Archive for ‘estate planning’

Some things to be aware of, should Congress not change the tax laws before December 31.

Income tax rates will increase across the board.  The lowest rate will go from 10% to 15%.  The highest rate will move to 39.6% from 35%.  All other rates will also go up.

The capital gains tax rate will go back to 20%, up from 15%.  Dividends will once again be taxed like ordinary income (between 15 and 39.6%, depending on your marginal tax rate).

For higher income earners, there will be limitations on itemized deductions (mortgage interest, state income tax, property tax, charitable deductions, etc).  There will also be a phase out on personal exemptions for higher income earners.

The Patient Protection and Affordable Care Act brings two new taxes.  The first is a 0.9% Medicare surtax for earned income in excess of $200,000 for single taxpayers and $250,000 for married taxpayers.  There will also be a new 3.8% Medicare surtax on unearned income (dividends, interest, capital gains, annuity income, royalties, and rental income), again for those in the $200,000+ (single) or $250,000+ (married) income levels.

One other notable PPACA effect: deductions for out-of-pocket medical expenses are allowed when they are greater than 10% of your adjusted gross income (currently this is set at 7.5% of AGI).

Finally, the estate tax exemption will go down to slightly more than $1 million per individual (from the current $5.12 million), and the tax rate on estates in excess of $1 million will be 55% (up from 35%).  Keep in mind that your estate is comprised of any real estate you own, your retirement accounts, life insurance that is held in your name, investment account, bank accounts, automobiles, and more.  You may be over the $1 million limit without even realizing it.

Now might be an excellent time to begin working on an estate plan, if you haven’t got one.  If you’ve made a will and an estate plan in the past, now is also an excellent time to review that plan and make sure it still accomplishes your goals.

(thanks to Stephanie Buckley at Pepperdine for her summary of the upcoming tax changes, from which I drew these notes)

ACGA:

The American Council on Gift Annuities (ACGA) board of directors held its semi-annual meeting on November 7, 2011. As part of a continual monitoring process, the board reviewed the current assumptions that underlie the rates schedules.  Given the significant changes in the economic environment, the board approved a new schedule of suggested maximum gift annuity rates which will become effective January 1, 2012.  At ages older than 60, when the majority of gift annuities are issued, one-life rates will decline by 0.5% to 0.8%.

You have probably heard from ACU or others about the benefits charitable gift annuities can offer.  (See here for a concise explanation.)

• Backed by the full assets of Abilene Christian University
• Increases income, sometimes significantly, over a maturing CD or a savings account
• Provides a current charitable income tax deduction to you
• Can help you avoid capital gains taxes
• A significant portion of your annuity payment may be income tax-free
• Provides you with fixed income for your life, or jointly for your and your spouse’s lives
• Upon your passing any remainder will go towards funding life-changing opportunities for future students at Abilene Christian

But as the announcement from the ACGA (the group that sets recommended gift annuity rates, to which ACU adheres) makes clear, those rates are being lowered effective January 1, 2012.  Depending on your age and whether you create a single-life or joint-life annuity, your rate will drop between 0.4-0.8%.

As an example, for a husband and wife both aged 70, the gift annuity rate until December 31 is 5.2%.  Beginning January 1, 2012, that rate will be 4.6%.

For a single individual aged 75, the current gift annuity rate is 6.5%.  Beginning January 1, that rate will be 5.8%.

For a husband and wife both aged 80, the current gift annuity rate is 6.3%.  Beginning January 1, that rate will be 5.7%.

It is important to note that if you have already created a gift annuity with ACU or any other non-profit, the contractual rate and payment you currently receive will not be changed.  This rate change is effective only for new gift annuities created after December 31, 2011.

If you have ever considered a charitable gift annuity and you have a low-yielding savings account, a recently-matured CD, or a CD that will mature prior to December 31, we encourage you to call The ACU Foundation (800-979-1906) and we will be happy to provide specific information for your situation with no obligation.

Our offices will be closing at 5pm on December 23 and remain closed through January 2 for the Christmas holiday, but we can complete transactions postmarked and funded by December 31.

After a decade of working in the financial services arena and knowing the human propensity to “put off ’til tomorrow” when it comes to money matters, this story is extraordinary to me.

Personal Finance blog Get Rich Slowly has an excellent guest post on planning ahead for your demise.  The father in this story went above and beyond, in my view, just to make things easier for his executor (his daughter, the author of the post).  This wasn’t just ordinary estate planning.  This was a process that took YEARS and the man was very intentional about it.  I particularly appreciated the section on “Settling Affairs”, as it highlights a potential deficiency in the “all children receive equal shares” theory.

I see a couple of possible lessons in this story.

1. Your executor has to be someone you trust implicitly.
2. Take a significant amount of time to think through your plan, and be willing to alter the plan along the way.
3. Realize that when an heir is also your executor, the emotions of the heir will make the job of the executor more difficult.  Plan accordingly.
4. When possible, have a real relationship with a banker, investment professional, insurance agent, attorney, and accountant.

What are some other conclusions that could be drawn from this example?

The following is a little bit “inside baseball”, but it’s useful to know if your situation is relevant.  I promise I won’t do posts like this very often.

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The WSJ has an article on the IRS clarification of some estate tax laws affecting people who die in 2011 or 2012.  The issue here is the new idea of estate exemption portability, whereby the surviving spouse can co-opt any unused portion of the deceased spouse’s estate tax exemption.

