relationships as well.
2) Create Ancillary Plan Documents: Consider drafting and implementing documents such as a Power of Attorney and a Health Care Proxy. The power of attorney is a document that authorizes another person to make decisions for you. Sometimes broad powers are given to make financial decisions or limited to specific situations. Usually, the power of attorney is only used when the authorizing person is unable to make decisions. The health care proxy is similar to the power of attorney but is limited to health care decisions.
3) Review and Update your plan documents often. Review your plan documents at least annually or anytime there is a significant change in your life such as an addition to your family, divorce, etc. Review and update your plan documents with your estate planning professional at least every three years or any time there is a tax law change.
4) Review method by which assets are transferred to a surviving heir: There are various methods of holding assets that will transfer by law to another person. An example of this is jointly-held real estate. “Joint tenants with right of survivorship” will pass to the surviving individual by law rather than by will. Meanwhile, “Tenants in common” retains its rights to pass by will. Another example would be the savings account held in joint names. This will go directly to the surviving individual without passing on by way of the will. Other examples of similar types of assets are a) life insurance proceeds, b) IRA funds and c) pension plan assets. The beneficiaries of these assets are usually designated by the owner at the time of set-up. If you are uncertain of how these assets will are transferred, consult with your estate planning professional.
5) Use of Annual Gift Tax Exclusion: Presently, there is a unified estate and gift tax credit equivalent to value of $3.5 million in estate assets. However, lifetime gifting is limited to the first $1 million in value before a tax is assessed. Annually, each individual may gift up to $12,000 (increase to $13,000 for 2009) to any number of people without impacting your available unified estate and gift tax credits. Husband and wife are able to gift away a combined $24,000 annually to each family member (children, grandchildren, in-laws) As you can imagine, annual planned giving can reduce one’s estate significantly.
6) Establish a Living (Revocable) Trust to simplify probating estate:
Living trusts may be established as an estate planning tool to hold assets during one’s lifetime whether the assets are investments, cash or even real estate. The trust document would detail actions that the trustee may perform such as investing, distributions of income or corpus, etc. Usually during one’s lifetime the donor and trustee is the same person. Assets that are held in trust are not required to be probated. The living trust may simplify the disposition of the estate assets by limiting the cost, public disclosure and activity related to probating the will. But, be sure to transfer your assets into the trust during one’s lifetime, otherwise, this technique is all for not.
7) Irrevocable Life Insurance Trust: Form a Trust that will own a life insurance policy on you. As the name suggests, once this trust is funded, it may not be changed. The donor (you) contributes annual gifts to the trust to purchase and pay for the annual premium costs of a life insurance policy. Since the donor does not have any ownership rights to the policy, it is not included in their taxable estate. There are many variations on this planning tool such as a “second-to-die” policy insuring both husband and wife. In this format, the purpose is usually to increase the value of their estate or to cover the overall estate tax that may be payable on the death of the surviving spouse.
8) Consider a QPRT (Qualified Personal Residence Trust):This technique works best for a second residence that the individual or both spouses, wish to pass on to succeeding generations. Create a trust that will hold your personal residence. The beneficiaries are the next generation (children). You retain the use of the residence for a set number of years (i.e. 10years or 15 years). At the end of the period chosen, the beneficiaries own the property. The intent is to make a discounted gift (future gift) to reduce the utilization of estate/gift tax credits and to move the appreciation in value of the real estate out of your estate. This can only happen if you outlive the term of the QPRT elected.
9) Use of Gift Tax Exclusion to fund Higher Education of Family (equal to five years annual exclusion amount): Under current law, a donor may contribute $60,000 ($65,000 for 2009) to a 529 Plan (as allowed by Internal Revenue Code Section 529), tax deferred investment account, which will at sometime in the future pay for an individual’s higher education costs. These are specialized tax deferred accounts that have many intricate rules that are too detailed to go into in this article. For husband and wife, this gift could total $120,000 per individual with the advantage of removing the transferred assets from the taxable estate at the time of the gift.
10) Consider gifts of appreciated assets to charities sooner than later. Gifting of appreciated assets to charities while living has three possible benefits. a) the possibility of avoiding capital gains tax if the asset were sold and the proceeds gifted to charity, b) allow a current tax deduction for charitable gifting at the asset’s fair market value and c) reduce your taxable estate.
Estate tax planning has not been simplified by the impending demise of the Federal estate law in 2010, nor the sunset provisions of 2011. Massachusetts has brought back its estate tax law (as have many other states) to counter the pending loss in revenues due to the federal changes. Therefore, there will be a need for each of us to continue our estate planning. Review each of the above ten estate planning tips and consider if some or all of these tips may benefit you in your planning. As always, consult with your estate and tax advisors before implementing these strategies into your plan.
Kevin E. Hines, CPA, MST, CVA, CSEP is a
Partner with Meyers Brothers Kalicka, PC,
330 Whitney Ave, Holyoke, Ma focusing in the areas
of Estate Planning, Business Valuations and
Small Business Consulting.
