Now is the time to implement strategies to reduce your estate tax exposure.
Readers of this blog are well aware of the upcoming changes in federal law. While the federal estate tax was repealed for 2010, the tax returns on January 1, 2011. This means that the IRS will collect a 55% tax (60% on estates over $10 million), less a $1 million 'exemption', on the estates of all persons who die on or after January 1, 2011.
This tax will have a widespread impact. Consider a couple owning a home, with an IRA/401k and life insurance. These are not liquid assets, but they are included in the couple's taxable estate. Accordingly, the estate tax rules will treat many people as being rich and taxable who do not think of themselves as particularly wealthy. (One of the criticisms against the estate tax is that it penalizes 'savers' and rewards 'consumers'.)
One common mistake is to just 'give away' real estate or other assets to remove them from your estate (such as a quit claim deed to your son). The federal gift tax will apply to such gifts; in addition, there may be liability and other issues raised by such gifts. So, how to address the estate tax issue if Congress and the President do not agree on changes to the law by December 31?
Here are some common approaches to reducing estate tax exposure (each of which has been approved by the IRS):
1. Irrevocable Life Insurance Trust: This trust is used to remove the death benefit of your life insurance policies from your taxable estate.
2. Qualified Personal Residence Trust: This trust is used to remove the value of your home from your taxable estate, although with gift tax consequences.
3. Grantor Retained Annuity Trust: This trust is used to remove the value of one or more investment accounts and similar assets from your taxable estate, although with gift tax consequences.
Each of these strategies has pros and cons and there are details to address. For example, each of these strategies requires you to give up control over the asset placed in trust. Nonetheless, it is possible to make a significant dent in your taxable estate by planning ahead.
Wednesday, November 17, 2010
Wednesday, November 10, 2010
Why You Want a Lawyer for Even a 'Simple' Will
A recent case shows why it's a good idea to hire a lawyer, even if everything appears simple and straightforward.
A Florida Court of Appeals today issued a ruling reversing a trial court decision construing a will. The decedent left a will providing for his house to go to his brother and his brother-in-law (50/50). The will also said if either the brother or the brother-in-law did not survive to receive their share of the house, then their share would go to their spouse.
As it happened, the brother did not survive - in addition, the brother's spouse did not survive. The children of the brother claimed that they should get the share that the brother was entitled to receive. The brother-in-law claimed he should get the brother's share - and thus the entire house. (Stop at this point and think what you would do if you were the judge.)
The trial court sided with the children of the brother and awarded them half of the house. The brother-in-law appealed and won the entire house. The appellate court ruled that the children were not legally entitled to any share in the house.
It's obviously not possible to know what the decedent would have wanted to happen in this situation. Still, it would have been simple enough to have specified in the Will exactly what was desired. This sort of specificity would have saved family contention, as well as litigation time and expense (more than two years passed from the death of the decedent to this decision!).
A Florida Court of Appeals today issued a ruling reversing a trial court decision construing a will. The decedent left a will providing for his house to go to his brother and his brother-in-law (50/50). The will also said if either the brother or the brother-in-law did not survive to receive their share of the house, then their share would go to their spouse.
As it happened, the brother did not survive - in addition, the brother's spouse did not survive. The children of the brother claimed that they should get the share that the brother was entitled to receive. The brother-in-law claimed he should get the brother's share - and thus the entire house. (Stop at this point and think what you would do if you were the judge.)
The trial court sided with the children of the brother and awarded them half of the house. The brother-in-law appealed and won the entire house. The appellate court ruled that the children were not legally entitled to any share in the house.
It's obviously not possible to know what the decedent would have wanted to happen in this situation. Still, it would have been simple enough to have specified in the Will exactly what was desired. This sort of specificity would have saved family contention, as well as litigation time and expense (more than two years passed from the death of the decedent to this decision!).
Wednesday, November 3, 2010
Planning for Incapacity
You can make decisions now to control what happens when you can't make decisions later.
It is an unfortunate reality that many people will experience an event of incapacity (such as Alzheimer's, accident trauma or just advancing age). One consequence of incapacity is the loss of legal control over your medical and financial decisions. That means someone else will decide where you will live, how your money is spent, what medical treatment you receive, etc.
Happily, the law allows us to plan today for these events. 'Estate planning' is often thought of as addressing what happens when we die, but your complete estate plan should also include documents that identify who has the ability to make decisions for you if you become incapacitated. The typical documents include:
First, a Durable Power of Attorney. This document names your 'Attorney-in-Fact', who is authorized to make financial decisions for you.
Second, a Health Care Advance Directive. This document names your 'Surrogate', who is authorized to make medical decisions for you.
Third, a Living Will. This document sets forth your wishes regarding certain end-of-life decisions.
Without these documents, courts (and lawyers) will need to get involved to appoint a Guardian to make these decisions for you. The expenses of the guardianship (court fees, attorney fees, guardian fees, etc.) will be paid from your assets. Unless you recover from your event of incapacity, you will likely have a Guardian throughout your lifetime.
As with other areas of estate planning, failing to act is a bad idea.
It is an unfortunate reality that many people will experience an event of incapacity (such as Alzheimer's, accident trauma or just advancing age). One consequence of incapacity is the loss of legal control over your medical and financial decisions. That means someone else will decide where you will live, how your money is spent, what medical treatment you receive, etc.
Happily, the law allows us to plan today for these events. 'Estate planning' is often thought of as addressing what happens when we die, but your complete estate plan should also include documents that identify who has the ability to make decisions for you if you become incapacitated. The typical documents include:
First, a Durable Power of Attorney. This document names your 'Attorney-in-Fact', who is authorized to make financial decisions for you.
Second, a Health Care Advance Directive. This document names your 'Surrogate', who is authorized to make medical decisions for you.
Third, a Living Will. This document sets forth your wishes regarding certain end-of-life decisions.
Without these documents, courts (and lawyers) will need to get involved to appoint a Guardian to make these decisions for you. The expenses of the guardianship (court fees, attorney fees, guardian fees, etc.) will be paid from your assets. Unless you recover from your event of incapacity, you will likely have a Guardian throughout your lifetime.
As with other areas of estate planning, failing to act is a bad idea.
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