If a couple’s combined estate is worth $8M and the deceased spouse’s portion of that is $2M, that leaves $3M of the estate tax exemption unused.  That $3M can be added to the surviving spouse’s $5M exemption, giving the surviving spouse enough exemption coverage to eliminate any estate tax.

But according to the IRS, the surviving spouse will only get credit for the unused exemption amount if the executor of the deceased spouse files an estate tax return.  However, many advisors and executors don’t go through the process of filing an estate tax return if the size of the estate is under the exemption amount, or so says the article.

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In other news, the IRS has made some concessions towards the estates of those who passed away in 2010, particularly late December 2010.  Because of the extremely late Congressional action to act on the 2010 repeal of the estate tax, the IRS has conceded that estates may need more than the typical 9 months to file an estate tax.  Thus, just by asking nicely, estates that meet certain requirements can have up to a penalty-free 15 months to file the estate’s tax return.  Interest will, of course, be charged after month 9.

Interesting article from the WSJ on unequal inheritance shares.  There is discussion of fairness vs. equality, some reasons why unequal shares might be reasonable, and how to minimize the potential for legal challenges to the will.

Personal finance blog Squirrelers notes that the decision to bequeath equal shares isn’t necessarily a simple one and probably deserves more than just a cursory though.

My boss Dan Garrett has been working with people to plan estates in the most tax-efficient manner for over 30 years.  He says he has three questions he always asks clients at his first meeting with them.

1. What do you own?
2. How do you own it?
3. After you’re gone, what do you want to happen to it?

The answers to these questions aren’t necessarily as easy as you might think at first blush.

What do you own?

Most people generally know what they own.  The issue is gathering all that information in one place, which becomes important if someone else (a non-involved spouse, power of attorney, executor, child, etc.) needs access to that information .  There are quite a few books and electronic documents that could be called “life organizers”.  Another alternative is the Provide and Protect website, which is sort of an online organizer that’s tied to a network of estate planning attorneys. More »

Article summary: the differences between, and uses for, power of attorney, medical power of attorney, and living will documents.

These three papers are part of what we call your essential documents (the other being your Will).  These documents specifically allow other people to make certain medical or financial decisions for you, in the event you are incapacitated or otherwise unable to decide for yourself.  The catch, of course, is that the power these documents provide has to be granted in advance of the incapacitating event.

Put another way, you should probably have these documents drawn up before you are diagnosed with a mental or terminal illness, or have a catastrophic incident. More »

Article summary: What a will is, what things you must have to make your will legal, common parts to a will, and some other things to be aware of when making out your will.

Will (n.): a legal declaration of a person’s wishes regarding the disposal of his or her property after death, especially: a formally executed, written instrument by which a person makes disposition of his or her estate to take effect after death.

It sounds a little ominous, when written like that.  Maybe it’s easier to read it like this:

Will (n.): the desire, inclination, or choice of a person.

That’s a little easier to cope with.

In previous blog posts we’ve covered common excuses people give for not creating a will and looked at a few real-life examples where having a will is better than not having one.  Now let’s examine the will in a little more detail, and touch on the legal (probate) process all wills eventually go through.

More »

At least, that’s what SmartMoney (part of the Wall Street Journal network) calls them, though that may be overselling the point a bit.

Now that we are eight months removed from the Tax Relief Act of 2010, tax and estate planning professionals have had a good chance to digest some of the implications of the Act.  Among the things SmartMoney notes are potential changes to asset protection strategies, certain types of trusts, and the hazards posed by individual states that have their own estate tax regime (16 of them, plus the District of Colombia).  The most salient point for me is the one on “formula clauses” in wills.  Excerpt:

Let’s say you and your spouse have $4 million, divided equally. Your will, prepared in 2001, might very well call for “an amount up to the federal estate-tax exemption” to be transferred to a trust for the benefit of your children, with the balance passing to your spouse. The exemption in 2001 was $675,000, so if you died that year with a $2 million estate, the former amount went to the trust, and $1.3 million went to your spouse.

It’s a different story now that the estate-tax exemption has risen to $5 million. If you die tomorrow with a $2 million estate, the same wording would deliver all that money to the trust. Your spouse gets nothing.

Changes in estate law should always be an opportunity for you to re-look at your will and the rest of your intentional estate plan, just to ensure that what you want to happen when you pass away is actually what will happen.

Article summary: We consider some real-life scenarios in which an intentional estate plan would be beneficial.  State probate law is an inflexible, one-size-fits-all estate distribution option that is unlikely to meet with the approval of the deceased or the heirs in most of these cases.

Last week I talked about three common reasons people give for not wanting to create an estate plan.  Let’s take a look now at some good reasons to make an intentional estate plan.  It is important to realize there are common family dynamics that state probate laws do not consider.

If any of these situations describe your family and you have your own ideas on how your assets should be taken care of upon your death, you’re going to need to be proactive.  Otherwise, you’re at the mercy of the courts and the law.

Consider these various scenarios:

• You are childless and have always been so.
• You have children who are still minors.
• You have children who are deceased…who had kids of their own before they passed away…or who were childless before they passed away.
• You have step-children.
• You have adopted children.
• You have estranged children.
• You have a special needs child…or more than one.
• You have children of vastly different ages, stations in life, income-producing capacity, money-management skills, or levels of maturity.

More »