♦ You cannot take it with you, but failing to plan for your estate can mean that the government, rather than your heirs, may get the major portion of your hard-earned money. Why? Because the top estate tax rate is a whopping 40% (2013).
♦ Most people are aware of the exclusion of a certain amount of assets from state taxes. For years, this amount has been $600,000; that figure will now increase gradually until it reaches $3,500,000 in 2009, $5,000,000 in 2011, $5,150,000 Iin 2012 and $5,250,000 in 2013. This seems like a significant amount. Yet, when you consider the value of retirement benefits, life insurance, the value of your home and other assets, you may be surprised at how much you are worth.
♦ It is not effective estate planning to simply put everything you own in joint title or to draw up a will leaving everything to your spouse. You need to review your total financial position and estimate what estate taxes you would pay if you changed nothing. Then consider options available to cut estate taxes while still accomplishing your wishes concerning the disposition of your assets.
♦ Good estate planning may result in savings of at least 37% and perhaps as much as 40% (2013) depending on the size of your estate.
♦ Even if you have no concern for reducing estate taxes, you may want to consider some estate planning techniques that can be used to reduce your current income taxes.
Some possibilities
♦ Give away property that you do not use. Current tax law allows you to give away up to $14,000 (2013) per year (indexed for inflation), per recipient, free of gift taxes.
♦ Making annual gifts over several years can remove substantial amounts from your estate. If you give away more than the amount covered by the annual gift tax exclusion, you may not owe taxes for the gift, but you can start to tap into your "unified tax credit."
♦ The "unified tax credit" allows you to transfer a certain amount of assets tax-free. If the credit is fully used for gifts you make during your lifetime, you will have no credit left to reduce your estate taxes.
♦ The tax-free transfer allowed by the unified tax credit is in addition to the tax-free gifting of $14,000 (2013) per year (adjusted for inflation), per recipient.
♦ When undertaking a gifting program, consider the tax effect of various gifts. If you give away stock, which generates dividend income, you will shift income to the donee (often your children), thereby reducing your current income tax bill. You will also reduce your estate by the value of the gifted property, and any future appreciation of the property will escape taxation in your estate.
♦ Gifts of tuition and medical bills If paid directly to the school or doctor, are also tax-free.
♦ Make charitable gifts. If you are charitable inclined, you can reduce both your current income tax bill and your estate tax by making gifts to qualified charitable or educational organizations. Gifts to charities are tax-free.
♦ Property can be transferred to a spouse, either during your life or upon your death, tax-free. However, if you leave everything to your spouse, your estate could lose out on the; unified tax credit. If your combined estates are large, the second estate could pay thousands more in tax than necessary. Consider estate planning that allows both you and your spouse to use your exemptions.
♦ Protect your life insurance from taxes in your estate by having your policy owned by someone else. The owner will have to pay the premiums. You forfeit the right to change beneficiaries or borrow against the policy.
♦ Trusts can be an effective way to remove assets from your estate. There are many kinds of trusts; each designed to accomplish certain objectives. Trusts vary considerably in complexity, and they are under no circumstances a do-it-yourself affair. Seek professional advice.
Living Trusts: The Pros and Cons
♦ Living trusts have become a popular way to reduce the probate and administrative costs in an estate, though they do not necessarily change the estate taxes that might be due on your estate.
♦ A living trust is one you create while you are alive as opposed to a testamentary trust created by your will and taking effect upon your death.
♦ A living trust can be either revocable or irrevocable. If you create a revocable trust, you can change it or revoke it at any time. If you create an irrevocable trust, you give up control of the assets transferred to the trust, and you cannot change the provisions of the trust.
♦ Advantages. A major advantage of using a living trust is that you eliminate probate on the assets in the trust when you die. You specify in the trust document how your assets are to be managed, and if the trust is to end at your death, how the assets are to be distributed. Terms of the trust are usually private whereas probate proceedings are a matter of public record. Generally, a living trust is less easily contested than a will.
♦ Disadvantages. One of the disadvantages to a living trust is that you must actually transfer the titles of your assets to the trust, with whatever resulting complication of our affairs this might entail. A living trust does not completely eliminate the need for a will because the trust will not take care of the distribution of any property not included in it.
