You may be surprised to learn what is included in your taxable estate.
Your 'taxable estate' is created upon your death. Simply put, it is a snapshot of all of your assets (real property, bank accounts, your personal items, etc.). The IRS uses the value of your taxable estate to determine what taxes may be imposed on your estate.
There are, however, some items included in your taxable estate that you may not expect. In particular, there are some assets that are not available to you during your lifetime but which are nonetheless taxed.
For example, if you purchase life insurance, the proceeds payable on your death are included in your estate. This is surprising to many clients because they generally do not consider the policy proceeds to be an asset of theirs. Furthermore, in the case of a term life insurance policy, there is no cash surrender value that you can access during your lifetime. Nonetheless, the proceeds from the life insurance are included in your taxable estate.
For example, suppose the net value of your home, bank accounts and IRA is $200,000. Your taxable estate would be $200,000, which is below the $1 million exemption amount effective January 1, 2011. But, if you purchase a term life insurance policy that pays $1 million to your children upon your death, your taxable estate would increase to $1.2 million and you would be subject to estate taxes. (Under current federal law, this situation would require your estate to pay the IRS $110,000 if you died on January 1, 2011.)
There are steps you can take to reduce your taxable estate (and, as a result, the amount of taxes that will be imposed on your estate). If nothing is done, however, the full value of the proceeds will be included in your taxable estate. This would be an unpleasant surprise for your heirs.
Wednesday, October 27, 2010
Thursday, October 21, 2010
Choosing Fiduciaries
For some folks, choosing the people to make the decisions is the hardest part.
Proper estate planning includes your designation of persons to make medical and financial decisions for you if you become unable to make those decisions (because of mental incapacity). In addition, in your estate plan you will designate the persons who will oversee the management of your estate after you are gone; these persons will ensure that the beneficiaries you name receive their inheritance on time.
Accordingly, it is important to carefully consider whom to name in these roles (these persons are commonly referred to as 'fiduciaries'). You want to be certain that the fiduciaries you name are persons you trust without hesitation; after all, you will be giving these people a lot of control over you and your estate. The fiduciaries will be called on to interact with your family in various capacities down the road.
For these reasons, the first consideration is to exclude anyone whom you do not trust from your list of potential fiduciaries. The persons you designate may be able to hire the help they need (to interact with courts, prepare tax returns, etc.), but if they are not trustworthy you should not name them.
Many clients name family members as fiduciaries and this often works well. Some clients, however, do not have close relationships with family members or for other reasons do not wish to name family. For these individuals, a long-time trusted friend may be the solution. For others, a financial institution may be the right choice to serve as fiduciary. There are pros and cons to these decisions that should be considered before the documents are signed.
One bit of helpful information is that you generally can change your mind later. Should your circumstances change down the road, or should the circumstance change of a fiduciary you have selected, you may remove a fiduciary or add a new fiduciary, so long as your documents permit changes and you are still mentally alert.
Choosing not to create a document is not a good choice. When the time comes, a court will need to get involved (and lawyers) to appoint a fiduciary. This means you will have forfeited your right to name the fiduciary and there will be more hassle and expense (payable from your estate!).
Proper estate planning includes your designation of persons to make medical and financial decisions for you if you become unable to make those decisions (because of mental incapacity). In addition, in your estate plan you will designate the persons who will oversee the management of your estate after you are gone; these persons will ensure that the beneficiaries you name receive their inheritance on time.
Accordingly, it is important to carefully consider whom to name in these roles (these persons are commonly referred to as 'fiduciaries'). You want to be certain that the fiduciaries you name are persons you trust without hesitation; after all, you will be giving these people a lot of control over you and your estate. The fiduciaries will be called on to interact with your family in various capacities down the road.
For these reasons, the first consideration is to exclude anyone whom you do not trust from your list of potential fiduciaries. The persons you designate may be able to hire the help they need (to interact with courts, prepare tax returns, etc.), but if they are not trustworthy you should not name them.
Many clients name family members as fiduciaries and this often works well. Some clients, however, do not have close relationships with family members or for other reasons do not wish to name family. For these individuals, a long-time trusted friend may be the solution. For others, a financial institution may be the right choice to serve as fiduciary. There are pros and cons to these decisions that should be considered before the documents are signed.
One bit of helpful information is that you generally can change your mind later. Should your circumstances change down the road, or should the circumstance change of a fiduciary you have selected, you may remove a fiduciary or add a new fiduciary, so long as your documents permit changes and you are still mentally alert.
Choosing not to create a document is not a good choice. When the time comes, a court will need to get involved (and lawyers) to appoint a fiduciary. This means you will have forfeited your right to name the fiduciary and there will be more hassle and expense (payable from your estate!).
Monday, October 11, 2010
Title Issues
Title issues are not terribly exciting, but they can make all the difference!
