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Things to consider when creating an estate plan

Estate planning is not only for someone else or for some other time. Now is the time to put into place the safe-guards that will ensure that your family and finances that you’re working so hard for are protected. These are decisions that will be made, the question is whether they will be made by you or left to the whim of others and outside agencies. What makes the difference is planning now. Take some time to consider these things when creating an estate plan.

•    Everybody needs a will. It informs the world exactly what you want done with your assets. If you have children, it’s also the mechanism for determining who will be their guardian in the event of your passing. This can also be the same person that you would like to appoint to manage any assets that you leave to your children, should they be too young to do so themselves.

•    Trusts are basically how you put conditions on how and when your assets will be distributed.  It also provides a financial benefit to your remaining family by reducing estate and gift taxes, as well as the delay and publicity of having to resort to a probate court. Another way to avoid the probate process with your funds is to name a specific beneficiary for things like bank accounts and retirement plans, making them automatically “payable on death” to whomever you chose.
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Access to your power of attorney documents

It’s important to have access to the originals of your power of attorney documents, because a photocopy sometimes won’t be accepted.

Sometimes an estate planning attorney keeps the originals, and sometimes the client keeps them. Both are good ideas. But either way, make sure you can access them when you need them. If you keep them yourself, put them in a safe place. And if your estate planning attorney keeps them, be sure you leave enough time to obtain them if you’ll need them for a transaction.

This issue came up recently when a women signed a power of attorney. She was deploying overseas with the Air Force, and wanted her husband to be able to manage their affairs back home. Later, the husband refinanced the couple’s mortgage. But when it came time to record the new mortgage with the county, the clerk’s office refused to do so – because he couldn’t find the original notarized power of attorney, and only had a photocopy.

He explained that it would be very difficult to get a new power of attorney document when his wife was serving overseas, but the clerk’s office wouldn’t bend.

He eventually sued the county, claiming that he suffered damages because he couldn’t refinance or sell the property. But a federal appeals court said the county was within its rights, and the couple was out of luck.

New 3.8% tax on investment income starts in 2013

A new 3.8% tax on investment income will take effect in 2013, and anyone who has significant investments or who manages a trust should be planning for it now.

The tax was included in President Obama’s health care law. In the past, many people didn’t plan for the tax because they thought the law might be struck down by the Supreme Court. But now that the Supreme Court has upheld the law, the tax will take effect as scheduled starting January 1.

The tax applies to single filers with adjusted gross income over $200,000 and married filers with adjusted gross income over $250,000. It also applies to trusts (and estates) with undistributed investment income of more than about $12,000 – so the effect could be very great on them.

For single and married taxpayers, the flat 3.8% tax applies to (1) the total amount of investment income, or (2) the amount by which adjusted gross income exceeds the $200,000 or $250,000 thresholds – whichever is less. So for instance, if a single taxpayer has $225,000 in adjusted gross income and $10,000 in investment income, the tax applies to the $10,000. But if the same taxpayer has $225,000 in adjusted gross income and $50,000 in investment income, the tax applies to $25,000 (the amount by which the taxpayer’s income exceeds the $200,000 threshold). [Read more…]

Big tax-saving opportunity is available only until the end of the year

An enormous opportunity for families to reduce their estate taxes – and in some cases, save millions of dollars – will end on December 31, 2012. If there’s a chance you can take advantage of these savings, it’s wise to act immediately, because unless Congress changes the law, the window of opportunity will close permanently when the ball drops on New Year’s Eve.

Between now and the end of the year, the lifetime exemption from the federal gift tax is $5.12 million. But on January 1, 2013, this exemption is scheduled to be reduced drastically, to just $1 million.

The gift tax applies anytime you make a gift to someone other than a spouse or a charity. In general, you can give any person (or a trust) up to $13,000 a year without there being a gift tax. But if you give someone more than $13,000 in a calendar year, then the tax applies to the excess.

However, you also have a “lifetime exemption.” Over the course of your lifetime, you can make gifts over the $13,000 annual threshold up to the amount of this exemption without paying tax. [Read more…]

Inherited IRAs can be a great idea

Leaving an IRA to your children or grandchildren can be a great idea. That’s because withdrawals from the IRA can be “stretched out” over many years, and the IRA can grow tax-free for decades, giving your heirs a huge tax benefit.

However, if you’re planning to leave an IRA to your heirs, it’s important to talk with them now about this strategy – so they understand how to take advantage of it.

A recent study by the AXA insurance company showed that 87% of children who inherit an IRA from a parent liquidate it within a year of the parent’s death.

Of course, in many cases, the children may have an immediate need for the money. But it also seems likely that there are a large number of cases where the children simply don’t understand the tax advantages of leaving the assets in the IRA – because the family never had a discussion about it.

