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Estate Planning -- Part
VI
If you haven't already thought about estate planning, now is the time to start. Nobody wants to think about what will happen once they're gone. But, by clarifying your goals and using basic estate planning techniques you can ensure that your wishes will be carried out and that your family is adequately provided for after you are gone. As a new parent the most important elements to consider are wills, trusts and other means of gifting assets.
Wills
Wills represent the cornerstone of any effective estate planning strategy. Although it may be the farthest thought from your mind, drawing one up should be one of the first things that you and your husband do as new parents. In particular, it enables you to establish trusts, who will act as your children's guardian and who will execute your affairs after you die. If you don't do so, know that there is no guarantee a judge will appoint the guardian you would have selected to care for your children and manage money you set aside for them.
You can choose one guardian to both care for the children and look after their
financial affairs, or alternatively, you can choose to have
two guardians- one to care for the children, and another to
look after their finances.
State laws dictate that the guardian may use any assets left to the child for child support, maintenance and education only. A periodic accounting is required by the court to ensure that this is indeed the case.
Trusts
With a trust, you can leave your money to a beneficiary and still have control over how the money will be put to use. It lets you designate how and when the beneficiary receives the funds. For instance, you can require that the funds be invested conservatively and that the beneficiary not gain access to the funds until she/he is a specific age. Also, a trust protects the money from creditors since this money can not be taken from the beneficiary to settle a debt.
Benefits of trusts
- You can require that the funds be invested conservatively
- Protects the money from creditors since this money can not be taken from the beneficiary to settle a debt
- Can designate how and when the beneficiary receives the funds
Powers of Attorney
In the event that you should become incapacitated, you should appoint someone to hold your power of attorney to make important decisions for you. There are generally two types of Power of Attorney: Durable and Health care.
1. Durable - A durable power of attorney gives authority to one or more people to manage your financial affairs on your behalf if you are disabled or are not capable of handling your finances yourself. This arrangement can be temporary or long term. Under it's authority, the appointed "attorney-in-fact" can act on your behalf in the following ways:
- Use your money for your benefit to care for you, pay your medical bills etc.
- Make charitable contributions from your estate
- Sign your tax return and other important documents
- Open bank and investments accounts and deposit funds into them
- Attend real estate closings
- Vote shares of stock that you own
- Make distributions from a trust for which you are the trustee or establish trusts for your beneficiaries if you haven't already done so
Be careful when choosing a person for the role of power of attorney. Power is effective before you become disabled and therefore the holder of this power may transfer your assets in ways you do not approve of.
2. Healthcare - A healthcare power of attorney allows an individual to make your health care decisions in case you are unable to. For example, the holder of the power of attorney can ask doctors to terminate life support should the situation arise.
Living wills
A living will clarifies your wishes regarding artificial life support. Most states now recognize your right to die and the courts usually side with patients who have given instructions in advance concerning extending their lives with artificial support.
The easiest way to execute a living will and health care power of attorney is to use a standardized form available from most estate planning lawyers or from Choice in Dying, www.choices.org. Sign this living will in front of two impartial adults who are not related to you and who stand to inherit nothing from you. Copies of these wills should be placed with your medical records and with the executor of your estate.
Gifts
Gifts are another effective way to pass your assets along to your survivors - tax-free. Through a carefully planned program, you may be able "to gift" your assets to whom you want and to save significant taxes in the process. The advantages and disadvantages of gifting money in this way are as follows:
Advantages of gifting assets
- Because of the Annual Gift Tax Exclusion, you may give up to $10,000 every year to each of your children (or to anyone else) without incurring a gift tax. As a couple, you can give $20,000 to each child (or anyone else) without any gift tax liability. All gifts that fall within these limits are protected from federal gift and estate taxes, making this one of the easiest ways to reduce the size of your taxable estate and build a nest egg for your children's future. And, gifts can be given while you are still alive so you can ensure that your assets go exactly where you intend them.
- Gifts are a private matter. Whereas the contents of your will often become a public record in the probate court, gifts remain behind closed doors.
An example of gifting assets: Jane and John are 60 years old and have $3 million saved. They have two children and 4 grandchildren. When they die, their taxable estate will equal $1,650,000 (after the Unified Credit Exemption: $3m - (675,000 *2) = 1,650,000). This will require the children to lose an additional $660,000 to the IRS (assumes a 40% tax rate: 40% * 1,650,000 = $660,000.) However, Jane and John can give away to their children and grandchildren $160,000 each year - tax free. Each year, this would save $64,000 ($160,000 * 40% = $64,000) in estate tax that would have been paid after their deaths.
Disadvantages of gifting assets
- Gifts are irrevocable - which means that you can't take any money back once it has been given. Also, you can't control how your child uses the money they have been gifted once he or she comes of age. To prevent the child from spending the money at a young age, you might want to appoint a legal guardian to handle your child's money.
- Also, once you "gift" assets to a child, you typically can't use income from these assets (see UGMA) to pay for a child's basic necessities. The reason for this limitation is that the government views taking care of your child as a legal obligation of you as a parent, rather than your child's obligation.
Uniform Gift to Minors Accounts (UGMA)
One way to avoid the need to appoint a guardian and to not give money to a child until the age of 18 or 21 (depends on state law) is to transfer the money into an account under your spouse's name as custodian for your child. Such custodial accounts are known as Uniform Gift to Minors Accounts, or UGMA, accounts.
Income from interest, capital gains and dividends is taxed at your child's rate which is typically less than your own, unless your child's under 14, in which case he/she would be taxed at your rate until the child reaches 14 years old. (Kiddie Tax)
When your child reaches the age of eighteen or twenty-one (depending on the state), she/he is legally entitled to the funds in the account and can do with them what she/he pleases. (Note that UGMA is now known as UTMA (Uniform Transfer to Minors Act).
Continue to: Part VII: Insurance
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