Although the estate tax is currently in limbo, it is expected to return in 2011 and barring any changes by Congress, the exemption will revert back to $1,000,000. This estate tax must be paid by your trustee or estate executor within nine months of your death. But how your executor or trustee pays these taxes will depend upon what types of liquid assets you have in your estate.
When you plan your estate you should go over your net worth with your attorney to determine how much estate tax your family should expect to pay. By doing this you set aside funds in the form of a savings account or Totten Trust to cover the taxes and avoid having to liquidate personal property or real estate.
Life Insurance Policies
If you have a life insurance policy, make sure it is easily accessible to your heirs by properly naming a beneficiary. Your beneficiary can then use the money to pay any taxes due. If your policy beneficiary is not the person in charge of your estate execution, you may wish to name your Trust as the primary beneficiary. Your Trust can then dictate who receives policy funds after taxes have been paid.
If you don’t have enough funds available, your loved ones will have to liquidate some of your assets. This, unfortunately, could require them to sell prized family possessions or, depending upon the tax bill, even your family home.
Estate Tax Elections
Estate tax elections are options for certain types of estates to avoid liquidating assets and instead pay taxes over time. Your estate may qualify if it is a family farm or a family business. Estate tax election laws, however, are very specific and you should consult with your estate planning attorney to find out if your estate would qualify.
Funding a Revocable Living Trust isn’t as difficult as you might think. In fact, you should include as much of your estate as possible.
First, start with your bank accounts. This includes your savings account, money market accounts and Certificates of Deposit.after they’ve matured. You can also include your checking account but you should talk to your attorney first – it might be easier to conduct day-to-day business if the account does not reflect the name of the trust.
Investment or Brokerage Accounts
As long as your investment or brokerage account is a non-retirement account and does not penalize for early withdrawal, you should be able to fund it into your Revocable Living Trust.
For retirement accounts such as a 401K or IRA, funding into a trust may be deemed cashing out early. If a retirement account is considered fully withdrawn, all income taxes for it will be due in that year. For accounts that you cannot withdraw early, you should designate an account beneficiary to receive all funds upon your death. You can also choose your Trust as the primary or secondary beneficiary of such accounts.
If you have an annuity that you set up outside of your employment you can fund it into your Trust. This type of annuity is called nonqualifed because it does not qualify for special tax deferment . If, however, you have a qualified annuity you cannot fund it into your trust. Instead, like other retirement accounts, you may name your Trust as the beneficiary.
Most personal property such as jewelry, photo albums and any other belongings can be funded into your Trust and you can do so with an Assignment of Tangible Personal Property, also known as a Quitclaim Bill of Sale. You can usually fund vehicles too, although in some cases it may be seen as a sale, and you may have to pay taxes to transfer the Title. You should also talk to your attorney before titling a car or boat to your Trust as it could create a liability for the Trust if there was an accident.
All real estate can be funded into your Trust. It does, however, required a new Deed to be recorded in the name of your Living Trust.
If you can expect to see funds from a debt, copyright, royalties, or other financial dealing, you can fund these items into your trust so that any future funds after your death or disability become part of your Trust estate.
Life Insurance Policy
If you have a life insurance policy, you can fund it into your Trust without paying income taxes on the amount and doing so could allow your trustee to borrow the funds to assist with your living expenses.
Of course, before you place any assets in your Trust, you should consult with a qualified estate planning attorney.
Unlike your personal belongings, your home and your car, retirement accounts are not part of the probate process and cannot be transferred to your heirs in a Will. Instead, you must name a beneficiary on the plan document itself and upon your death, any remaining funds will be transferred directly to the designated person.
Known as a Pay On Death (POD) account, retirement plans and life insurance policies can present some unique challenges when planning your estate.
For starters, if your heirs don’t know the plan exists, they won’t know to collect on the funds after you’re gone. Secondly, if the beneficiary you name is already deceased, your funds may be tied up in court while a judge decides where they should go.