'Title issues' have to do with who owns your home, car or other assets. You can find the answers by looking at the deed, car title, account statement or other evidence. These issues frequently make people squirm when opening a new bank account or buying a home; there is often a moment of uncertainty how to 'name' the account.
For instance, suppose you were opening a new checking account. You might set up the account with just your name on it. Alternatively, you could add your spouse (or another person) as a co-owner. If you have more than one name on the account, you could indicate that the account is held by the two of you as 'tenants in common', 'joint tenants with rights of survivorship' or even 'tenants by the entirety'.
Each of these choices have consequences under tax, probate and asset protection laws. Just the few words you list in the title of the account may determine whether you are liable for tax on the account, whether the account will be subject to probate administration upon your death and whether the account could be seized by your creditors (if you are sued for an auto accident, unpaid debt or other issue).
The moment's uncertainty that you feel may be a signal to you to seek help in making these decisions. Rather than making a decision without fully understanding the legal implications, you may wish to slow down the process and ask a few questions. You may find there are ways to achieve your goals that could save you on taxes or help protect your assets from creditors.
'Title issues' have to do with who owns your home, car or other assets. You can find the answers by looking at the deed, car title, account statement or other evidence. These issues frequently make people squirm when opening a new bank account or buying a home; there is often a moment of uncertainty how to 'name' the account.
For instance, suppose you were opening a new checking account. You might set up the account with just your name on it. Alternatively, you could add your spouse (or another person) as a co-owner. If you have more than one name on the account, you could indicate that the account is held by the two of you as 'tenants in common', 'joint tenants with rights of survivorship' or even 'tenants by the entirety'.
Each of these choices have consequences under tax, probate and asset protection laws. Just the few words you list in the title of the account may determine whether you are liable for tax on the account, whether the account will be subject to probate administration upon your death and whether the account could be seized by your creditors (if you are sued for an auto accident, unpaid debt or other issue).
The moment's uncertainty that you feel may be a signal to you to seek help in making these decisions. Rather than making a decision without fully understanding the legal implications, you may wish to slow down the process and ask a few questions. You may find there are ways to achieve your goals that could save you on taxes or help protect your assets from creditors.
Monday, October 4, 2010
501(c)(3) Organizations
Setting up a 501(c)(3) organization may be a great idea for you!
A '501(c)(3) organization' is the name commonly given to a corporation that has been recognized by the IRS as exempt from federal income taxes. This means that when these charities receive donations from the general public, the donor receives a tax deduction and the organization does not pay income tax on the donation. Thank you IRS!
The reason 501(c)(3) organizations are given this tax favored treatment is because the organizations are dedicated to charitable purposes (indeed, the IRS closely scrutinizes tax-exempt organizations to confirm they are correctly organized and operated). For example, a charity may raise funds to fund cancer research, scholarships for kids going to college from a particular city, and many other purposes.
You may ask why this is important to you. The answer is that you may have charitable aspirations of your own. If so, setting up your own 501(c)(3) organization could be a way to fulfill these aspirations and even involve your family in the effort. In addition, you could receive some terrific tax benefits. Even if you have no intent to seek donations from the general public, you could have your own charity dedicated to a charitable purpose that you select and still receive many tax benefits.
As mentioned, donations to a tax-exempt entity are deductible (and the entity itself does not pay income taxes on the donations). Plus, amounts left to the entity in your Will or Trust are deductible from federal estate taxes (which will begin again in just a few months!). Plus, the donations to the entity are also deductible from the federal gift tax. In other words, you can save a lot of taxes, advance a cause that you believe in, give your family members a temporary or permanent role in the effort and feel the intangible benefits during your lifetime. Not a bad deal!
A '501(c)(3) organization' is the name commonly given to a corporation that has been recognized by the IRS as exempt from federal income taxes. This means that when these charities receive donations from the general public, the donor receives a tax deduction and the organization does not pay income tax on the donation. Thank you IRS!
The reason 501(c)(3) organizations are given this tax favored treatment is because the organizations are dedicated to charitable purposes (indeed, the IRS closely scrutinizes tax-exempt organizations to confirm they are correctly organized and operated). For example, a charity may raise funds to fund cancer research, scholarships for kids going to college from a particular city, and many other purposes.
You may ask why this is important to you. The answer is that you may have charitable aspirations of your own. If so, setting up your own 501(c)(3) organization could be a way to fulfill these aspirations and even involve your family in the effort. In addition, you could receive some terrific tax benefits. Even if you have no intent to seek donations from the general public, you could have your own charity dedicated to a charitable purpose that you select and still receive many tax benefits.
As mentioned, donations to a tax-exempt entity are deductible (and the entity itself does not pay income taxes on the donations). Plus, amounts left to the entity in your Will or Trust are deductible from federal estate taxes (which will begin again in just a few months!). Plus, the donations to the entity are also deductible from the federal gift tax. In other words, you can save a lot of taxes, advance a cause that you believe in, give your family members a temporary or permanent role in the effort and feel the intangible benefits during your lifetime. Not a bad deal!
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