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Tips for Your Estate Plan

Senior couple signing financial contractThe estate tax exclusion amount is $5,340,000 in 2014. While that amount is so large that most estates won’t be subject to estate taxes, that does not mean you should not make estate plans. Instead, consider the following tips:

  • Plan your estate, even if it won’t be subject to estate taxes. There are reasons 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.
  • 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, when your spouse dies, your 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 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. A trustee manages property in the trust and distributes income and principal. A guardian takes physical care of your minor children and handles their finances. All three jobs significantly impact your estate, so choose these individuals carefully.
  • Review the distribution of assets that bypass your will. Jointly owned property will transfer directly to the co-owner, while assets with names 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 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 their 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.
  • Implement an annual gifting program. You can make annual gifts, up to $14,000 in 2014 ($28,000 if the gift is split with your spouse), to any number of individuals without paying federal gift taxes. This strategy removes assets from your taxable estate as well as any future appreciation or income generated on those gifts. You may also want to use part or all of your $5,340,000 exclusion amount.
  • 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 equal to the estate tax exclusion amount before triggering an additional tax called the generation-skipping transfer tax.
  • 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 form themselves or others, to avoid probate, to allow a professional to manage assets, or to ensure provisions are made for minors.

Please call if you’d like to discuss your situation in detail.

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