August 6, 2013

Estate & Gift Tax Planning

Integrated CPA Group can help you with your estate & gift tax planning.

Few people want to think about estate planning because it reminds them of their mortality. It’s easier simply to ignore the inevitable and put off planning until some indefinite future.

Perhaps some believe their procrastination has paid off. With recent estate tax changes, their question may be, “Is estate planning still necessary?”

The Importance of an Estate Plan

Estate planning encompasses more than the distribution of your assets. It covers important issues, such as who will take care of your children, who you can depend on to handle your medical and financial affairs, and how you can minimize or possibly avoid estate taxes. A good estate plan will answer all these questions.

The degree of estate planning you need depends on your age, your financial situation, your life expectancy and other nonfinancial issues. But anyone with children or significant assets should begin developing an estate plan right away.

It’s not a question of whether you need estate planning – it’s how much planning your estate needs.

The Value of Your Estate

If, like most people, you tend to underestimate the value of your estate, remember your home, business and other real estate, stocks and bonds, savings and cash. Also include furniture, automobiles, retirement accounts, jewelry and life insurance benefits.

The gross estate includes all assets that you own or control on the date of death at fair market value. Or, if the executor elects and you are eligible, your gross estate is the fair market value exactly six months after the date of death – the alternate valuation date. The gross estate includes:

  1. Living trust assets – Transferred into a living trust during your lifetime, they are part of your gross estate but usually not your probate estate.
  2. Assets titled in your name – They include the value of your ownership in a family business, for instance.
  3. Joint tenancy assets – Assets titled with a spouse or nonspousal joint tenant vest with the surviving tenant. They are part of the decedent’s gross estate but usually not the probate estate.
  4. Life insurance policies – The policies’ death proceeds are included in the estate if the insured has any “strings” on the policy or if the proceeds are used to satisfy an obligation of the estate to the extent of that obligation. “Strings” include policy ownership and the ability to name or change the beneficiary and borrow against the cash surrender value. However, many people use irrevocable life insurance trusts, which contain special provisions to remove the life insurance proceeds from their estates.
  5. Qualified retirement plans and IRAs

The Advantages of ‘Temporary’ Tax Breaks

After the full repeal of the federal estate tax in 2010, Congress reinstated it for 2011 and 2012 under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. Estate and gift taxes apply to a combined estate value and lifetime gifting amount greater than $5 million, an increase from 2009’s $3.5 million estate tax exemption and $1 million lifetime gift exemption. The top federal estate tax rate is now 35 percent.

However, under current law, these favorable changes are no longer valid after Dec. 31, 2012. Absent congressional action to change the law, the top tax rate will revert to 55 percent with an exemption amount of only $1 million.

Also, another very significant change is in effect for 2011 and 2012: Congress made the estate tax exemption portable between spouses. Estate “portability” means any remaining exemption from federal estate and gift taxes will be transferred to the surviving spouse upon the death of the first spouse, if so elected.

With portability, you may or may not need a will that includes language creating a bypass trust or other complicated provisions that allow your heirs to reduce or avoid estate tax.

 Lifetime Transfers

Assets passing to your heirs or others during your lifetime as gifts (other than those qualifying for the annual gift exclusion, which is currently $13,000 per recipient) are added to the assets transferred at your death. The total transfers are taxed.

Total taxable transfers below the current $5 million threshold (or $10 million threshold for married couples) are not subject to taxation because of the unified estate and gift tax exemption.

Opportunities to Reduce Your Estate Tax Burden

An opportunity available only in 2011 and 2012 is gifting to heirs or others up to $5 million from an individual or $10 million from a married couple. This strategy serves two purposes:

  1. It reduces the size of the estate.
  2. It removes future asset appreciation from the estate.

However, if you and your spouse have a combined estate approaching or exceeding $10 million, traditional estate planning tools, such as equalizing your individual estates and using bypass trusts, may be a better option than relying on the portability feature of the temporary law.

In addition, you must elect portability on a timely filed estate tax return. Estates, no matter how small, will have to file a return if the surviving spouse is to gain the benefit of the deceased spouse’s unused exemption amount.

Assets held in a bypass trust after the death of the first spouse can experience unlimited appreciation and still avoid tax in the surviving spouse’s estate.

You can use different types of trusts in conjunction with a gifting strategy as part of your estate plan. You will hear terms such as intentionally defective trust, AB trust, grantor retained annuity trust (GRAT) and charitable remainder annuity trust (CRAT), among others.

In addition, for business owners, discounts for lack of marketability and lack of control may still be available when transferring shares of closely held businesses.

With the decline in the economy in recent years and the record-low values of many assets, gifting during your lifetime using the increased exemption, coupled with still available discounts, may give you the most bang for your buck to reduce future estate taxes.

Whatever estate planning tools you decide to use, a qualified and experienced estate planner will help you to become familiar with your best options to minimize the impact of taxes on your estate.

Failure to Plan

Failing to have an estate and gift plan or to review current plans may present uncertain outcomes and consequences:

  1. You may still need to deal with estate and inheritance taxes imposed by your state, which can be significant.
  2. You may be unprepared to protect your estate from federal estate tax as your family wealth begins to approach the current $10 million exemption threshold. And, while the combined estates may be less than $10 million at the first death, the assets will continue to grow before the second death.
  3. Without a last will and testament, important questions about your estate may linger:
    • Are you sure your survivorship designations for retirement accounts, life insurance policies and similar assets cover all your assets, such as vehicles, works of art or other collectibles and personal valuables?
    • Have you designated a guardian for minor children? If so, how will the designated guardian gain access to the funds you leave behind to support and educate your children in the manner you desire?
    • Will funds be available for immediate financial needs?
  4. The end of your life or your capacity to make wise decisions can come swiftly and unexpectedly, leaving little or no opportunity to plan.

At the time of your death, loved ones will be dealing with difficult decisions and serious emotional issues. An estate plan can help make this time easier by protecting your estate from heavy taxation, freeing up assets for immediate financial needs and avoiding probate.

Because of the complexity of modern life, estate plans should be reviewed at least every three to five years, particularly in the event of a marriage or divorce, the death of a family member, an increase in family income, the birth of a child or a major tax law change. If you do not currently have a plan, consult with your CPA and attorney.

It may be time for you to consider whether your estate is in order. Use the following checklist to discover areas of concern that call for action.

 An Estate and Gift Plan Checklist

This checklist can help you start seriously contemplating an estate plan. Can you answer “yes” to these questions?

  • Has someone agreed to raise your remaining minor children if you and your spouse suffer sudden deaths?
  • Do you have a source of liquid funds for your family’s security if there is an untimely death or significant disability?
  • Do you have a concrete idea of what your estate taxes may total and plans to fund that liability?
  • Have you considered lifetime gifts to transfer part of your wealth to reduce or avoid estate taxes?
  • Do you have a will?
  • Have you named an estate executor?
  • Have you considered a living trust?
  • Have you named someone to handle your affairs if you become incapacitated?
  • Have you designated medical and financial powers of attorney?
  • If you become terminally ill and are unable to act for yourself, do you know who will make decisions regarding your medical care?
  • Do you have a written plan, covering both ownership and operational control, to determine what happens to your family-owned business upon your death or disability?
  • Are you sure your estate assets will wind up in the right hands?
  • Are you sure the beneficiary designations in your retirement plan, IRA accounts and life insurance policies provide the lowest transfer tax consistent with wealth preservation and your personal objectives?