By: Randall A. Denha, J.D., LL.M.
All of us have a list of some sort, whether it’s a top ten list by David Letterman or a list of things to do, a list exists. In the world of estate planning, the following is my list of the top estate planning tips, tricks and traps for you to consider as we embark on yet another new year in 2012. Here are my top (tax and non-tax) estate planning items, regardless of your level of wealth, for you to consider:
1. Wills Do Not Avoid Probate: Currently, assets owned by a person in his or her individual name and distributed pursuant to the terms of the decedent’s will are required to be probated in court prior to the final distribution. In order to avoid probate, assets should typically be titled in the name of a trust. What are the benefits of Probate? None. Generally, it is advantageous to avoid probate entirely. Probate leads to unnecessary expenses and time delays. The documents become public record for the entire world to see (and your nosy neighbors).
2. Change Fiduciary Names: Over time, the names of guardians, executors, and trustees may change. These should be reviewed every few years. You do not want your best friends to be the guardians of your children if they moved away and you no longer communicate with them!
3. Title Real Estate Properly: The titling of real estate is extremely important in order to avoid probate and to make sure that one’s estate is divided according to one’s wishes. Any time you buy or sell real estate, your estate planning attorney should be notified to determine the correct ownership of the property both for probate and for estate tax purposes. Sometimes, depending on other factors, it may make sense to have the property owned by a separate entity that, in turn, is owned by your living trust. Bottom line: avoiding probate and potentially saving taxes.
4. Create a Living Will and Health Care Proxy: A Health Care Proxy allows someone designated by you to make medical decisions on your behalf. Updated documents must contain special federal privacy language under HIPAA to reflect the new medical information privacy laws. Please make sure your primary care physician, a nursing home (if applicable) and any hospital to which one is admitted has a copy of this document. This can cause less running around at an inopportune time. A living will offers guidance to your health care agent regarding your end of life wishes. These documents can even be customized based on your religious beliefs.
5. Create a Durable Power of Attorney: A Durable power of attorney allows you to make legal and financial decisions for another. These should be updated every few years, since many banks and financial institutions require them to be current. Many elderly people enter nursing homes without this document. This may result in a costly court procedure to be able to sell their assets and pay their bills.
6. Make Gifts for a Beneficiary’s Medical and/or Tuition Expenses: Currently, anyone may make a gift to another person (related or not) up to $13,000.00 per recipient per year. In addition, spouses may make unlimited gifts to each other (assuming they are U.S. citizens). However, many people do not realize that this amount does not include medical or tuition expenses. The amount that one gifts for certain medical and tuition expenses paid directly to the service provider is unlimited both in amount and to number of potential gift recipients.
7. Make Gifts of $5,000,000 Carefully: Besides the gifts listed above, you are entitled to gift up to another $5,120,000 during your lifetime or $10,240,000 if your spouse also joins in the gift giving party for calendar year 2012. However, this may have positive or negative estate tax consequences and requires the filing of a gift tax return. It’s important that you speak to a tax advisor prior to making any large gifts in excess of your annual exclusion of $13,000.00 or $26,000.00 (if spouse participates) to any individual per year. For example, if you’ve used your annual exclusion, funded 529 plans, paid educational and/or tuition expenses and still want more, here’s an idea. Many clients like the idea of taking advantage of low interest rates and making loans to children. Now may be an ideal time to forgive loans while the exclusion is $5M.
What if the child is insolvent and note is also uncollectible? These facts may warrant a reduced value. In fact you may even get a write off of a bad debt. Remember that there is no income tax consequence to the child since it is a gift. However, if the interest is forgiven, it is treated as interest first received by the parent and then a gift back to the child. Some clients don’t want to forgive the loan as it teaches the children responsibility. If forgiving the interest is not an option, another gift option is paying off a child’s mortgages. This can provide financial security to the child.
8. Have Coordination of Planners: Many times clients have multiple planners including an accountant, life insurance agent, financial planner, and other attorneys (divorce, corporate, etc.). It can be very helpful to give your estate planning attorney the name and contact information of each of these individuals. Otherwise, one planner may counteract the sound planning of another.
9. Be Mindful of Life Events Such as Divorce or Marriage: Many clients do not realize that a divorce or marriage renders a Will or Trust null and void. Remember to get in touch with us before a divorce or marriage is final so that we may take the appropriate steps to update your estate plan.
10. Review Beneficiary Designations: Beneficiary designations typically supersede one’s estate planning documents. Therefore, beneficiary designations for retirement accounts, annuities, life insurance accounts and similar accounts should be reviewed and updated in cases of marriage, divorce, and additional children. Occasionally, the beneficiary designation should be one’s trust; however, it is prudent to review your beneficiary designation with one’s advisor to avoid potential adverse income tax consequences. Of course the list can continue but a solid foundation can be achieved if many of the foregoing suggestions are implemented.
CIRCULAR 230 DISCLAIMER: THESE MATERIALS ARE NOT INTENDED OR WRITTEN BY THE VARIOUS AUTHORS OR DENHA & ASSOCIATES, PLLC, TO BE USED, AND THEY CANNOT BE USED BY YOU (OR ANY OTHER TAXPAYER) FOR THE PURPOSE OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON YOU (OR ANY OTHER TAXPAYER) UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED.