5 common estate planning mistakes.
1. You don't have a gifting plan.
Don't underestimate the tax-saving power of the annual gift tax exclusion. For 2009, the exclusion is $13,000 per recipient ($26,000 if you split gifts with your spouse), up from $12,000 last year. If, for example, you and your spouse give away the maximum to five recipients every year for 10 years, you'll have transferred a total of $1.3 million tax free without using any of either spouse's $1 million lifetime girl tax exemption. Annual exclusion gifts are more effective because, unlike lifetime exemption girls, they don't reduce the amount of wealth you can transfer tax free at death.
Keep in mind that there are certain "gifts" that are not deemed to be gifts. For instance, medical expenses and tuition expenses (not room, board, books and other educational costs) paid on behalf of another aren't considered gifts as long as the payments are made directly to the medical provider or the school.
2. You own your life insurance policy.
If you own an insurance policy on your life, nearly half of the proceeds could be lost to estate taxes. However, if you don't own the policy, the proceeds won't be included in your taxable estate. One of the most effective strategies for keeping life insurance out of your estate is to set up an irrevocable life insurance trust (ILIT) to buy and hold the policy. You can even make annual exclusion girls to the trust to cover some or all of the premium payments.
If you already own your life insurance policy, you can transfer the policy to an ILIT. Watch out for the "three-year rule," which provides that certain assets, including life insurance, transferred within three years of your death are pulled back into your estate and taxed. So it's wise to transfer an existing policy to an ILIT sooner rather than later.
3. You're leaving everything to your spouse.
Designating your spouse as your sole beneficiary may seem like a good strategy. After all, the marital deduction allows you to transfer an unlimited amount of wealth to your spouse tax free (as long as he or she is a U.S. citizen). The problem is that it also wastes your estate tax exemption, currently $3.5 million.
Suppose that you and your spouse each have $3.5 million in assets. If you leave everything to your spouse, there's no current estate tax. When your spouse dies, he or she will have an estate worth $7 million (assuming the assets remain intact), resulting in $1.575 million in estate taxes (assuming the current rate of 45%).
You can preserve your exemption and eliminate estate taxes by placing your assets in a credit shelter trust, If properly structured, the trust provides your spouse with income for life--and access to the principal as needed--but the assets aren't included in his or her estate. Plus, your exemptions shield both of your estates from federal tax. It is important to remember, however, that some states have an estate tax that still needs to be considered as part of your estate plan.
4. Yon haven't considered GST taxes.
The federal generation-skipping transfer (GST) tax applies at a flat rate (currently 45%)--in addition to any gift or estate taxes--to transfers to people who are more than one generation below you. Note that there are exceptions in the tax code so, under certain circumstances, a transfer to your grandchild might not be subject to the GST tax. For nonfamily members, there is an age test. Someone who is 37 1/2 years or more younger than you is considered to be more than one generation below you.
The GST tax can quickly eat up substantial amounts of wealth, so it's critical to allocate your GST exemption (currently $3.5 million) carefully. If you plan to make gifts to your grandchildren or other "skip" persons or you have a trust that may benefit them in the future, consult your tax advisor about how to allocate your exemption most effectively.
5. You own assets jointly.
Many people hold property as joint tenants with rights of survivorship (with a spouse or child, for example) because they think it's a simple way to avoid probate and transfer the property automatically when one owner dies. There are several potential problems with this strategy.
For one thing, it doesn't avoid probate. It merely postpones it until the surviving owner's death. More important, joint ownership has several tax disadvantages. If you and your spouse have estates large enough to trigger estate tax problems, holding most of your property jointly will waste one of your estate tax exemptions. If you're in a community property state, however, you have the opportunity to avoid this problem. You can equalize your estates--for instance, by holding property as tenants in common or by properly titling community property--and use a credit shelter trust to minimize estate taxes. (See #3: "You're leaving everything to your spouse".)
No matter how much effort you put into determining how your wealth will be divided after you're gone, it will be all for naught if your beneficiaries die before you. To avoid having the state design an estate plan for you, name contingent beneficiaries in your will, living trust, life insurance policy, retirement plans and other important documents that require a beneficiary designation.
Make no mistake.
Even if your estate plan is mistake-free, review it periodically to be sure it reflects your current personal and financial circumstances as well as any changes in the gift and estate tax laws and regulations. Keep in mind that everyone's situation is different, so the strategies you employ may be different from the ones your loved ones are using. It is important that you periodically review your estate plan with your certified public accountant.
By Marc Wieder, CPA
Anchin Block and Anchin LLP
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|Publication:||Real Estate Weekly|
|Date:||Nov 18, 2009|
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