Current tax laws have made estate planning more complicated. The estate tax is scheduled to have a higher credit amount for 2009, be repealed in 2010, and then be reinstated in 2011 based on 2001 tax laws. That assumes there will be no future tax legislation before then. 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 beneficiaries other than your spouse without paying estate taxes will increase from the current $2,000,000 to $3,500,000 in 2009. As noted above, estate taxes will be repealed 2010, but reinstated again in 2011 based on 2001 tax laws. However, there are reasons other than minimizing other than minimizing estate taxes for planning 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 provisions made in other legal documents. You can also explain your rationale for distributing assets, especially if they aren’t split equally among beneficiaries.
- 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 estate does not get to utilize that exclusion amount when all assets are left to your spouse. Thus, when your spouse dies, the beneficiaries 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 beneficiaries 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. A trustee manages property in the trust and distributes income and principal. A properly named guardian takes physical care of your minor children and handles their finances. All three jobs significantly impact your estate, so choose these individuals carefully, making sure 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 beneficiaries disclaim all or a portion of your inheritance. That way, beneficiaries 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 $12,000 in 2008 ($24,000 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 exemption.
- 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 $2,000,000 in 2008 (over and above the $12,000 per-person annual exclusion) before triggering an additional tax called the generation-skipping transfer tax. This GST exclusion amount is equal to 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, plus you get 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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