CERTIFIED PUBLIC ACCOUNTANTS AND ADVISORS |
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8 ESTATE PLANNING STRATEGIES YOU SHOULD
KNOW Despite the scheduled repeal of estate taxes by 2010 (and
scheduled to reappear in 2011), many estate planning strategies, including tax
reduction strategies, are still needed. Here are eight estate-planning
strategies you should know. 1. A will. A valid will stipulates to whom you want
your assets distributed. Without a will, the laws of the state where you reside
will determine for you. 2. A living will, medical power of attorney and
financial power of attorney. A living will stipulates what life-saving
medical procedures you want or don’t want in the event you are physically or
mentally incapacitated. A medical power of attorney appoints a person the power
to make medical decisions on your behalf, while a financial power of attorney
states who can make financial decisions on your behalf. 3. The annual gift-tax exclusion. One of the most
basic and inexpensive strategies for saving estate taxes, the gift-tax exclusion
allows you to give away, tax free, $11,000 a year (indexed for inflation) to
each beneficiary you choose. Thus, you and your spouse could jointly give away
$22,000 annually to each of your children, grandchildren or anyone else without
incurring a gift tax. 4. Medial and tuition payments. A person can make
unlimited gift-tax-free payments for another’s tuition or medical bills
without it counting against the payer’s lifetime gift-tax exclusion, as long
as the payments are made directly to the educational or medical institution. A
grandparent, for example, could pay a $20,000 annual tuition bill to a college
for a grandchild gift-tax free, and then give directly to the child up to
another $11,000 a year for non-tuition college expenses, taking advantage of the
annual gift-tax exclusion. 5. Lifetime giving. Assuming you have sufficient
funds to live on, lifetime gifting often can better reduce your estate tax
liability than waiting until death to pass on your estate. One advantage of
lifetime gifting is that you can remove appreciating assets, such as common
stock, from your estate. The second advantage is that if your gift is taxable
(you can give away up to $1 million gift-tax free during your lifetime), the
money you use to pay the gift tax is also removed from your estate, thus
reducing any future estate taxes. 6. By-pass trust or credit-shelter trusts. For
people who die in 2002 or 2003, the first $1 million of their estate is exempt
from estate tax (assuming they haven’t used up some or all of their exemption
amount through taxable lifetime gifts). That exemption amount gradually rises to
$3.5 million by 2009. A spouse (with the exception of a foreign-citizen spouse)
can pass his or her entire estate tax free to the surviving spouse. But because
the surviving spouse can’t take use the deceased’s exemption amount at his
or her subsequent death, this “wastes” the deceased’s exemption amount. Often it’s better for the first-to-die spouse to pass his
or her exemption amount to a credit shelter trust. The surviving spouse can use
income generated by the trust assets, and at the survivor’s death, the assets
pass to the trust’s beneficiaries tax free. In addition, the estate of the
second spouse also saves the additional exemption amount. Thus, for example, if
both spouses died in 2003, they could exempt $2 million between them instead of
only $1 million. 7. Irrevocable life insurance trust. The proceeds of
a life insurance policy held in your estate, perhaps used to pay for estate
taxes, is subject to estate tax. But if an irrevocable life insurance trust owns
the policy, the proceeds will not be included in your estate. You may donate
annually to the trust an amount equal to the premiums to pay for the policy. For
these donations to qualify for the annual gift-tax exclusion, you must use a
complicated strategy called Crummey letters. 8. Charitable remainder trust. The donor transfers property to the CRT, receiving an immediate income-tax deduction and avoiding any capital gains taxes on donated appreciated property. In return, the donor receives an income stream generated by the trust assets either for a specified time or for life. At the end of that period, the charitable organization inherits the trust assets. April 2002— This column is produced by the Financial Planning Association, the membership organization for the financial planning community, and is provided by McGuire & Co., LLP, a local member in good standing of the FPA. |
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