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Tips to Consider for Your Estate Plan
by Roger Wohlner (Write for us!)
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Current tax laws have made estate planning more complicated. The estate
tax is scheduled to phase out gradually until 2009, be repealed in 2010, and then reinstated in 2011 based on 2001 tax laws. That assumes there will be no future tax legislation during that time. But don't let these evolving tax laws prevent you from planning your estate. Instead, consider the following tips:
- Plan your estate, even if it won't be subject to estate taxes.
The amount you can distribute to heirs other than your spouse without paying estate taxes will increase from the current $1,500,000 to $2,000,000 in 2006 and $3,500,000 in 2009. Estate taxes will be repealed in 2010, but then reinstated again in 2011 based on 2001 tax laws. However, there are reasons other than minimizing estate taxes to plan your estate. For instance, parents with minor children should name guardians and provide for their children's support, while individuals in other than first marriages may want to protect children from prior marriages. You may also need a will, durable power of attorney, and health care proxy.
- Leave written instructions for heirs.
You can provide heirs with important financial and personal information and clarify requests made in other legal documents. You can also explain your rationale for distributing assets, especially if they aren't split equally among heirs.
- Decide whether to leave your entire estate to your spouse.
With the unlimited marital deduction, you can leave all your assets to your spouse without paying any estate taxes. However, if you have assets in excess of the estate tax exclusion amount (detailed above), your heirs will not be able to utilize that exclusion amount when all assets are left to your spouse. Thus, when your spouse dies, they may pay more estate taxes than if you had left some assets to them, either outright or through trusts. If your spouse needs those assets after your death, you can set up a trust that allows your spouse to use income during his/her life, with the balance distributed to heirs after your spouse's death.
- Name executors, trustees, and guardians carefully.
An executor (or personal representative) administers your estate through probate court, locates and values all assets, pays your estate's obligations, and distributes your estate to heirs. A trust manages your estate and distributes income and principal. A guardian takes physical care of your minor children and handles their finances. All three roles significantly impact your estate, so choose these individuals carefully and ensure they can handle the responsibilities.
- Review the distribution of assets that bypass your will.
Jointly owned property will transfer directly to the co-owner, while assets with named beneficiaries will transfer directly to those beneficiaries. If you don't keep this in mind, some heirs could receive a higher percentage of your estate than intended. Beneficiaries of assets such as life insurance policies, 401(k) plans, and individual retirement accounts should be reviewed after major personal changes, such as marriage, divorce, death, or birth.
- Consider adding a disclaimer provision to your estate planning documents.
This provision details what happens if your heirs disclaim all or a portion of their inheritance. That way, heirs can decide after your death how much to place in various trusts. For instance, a husband can leave all assets to his wife with the condition that any disclaimed assets go into a trust paying her income for life and distributing the remaining assets to their children after her death. This gives the wife the opportunity to divide assets based on her needs and the estate tax laws at the time of her husband's death.
- Implement an annual gifting program.
You can make annual gifts, up to $11,000 in 2004 ($22,000 if the gift is split with your spouse), to any number of individuals without paying federal gift taxes. Since estate tax repeal is only scheduled for one year, this strategy removes assets from your taxable estate as well as any future appreciation or income generated on those gifts. Over a number of years, an annual gifting program can remove substantial assets from your estate. You may also want to use your $1,000,000 lifetime gift tax exclusion.
- Skip a generation on a tax-free basis.
Leaving assets to children who already have sizable estates may mean the assets will be taxed again when they bequeath them to your grandchildren. A better strategy may be to transfer those assets directly to your grandchildren, although you can only transfer a lifetime amount of $1,500,000 in 2005 before triggering an additional tax called the generation-skipping transfer tax. This amount follows the estate tax exclusion.
- Consider making charitable contributions during your lifetime.
While charitable contributions made after death are free of estate taxes, that may not provide any benefit due to higher exemption amounts. Charitable contributions made during your life will still lower your taxable estate and provide a current income tax deduction.
- Understand when a revocable living trust is appropriate.
Living trusts can provide substantial estate planning benefits, such as removing assets from probate and preserving the use of your estate tax exclusion. However, these trusts do not reduce estate taxes unless used in conjunction with other trusts.
- Shelter life insurance proceeds from estate taxes.
While life insurance proceeds are always free from federal income taxes, owning the policy yourself will cause the proceeds to be included in your taxable estate. Instead, you may want another individual or trust to own the policy, so the proceeds are excluded from your taxable estate.
- Realize a wide variety of trusts exist to meet specific estate planning needs.
Trusts can be established to meet a variety of objectives - to reduce estate taxes, to control asset distribution, to make gifts to charities, to provide for the possible incapacity of the creator, to protect heirs from themselves or others, to avoid probate, to allow a professional to manage assets, or to ensure provisions are made for minors.
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