WHAT IS ESTATE PLANNING
BASIC ESTATE PLANNING DOCUMENTS
ESTATE PLANNING CONSIDERATIONS
FREQUENTLY ASKED QUESTIONS ABOUT WILLS AND ESTATE PLANNING
PREPARING YOUR ESTATE PLAN CHECK-LIST
ESTATE PLANNING CHECK-UP
THOUGHTS ON GIFTS
Estate Planning is about developing plans to help protect the assets people have worked so hard accumulating during their lifetimes, and to make sure these assets are later distributed or used as they choose.
Wills: This document governs the disposition of your probate estate and appoints the person of your choice to carry out your plan. There are many different approaches wills can take to address different goals, needs, and circumstances.
Trusts: A trust is an estate panning tool in which your property is held and managed by a trustee for the benefit of one or more persons (beneficiaries), and according to the trust provisions tailored to meet your wishes. There are many different approaches trusts can take to address different goals, needs, and circumstances.
Living Will (Declaration as to Medical and Surgical Treatment): This document states your wishes and intentions regarding life-sustaining treatment should you have a terminal condition with no reasonable prognosis that you will recover, and be unable to communicate you wishes regarding such treatment.
Durable Medical Power of Attorney: This document states your wishes as to who should make health care decisions for you if you are unable to do so.
General Durable Power of Attorney: This document states your wishes as to who should make financial decisions and manage your affairs if you are unable to do so.
Guardianship Declaration: This document sets forth your wishes regarding the appointment of guardians for your minor children, should you die or become incapacitated.
ESTATE PLANNING CONSIDERATIONS
How do you want to give your final gifts?
During your lifetime, you give gifts for various occasions: birthdays, Christmas, anniversaries, Valentine’s Day, etc. For the important people in your life, you spend much time and thought in choosing the right gift and wrapping. The same attention should be given to preparing your estate plan. The gifts you give through your estate plan will not only be the last gifts you give, but may also be the largest gifts you give.
Just like gift wrap, the manner by which you give your final gifts is important. Of course some people are satisfied receiving a gift in a shopping bag. Similarly, it is possible that, even if you do not have a will or make preparations in your estate plan, your loved ones may receive their gifts anyway, provided your intentions coincide with the state’s intestate succession laws. However, if you take the time now to prepare your will, your loved ones will know that you chose the gifts for them. In addition, the organization and preparation involved in preparing your will provides the wrapping for a smoother transition.
FREQUENTLY ASKED QUESTIONS ABOUT WILLS AND ESTATE PLANNING
What is estate planning? I don’t have an estate, so why do I need to plan?
Estate planning is the process of: (1) analyzing your assets—what are your assets and how do you own your assets; (2) deciding how you want your assets to be owned and managed during your lifetime; and (3) deciding how you want to pass on your assets upon your death. Many people do not think they have an estate because they have not taken the time to analyze and organize exactly what they have. The estate planning process can be as important for your lifetime goals as it is for planning how you want to distribute your assets upon your death.
Your estate plan was created so that your wishes will be carried out after your death. If you have already created an estate plan, you want to make sure that changes in circumstances or your wishes are reflected in your current estate plan. If you have encountered any of the following circumstances, you may want to revise your estate plan.
THOUGHTS ON GIFTS
We all want to take care of our families.Sometimes, making gifts during life is an important tool both for helping family members and for personal estate planning.However, there are legal and tax traps for the unwary in making gifts.Possible legal and tax effects should be considered in advance before making a gift of money, property, or any other asset.
Until 2002, Federal estate and gift taxes were part of a unified system, with an overall limit for tax-free transfers made to anyone besides a spouse who is a U.S. citizen, whether these transfers were made during life as gifts or after death through one’s estate.
However, current law separates the sheltered amount for these different taxes.The amount sheltered from estate tax was only $600,000 before 1998.It is currently $2,000,000.It is scheduled to rise to $3,500,000 in 2009 and (theoretically) to be eliminated in 2010, before resuming again in 2011.The lifetime amount sheltered from gift tax now is $1,000,000 total, whenever during life these gifts are made.Gifts in excess of this amount incur a tax rate of up to 50% (although this tax rate is scheduled to decline slightly in future years).
A twist involved with gifts is that certain kinds of gifts are completely excluded from the gift tax system, and do not count against the lifetime shelter amount.First, a giver may give up to $12,000 worth of gifts to each recipient per year, with no strings attached and no tax due.This exemption amount will periodically adjust for inflation in future tax years.Gifts in excess of this amount each a year do not trigger a tax, but do trigger the requirement to report the excess amount on a gift tax return and use the corresponding amount from the lifetime exclusion.Second, there is an unlimited exclusion for gifts made in payment of another's medical or tuition costs.Such payments must be made directly to the provider or institution.They cannot be given outright to the beneficiary with an understanding of how they are to be used.Finally, there is an unlimited exclusion for gifts to IRS-qualified charities.
Note that a transfer is not a gift unless it is made immediately and outright, with no strings attached.It cannot be simply a promise of a future benefit or a “gift” in which the giver maintains some interest or control.
One estate planning strategy involves making gifts over time from a large estate to family members in succeeding generations. The goal is to remove appreciating assets from an estate.The trade off is that using up the lifetime exemption and paying any gift tax now removes assets from the estate, and is better than paying much more estate tax later when those assets are much more valuable.Other tax issues, like generation-skipping transfer tax concerns, may arise in such plans, so it is best to get specific legal and tax advice before beginning any such strategy.
Consider the following example of gifting in action: A husband and wife sell a house to their son for $100,000, when it is worth $200,000. A $100,000 gift has been made. The parents elect to split the gift in two gifts, so that both of their $12,000 annual gift tax exclusions can be used. This $24,000 combined exclusion results in a potentially taxable gift of $76,000 to the son ($100,000 - $24,000). A federal gift tax return should be filed, but no tax is now due. Instead, because the gift has been split, each parent uses $38,000 of his/her $1 million lifetime gift tax shelter to "protect" the gift from all tax. The son pays no tax on the gift, because true gifts of any size are always free from federal income tax to the receiver.
Assuming this has been their only taxable gift to anyone, each of the parents will then have a shelter of $962,000 remaining to shield future lifetime gifts from federal gift tax ($1,000,000.00 - $38,000). The gift tax return that has been filed with no payment allows IRS to keep track.
A different way to handle the above situation would be to sell the house to the son at full price. Then, each year the parents can make a $24,000 gift indirectly by forgiving interest and principal under a carry-back promissory note/mortgage.By forgiving the debt and thus making gifts gradually, the parents can take advantage each year of both of their annual $12,000 exclusions, and not use up any of their two $1 million shelters.
Patterson Tabert Law Offices helps our clients with estate planning matters, working in cooperation as appropriate with their other professional and financial advisors. The matters set forth here are for general reference only.If you have questions about estate planning matters for your unique goals and personal situation, we welcome your inquiry.
NOTICE: This article represents copyrighted material and may only be reproduced in whole for personal or classroom use. It may not be edited, altered, or otherwise modified, except with the express permission of Patterson Tabert Law Offices. This article discusses general legal issues of interest and is not designed to give any specific legal advice pertaining to any specific circumstances. It is important that professional legal advice be obtained before acting upon any of the information contained in this article.