For information about Conrad Teitell’s publications and lectures visit: taxwisegiving.com. For information about Cummings & Lockwood visit: cl-law.com.
“If you turn on your television and nothing is happening, do not call a repairman. You have tuned into the U.S. Senate.” — David Brinkley
We know what the taxes on ordinary income, dividends and capital gains are for 2012. We also know what the increased taxes will be for 2013, if Congress takes no action by the end of this year.
We also know what the gift, estate and generation-skipping transfer (GST) taxes are for 2012 —and the increased taxes scheduled for 2013, if Congress doesn’t extend the 2012 rules.
We don’t know what Congress will do, if anything, in a lame duck session after the election; nor what it might do, retroactively, next year.
Getting down to brass tax. Nobody, including Congress, knows what all these taxes will or won’t be in 2013. So, let’s look at the non-tax aspects of estate planning for the super-rich, merely-rich, comfortable and uncomfortable individuals.
Just what is estate planning? I heard one professional say that estate planning is the orderly and systematic transfer of a client’s wealth and assets into fees and commissions. That’s estate planning for him. But what about the rest of us?
Simply put, modern-day estate planning addresses how to provide for yourself, your family and the charitable causes that are important to you right now — in a meaningful way. It also involves providing for retirement, possible mental or physical incapacity— and providing for your family and continuing your philanthropic legacy after your death.
Estate Planning Essentials
□ Determine your current and estimated down-the-road needs, including retirement and the possibility of disability.
□ Make a list of your assets—including cost basis, current fair market value and how they are owned (separate property, joint property, tenancy in common, community property). How much income do they pay? Should they be held or sold? Should the type of ownership be changed?
□ List your debts (including potential federal estate and any state estate taxes) and the assets your estate will use to pay them.
□ Decide on what you wish to pass on to others. Consider the strengths and weaknesses of potential beneficiaries and their current and future needs.
□ Charitable gifts during life and by will are an important part of many estate plans. So are charitable plans that pay you and others life income before the charity gets the gift. You’ll find that the tax laws enable you to be a philanthropist at wholesale cost.
□ Determine who would be appropriate fiduciaries—trustees, executors, guardians for minors and holders of durable powers of attorney or health-care proxies.
□ Consider the pros and cons of transferring some assets during your lifetime.
□ Plan for the continuation, sale or transfer of a business with minimum erosion from taxes and mismanagement.
□ Maintain an up-to-date will or living trust that will carry out your wishes and minimize administration expenses and taxes on your estate.
□ Review your life insurance and pension plans, including beneficiary designations and payment options.
□ Be sure to have a current living will.
□ Maintain an up-to-date durable health care power of attorney (a health-care proxy) that empowers the named person to make health care decisions for you if you are incapable of doing so.
□ Maintain a current durable power of attorney or trust for financial matters that grants another individual or trust company the power to act on your behalf should you become incapacitated.
□ The 2012 unified gift and estate tax exemption is $5,120,000 per person and twice that per couple. The GST tax exemption is also $5,120,000 per person. The tax rate for those taxes is 35 percent. If Congress doesn’t act, the unified exemption and the GST exemption will be $1 million starting in 2013 with a 55 percent rate (60 percent for a part of larger estates). Caution: With marital and credit shelter trusts that are often keyed to formulas, major distortions to an estate plan can result if the recent higher exemptions and possible future lower exemptions (or estate tax repeal) aren’t taken into account.
□ Portability of unused exemption: Under earlier law, couples had to do complicated estate planning to claim their entire exemption ($7 million for a couple in 2009, for example). For 2011 and 2012 the executor of a deceased spouse’s estate can transfer any unused exemption to the surviving spouse obviating the need for a credit shelter trust. But, for some estates, portability won’t be the best plan; and portability only applies for 2011 and 2012. What happens in 2013 and beyond if that law is not extended?
□ For those individuals who can afford it, take advantage of the $13,000 annual-per-donee gift tax exclusion ($26,000 for married individuals). Gifts that qualify for the annual exclusion don’t reduce the $5,120,000 unified gift and estate tax exemption or the GST tax exemption. Also, remember the additional annual exclusions for tuition (paid directly to the educational institution) and for medical expenses (paid directly to the health-care provider). Caution: Some advisers believe that if the unified gift and estate tax exemption is reduced in 2013 below the current exemption, part of that exemption could be “clawed back.”
□ High-net-worth individuals should still consider tax-saving techniques, such as family limited partnerships. And, for some individuals, qualified personal residence trusts, grantor retained annuity trusts and life insurance trusts can make good tax sense.
□ Consider trusts for yourself and beneficiaries to provide protection from creditors.
□ Keep good financial and tax records.
□ Disclaimers and powers of appointment can often play an important role in estate plans. They provide flexibility in dealing with a shifting tax picture and changed family and financial circumstances.
□ Review your plan periodically. Keep an eye on the ever-changing tax laws, while also taking into account any changed personal, family and financial circumstances.
□ Finally, remember to go about the business of enjoying life.
© Conrad Teitell 2012. This is not intended as legal, tax, financial or other advice. So, check with your adviser on how the rules apply to you.