ESTATE PLANNING & TAXATION

OVER 18

Since incapacity can strike anyone at anytime, all adults over 18 should consider having:

• A durable power of attorney: This document lets you name someone to manage your property for you in case you become incapacitated and cannot do so.
• An advanced medical directive: The three main types of advanced medical directives are (1) a living will, (2) a durable power of attorney for health care (also known as a health-care proxy), and (3) a Do Not Resuscitate order. Be aware that not all states allow each kind of medical directive, so make sure you execute one that will be effective for you.

YOUNG AND SINGLE

If you’re young and single, you may not need much estate planning. But if you have some material possessions, you should at least write a will. If you don’t, the wealth you leave behind if you die will likely go to your parents, and that might not be what you would want. A will lets you leave your possessions to anyone you choose (e.g., your significant other, siblings, other relatives, or favorite charity).

UNMARRIED COUPLES

You’ve committed to a life partner but aren’t legally married. For you, a will is essential if you want your property to pass to your partner at your death. Without a will, state law directs that only your closest relatives will inherit your property, and your partner may get nothing. If you share certain property, such as a house or car, you should consider owning the property as joint tenants with rights of survivorship. That way, when one of you dies, the jointly held property will pass to the surviving partner automatically.

MARRIED COUPLES

Married couples are effectively treated as one economic unit for federal gift tax and federal estate tax purposes, as long as each spouse is a U.S. citizen. This is accomplished using the unlimited marital deduction–a powerful estate planning tool, because you can conceivably give or leave your entire estate to your spouse tax free. The deduction not only allows spouses to shift wealth between each other without incurring gift tax or estate taxes, but also allows spouses to maximize the benefits that result (e.g., equalizing your estates to take full advantage of the applicable exclusion amount). This is especially important since the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (the 2001 Tax Act) signed by President Bush on June 7, 2001, which has increased the exclusion amount (as described in a following section). Married couples should also consider creating a bypass or credit shelter trust.

MARRIED WITH CHILDREN

If you’re married and have children, you and your spouse should each have your own will. For you, wills are vital because they can name a guardian for your minor children in case both of you die simultaneously. If you fail to name a guardian in your will, a court may appoint someone you might not have chosen. Furthermore, without a will, some states dictate that at your death some of your property goes to your children and not to your spouse. If minor children inherit directly, the surviving parent will need court permission to manage the money for them.

You may also want to consult an attorney about establishing a trust to manage your children’s assets in the event that both you and your spouse die at the same time.

Certainly, you will also need life insurance. Your surviving spouse may not be able to support the family on his or her own and may need to replace your earnings to maintain the family.

COMFORTABLE AND LOOKING FORWARD TO RETIREMENT

If you’re in your 30s, you’re probably feeling comfortable. You’ve accumulated some wealth and you’re thinking about retirement. Here’s where estate planning overlaps with retirement planning. It’s just as important to plan to care for yourself during your retirement as it is to plan to provide for your beneficiaries after your death. You should keep in mind that even though Social Security may be around when you retire, those benefits alone may not provide enough income for your retirement years. Consider saving some of your accumulated wealth using other retirement and deferred vehicles, such as an individual retirement account (IRA).

WEALTHY AND WORRIED

The American Taxpayer Relief Act of 2012 made permanent the major changes made in 2010 in the law regarding gift, estate, and generation-skipping transfer taxes.

Gift Tax – the tax-free annual exclusion amount is $14,000 per donee. The cumulative lifetime exemption increased from $5,250,000 in 2013 to $5,430,000 in 2015. The tax rate on gifts in excess of $5,430,000 is 40%.

Estate Tax – The estate tax exemption (reduced by certain lifetime gifts) also increased from $5,250,000 in 2013 to $5,430,000 in 2015. The estate tax rate on the excess value of an estate remains at 40%. All of a decedent’s assets (other than “income in respect of a decedent” such as IRAs and retirement plan benefits) are equal to the fair market value of those assets at the date of death (stepped up or down basis.). So be sure to advise your broker of your new basis in securities received by inheritance as they are required by the IRS to retain basis records.

GST Tax – the 2015 lifetime exemption also has increased to $5,430,000 and the rate also remains at 40%.

Portability of Estate Tax exemption. The 2012 Act also made permanent the temporary “portability rules introduced in 2010 that provide for the transfer of a deceased spouse’s unused estate tax exemption (DSUEA) to a surviving spouse. But remember there is no inflation adjustment and the DSUEA does not apply to GST taxes. Portability may allow some couples to forgo a more complex estate plan while still taking advantage of both spouses’ transfer tax exemption but it must be irrevocably elected on a timely filed estate tax return, even if a return is not otherwise required to be filed.

In 2015 married couples can get the benefit of two individual exemptions, so in 2015 the total exemption per couple will be almost $11 million.

As a result, the federal estate tax is no longer the biggest concern for most affluent Americans who want to avoid taxes on wealth they leave to heirs – as it was for many years.

ELDERLY OR ILL

If you’re elderly or ill, you’ll want to write a will or update your existing one, consider a revocable living trust, and make sure you have a durable power of attorney and a health-care directive. Talk with your family about your wishes, and make sure they have copies of your important papers or know where to locate them.