♦ Your will can direct that any assets inadvertently left out of the trust "pour over" into the trust. Though these assets will be subject to probate, the trust provisions will govern how they are to be distributed.
♦ Certain property automatically bypasses probate without having to put it in a trust. This generally includes property held in joint tenancy with right of survivorship, IRA and pension benefits with named beneficiaries, and insurance proceeds payable to specific beneficiaries.
♦ It is not effective estate planning to simply put everything you own in joint title or to draw up a will leaving everything to your spouse. You need to review your total financial position and estimate what estate taxes you would pay if you changed nothing. Then consider options available to cut estate taxes while still accomplishing your wishes concerning the disposition of your assets.
♦ Good estate planning may result in savings of at least 37% and perhaps as much as 40% (2013) depending on the size of your estate.
♦ Even if you have no concern for reducing estate taxes, you may want to consider some estate planning techniques that can be used to reduce your current income taxes.
Some possibilities
♦ Give away property that you do not use. Current tax law allows you to give away up to $14,000 (2013) per year (indexed for inflation), per recipient, free of gift taxes.
♦ Making annual gifts over several years can remove substantial amounts from your estate. If you give away more than the amount covered by the annual gift tax exclusion, you may not owe taxes for the gift, but you can start to tap into your "unified tax credit."
♦ The "unified tax credit" allows you to transfer a certain amount of assets tax-free. If the credit is fully used for gifts you make during your lifetime, you will have no credit left to reduce your estate taxes.
♦ The tax-free transfer allowed by the unified tax credit is in addition to the tax-free gifting of $14,000 (2013) per year (adjusted for inflation), per recipient.
♦ When undertaking a gifting program, consider the tax effect of various gifts. If you give away stock, which generates dividend income, you will shift income to the donee (often your children), thereby reducing your current income tax bill. You will also reduce your estate by the value of the gifted property, and any future appreciation of the property will escape taxation in your estate.
♦ Gifts of tuition and medical bills If paid directly to the school or doctor, are also tax-free.
♦ Make charitable gifts. If you are charitable inclined, you can reduce both your current income tax bill and your estate tax by making gifts to qualified charitable or educational organizations. Gifts to charities are tax-free.
♦ Property can be transferred to a spouse, either during your life or upon your death, tax-free. However, if you leave everything to your spouse, your estate could lose out on the; unified tax credit. If your combined estates are large, the second estate could pay thousands more in tax than necessary. Consider estate planning that allows both you and your spouse to use your exemptions.
♦ Protect your life insurance from taxes in your estate by having your policy owned by someone else. The owner will have to pay the premiums. You forfeit the right to change beneficiaries or borrow against the policy.
♦ Trusts can be an effective way to remove assets from your estate. There are many kinds of trusts; each designed to accomplish certain objectives. Trusts vary considerably in complexity, and they are under no circumstances a do-it-yourself affair. Seek professional advice.
Living Trusts: The Pros and Cons
♦ Living trusts have become a popular way to reduce the probate and administrative costs in an estate, though they do not necessarily change the estate taxes that might be due on your estate.
♦ A living trust is one you create while you are alive as opposed to a testamentary trust created by your will and taking effect upon your death.
♦ A living trust can be either revocable or irrevocable. If you create a revocable trust, you can change it or revoke it at any time. If you create an irrevocable trust, you give up control of the assets transferred to the trust, and you cannot change the provisions of the trust.
♦ Advantages. A major advantage of using a living trust is that you eliminate probate on the assets in the trust when you die. You specify in the trust document how your assets are to be managed, and if the trust is to end at your death, how the assets are to be distributed. Terms of the trust are usually private whereas probate proceedings are a matter of public record. Generally, a living trust is less easily contested than a will.
♦ Disadvantages. One of the disadvantages to a living trust is that you must actually transfer the titles of your assets to the trust, with whatever resulting complication of our affairs this might entail. A living trust does not completely eliminate the need for a will because the trust will not take care of the distribution of any property not included in it.
♦ Your will can direct that any assets inadvertently left out of the trust "pour over" into the trust. Though these assets will be subject to probate, the trust provisions will govern how they are to be distributed.
♦ Certain property automatically bypasses probate without having to put it in a trust. This generally includes property held in joint tenancy with right of survivorship, IRA and pension benefits with named beneficiaries, and insurance proceeds payable to specific beneficiaries.
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