To ensure that your loved ones receive all the proceeds from your retirement plans, there are a few things you should do now:
First and foremost, update the beneficiary information on your plan document. Typically, the primary beneficiary is your spouse but you should name a secondary beneficiary as well. If you’re naming minor children, you’ll want to talk to your estate planning attorney about naming a conservator or creating a trust to manage these funds until your child reaches the age of majority.
The next thing you should do is create a folder that organizes all your important documents, and include a list of life insurance policies, retirement plans and even any pensions you might have. Make sure to provide contact information and account numbers for these plans so that your heirs will know exactly who to contact and what accounts to address.
Be sure to put all these documents in one place and let your family know where they are kept.
In addition, you’ll also want to create a Durable Power of Attorney. This legal document allows you to designate someone to handle your financial affairs for you in the event you become incapacitated. This is important because without a Power of Attorney, your loved ones will have to have you declared incompetent so that a judge can appoint a conservator to act on your behalf.
For more information on organizing your affairs and creating an estate plan, contact our office today.
A Will can do a number of important things – it can distribute your assets to your heirs after you die for example, and it can name a guardian for your minor children.
But there are some things a Will can’t do and understanding the limitations of this legal document is an important part of planning your estate.
A Will cannot affect funds held in a pay on death account for example. Life insurance policies, retirement plans and pensions are all good examples of a POD account. These plans require you to name a beneficiary in the plan document and will not be affected by any bequest you make in your Will.
You can also not bequeath any joint property you own when there are rights of survivorship. This type of joint tenancy means that when one owner dies, the other owner automatically inherits the deceased’s share of the property – the heirs of the deceased have no right to that interest.
If you’ve created a living trust, any property you transferred to the trust cannot be transferred with your Will. And this is actually a good thing. Because while property named in a Will is subject to probate, property held in a trust is not.
Your Will cannot handle your funeral arrangements. Not that you’re prohibited from including them but understand that Wills are normally pulled out for review until weeks after you’re gone. By then the funeral is over and any preferences you might have stated in your Will are mute.
Your Will can also not bequeath money or property to your pets because under the law, pets are property too, thus they can’t inherit. If you want to ensure that Fido is provided for after you’re gone, your best bet is to invest in a Pet Trust.
To learn more about Wills and how they affect your estate plan, give us a call today.
Although estate taxes are currently up in the air, it will renew in 2011 unless Congress decides to take action. Assuming that the estate tax does go back into effect, your family members will have to pay taxes on your estate after you pass away. How much tax however, will depend upon the value of your estate.
So, here's a good way to estimate that value. Add together the following:
All bank accounts, including checking, savings and money markets, owned by you. If you have an account in a joint name, only 50% of the funds in the account should be taken into account at the time of calculation.
Investment accounts, including brokerage accounts and mutual funds. Similar to the bank accounts, only 50% of the value of the joint investment accounts held by you is included.
Stocks and bonds held in physical form.
US savings bonds.
Vehicles, such as car, airplanes and boats, owned by you.
Money you lent to others. This could include personal loans given by you to others and bonuses, commissions and salary owed to you at the time of your death.
Personal effects, such as clothing, jewelry, antiques, furniture and furnishings.
Retirement accounts, including 401(k); 403(b) and SEP IRAs.
Insurance policies. If there is a life policy in your name, the entire proceeds are included in the calculation of the estate value. However, if you own a policy taken on anyone else’s life, only the cash value of the policy is included.
In addition, the value of any real estate owned by you and/or your business interests is also taken into account.
To learn more about estate taxes and the value of your estate, you should contact a qualified estate planning attorney.
Social Security is a great addition to your individual retirement plan, but did you know that your loved ones may be able to continue collecting your social security benefits after you pass away?
Depending upon the number of work credits you have, your spouse and your children may be eligible to receive a percentage of your benefits.