This is one of many areas of estate planning where the best-laid plans sometimes go awry if the heirs don’t fully understand how the plans are supposed to work.

Equalize Family Gifts in 2012

There’s a limit on how much money you can give away each year without paying gift tax. For 2012, for instance, you can give any person up to $13,000 without paying tax.

Many people make annual gifts to family members as part of their estate planning. This is a smart idea, but one problem is that over time it can result in unequal gifts to different parts of a family.

For instance, Edna has three children: Alan is single, Stella is married with one child, and Andy is married with four children. Each year Edna gives $13,000 to each of her children, their spouses, and her grandchildren.

But that means that Stella’s family gets three times the amount of gifts that Alan gets, and Andy’s family gets six times the amount of gifts that Alan gets. Over time, this has resulted in a very large disparity in gifts, and Edna would like to equalize matters a bit.

Of course, Edna could leave more to Alan and Stella in her will, but that might be awkward.

An option for Edna is to take advantage of the large lifetime gift tax exemption in effect through the end of 2012.

During 2012, a person who hasn’t made any prior taxable gifts can give away up to $5.12 million without paying any gift tax. A married couple can give away up to $10.24 million. (These amounts are scheduled to be reduced to $1 million and $2 million in 2013.) [Read more…]

How to transfer a family business to the next generation

Many people who seek estate planning advice are owners of family businesses, and one of their chief concerns is how to pass on the business to the next generation.

The fact is, there are almost as many ways to transfer a family business as there are family businesses. There’s no way to know what’s best for you without a thorough discussion of your goals, your family, and your complete financial picture. However, there’s no question that dealing with a family business is an essential aspect of planning your estate.

Here’s a broad, general look at some of the ways in which a business can be transferred to your children:

Put it in your will. You can give your interest in the business to your children in your will. This is simple, and it allows you to keep complete control of the business for as long as you live.

There are some downsides to this method, however. Some business owners think that their children will benefit from having an ownership stake in the business while they learn to manage it. Some owners worry that as they get older, they might no longer be competent to fully run the company’s affairs. In addition, there may be very significant tax advantages to transferring all or part of the business while you’re still alive. [Read more…]

Moving? Update your estate plan

If you plan to retire and either move or away from Rhode Island, its a good idea to speak with your estate planning attorney about the estate laws in the state  to which you are moving.

Of course, your estate plan should be updated any time you make a major change, such as buying or selling real estate. But even if you’re not buying or selling anything, it’s wise to review your estate plan when you move because different states have different laws about how estate documents are interpreted.

For instance, New Yorker Rosanne McGathy wrote a will in 1997. She moved to Arizona in 2005, and she passed away several years later. Her will made specific bequests to several trusts for relatives, and left the remainder of her estate to some other relatives and charities. McGathy had other assets that went to people outside the will, including a home she co-owned, a life insurance policy, and an annuity.

Under New York law, if a will doesn’t specifically say who pays the estate taxes, then the taxes are apportioned among all the assets, including the trusts, the home, the life insurance and the annuity. [Read more…]

Gift tax on hard-to-value gifts

As part of their estate planning, many people want to give away property during their lifetime in order to reduce the size of their taxable estate.

In general, you can give $13,000 a year to anyone you like without having to pay gift tax, and you can make additional gifts over this limit, over the course of your lifetime, up to the amount of your gift tax exemption (although these larger gifts will reduce your estate’s exemption when you eventually pass away). Plus, you can give an unlimited amount to a spouse or charity.

One problem with making gifts for tax purposes is that some types of assets are hard to value. In particular, certain types of real estate, interests in a partnership, and stock in a family-owned business can be very difficult things on which to place a price tag.

You can obtain an independent appraisal of the assets’ value, but some people worry that even if they do, the IRS might disagree with the appraisal. They are concerned that the IRS will say the assets are worth more than they thought, and claim that the gifts were “over the limit” such that they have to pay gift tax. [Read more…]

Update your powers of attorney and health care proxies

Many power of attorney and health care proxy documents that were created years ago should be revised now as a result of a federal medical privacy law.

The law, known as HIPAA, generally prevents health care providers from disclosing your personal medical information to anyone but you and someone you’ve named as your “personal representative.”

Medical privacy may be a good thing – but the law can create complications.

For instance, you may have a health care proxy that names someone you want to make medical decisions for you if you’re not able to make them yourself. But if you haven’t also named that person as your “personal representative” under HIPAA, then he or she might not be able to access your medical information in order to make informed decisions.

Here’s another problem: Many power of attorney documents say that your agent can act on your behalf if you become incapacitated. But if your agent isn’t also your personal representative under HIPAA, then even if you do become incapacitated, your agent might not be able to access your medical records in order to prove it – and as a result, the power of attorney might be of little value. [Read more…]