The easiest way to calculate potential survivor benefits is to review your Social Security statement sent from the Social Security Administration office.
But here’s an overview of how the benefits will break down:
If you have enough work credits, your spouse or child could receive a one-time death benefit of $255 if they meet certain requirements.
In addition to the one-time death benefit, your spouse may be entitled to 100 percent of your basic benefit amount if he or she is full retirement age or older.
If your surviving spouse is age 60 or older but has not yet reached full retirement age, the benefit is between 71 to 99 percent of your basic benefit amount. A surviving spouse of any age with a child under the age of 16 can receive approximately 75 percent of your basic benefit.
Your unmarried children, age 18 or under (19 if a full-time student) can also receive 75 percent of your basic benefit amount.
The maximum your family members can receive each month ranges between 150 and 180 of your basic benefit.
Benefits may also be paid to stepchildren, grandchildren and even a divorced spouse under certain conditions. To determine if your family will be eligible for survivor benefits, contact your local Social Security office.
If money is a concern during your retirement years, you may be considering a number of options to help with your expenses. One such option – a reverse mortgage – is becoming a popular choice among retirees. But just what is a reverse mortgage? And how can it help you?
A reverse mortgage is essentially a loan on the equity in your home. The loan is tax free and can be use for anything, including travel, medical expenses and paying other bills.
The appeal of a reverse mortgage is that you do not have to pay it back until your sell your home, move or pass away. Then the loan – and the interest – become due. You (or your family members if you’re deceased) can pay back the loan by selling the home or by using life insurance proceeds or other funds that may be available.
To qualify for a reverse mortgage you and any co-owners must be at least 62 years of age.
If you decide to pursue a reverse mortgage, you will find that most currently have adjustable interest rates. You can choose to receive monthly income payments, a lump sum amount or even an account of money you can withdraw from as needed. There are, however, limits on how much you can take out. These limits depend upon your age, how much your home is worth and interest rates at the time the loan is taken out. The maximum amount you can borrow over time is usually around 80% of the value of your home.
The downside of course, is that you’re tying up your home. If this was the foundation of the estate you plan to leave your heirs, your reverse mortgage could make a serious dent in that inheritance.
For this reason, and because rates and terms can vary, consult with a financial planner as well as your estate plan attorney to ensure that a reverse mortgage is really right for you.
Hiring a tax professional can save you time, money and hassles. Especially if you’re a business owner, dealing with tax issues on your own can be time consuming and confusing. You want to make sure you’re minimizing your taxes, while still playing by the ever-changing rules. It’s a good idea to find a tax professional you’re comfortable with so that you can have a long-term relationship with him or her. This will reduce your stress and make sure your bottom line is taken care of. There are different types of tax professionals you can seek help from. Beware: there’s no specific license required for a tax professional so anyone can claim to be an expert. Make sure the person you’re dealing with has the appropriate credentials.
Enrolled Agent – An Enrolled Agent has a license issued by the IRS. Enrolled Agents have to clear a test or have to work for the IRS for five years. Their fees are low and they are tax experts who also offer help with accounting and bookkeeping.
Certified public accountants (CPA) – Are issued a license by the State and regulated by the State. They can take care of complicated accounting and tax-related work. Their fees are more expensive.
Tax attorney – These professionals have a specialized education beyond having a law degree. For instance, many tax attorneys have an LLM in Taxation. Their fees can be expensive but their services can be invaluable if you have a specific tax problem or need help in Court, or with business or estate planning.
The type of tax professional you choose depends on your individual needs and the scope of your financial problems or questions. Whichever kind of tax professional you hire, ensure that he or she can guide you with key decisions, provide basic information and advise you properly. You can also seek help for things like record-keeping, tax-form preparations, and advice about dealing with the IRS.
If you need a tax professional, it’s a good idea to seek personal referrals from friends, family, your attorney, banker, business associates for recommendations.