Case Studies and Articles

End of the Year Estate Planning – Vaughn Henry & Associates

End of the Year Estate Planning – Vaughn Henry & Associates

End of Year Planning Options

Vaughn W. Henry

 Even with the stock market’s hiccups, many people have seen their investment portfolios, land values and business interests steadily increase in value. Why is this a problem? More and more of the middle class are coming under the scrutiny of the IRS estate tax auditors, and families may be forced to pay taxes at rates in excess of 80% because of poor planning.

Inflation is a subtle process. Don’t think so? Well, remember your first house? Did it cost less than your last car? For most of you, it did, and this is one cause of the problem. So what are some of the available solutions? Besides sophisticated tax planning, there are some simple tools to squeeze, freeze and pass an estate to heirs, if you move forward now. Why now? The problems generally get worse by waiting and options more limited, so almost everyone with an estate, and for sure those in excess of $900,000 should look at potential tools and be familiar enough with them to react if the estate gets near the $1 million federal threshhold. Also, there is a planning window that may close if a fickle Congress feels that too much revenue is slipping through the cracks. So complete your plan while the rules are favorable.

Gifts to Charities

A simple planning process is to just sweep everything in excess of the estate tax exclusions to charity. If done properly, you can even give charities your income tax problems at death by naming them to receive retirement plan proceeds, since your heirs would have a significant income tax if they received them instead. Highly appreciated assets are often given to charities as a way to be more tax efficient since the capital gains are never realized and the charities can convert the gift to cash without paying tax. If a donor sells the asset and gives the cash, then there is an unnecessary tax paid to be charitable. Transfer old insurance policies directly to charity if there’s no estate liquidity needs. Charitable remainder and lead trusts, gift annuities and life estates are legal and ethical tools to meet financial security needs and benefit charity while still providing estate tax relief. With tax efficient wealth replacement vehicles, the family will not be short-changed if giving away wealth is a concern. Some of these tools require expert guidance, and few advisors understand them well, so it makes sense to use a team approach to solve planning problems.

Gifts to Heirs

Your estate can limit growth by making gifts to heirs now. Gifts to heirs are still limited to $11,000 per donor per recipient, and married couples can agree to join to make a tax-free gift of $22,000 of value. Where a lot of family members go off the approved IRS track is that they believe there is an exception to this rule when providing gifts at Christmas, Hanukkah, weddings, graduations and birthdays. There isn’t. Also, if you write a check to your child for college tuition and expenses, you may have given your child a taxable gift. For most families, expensive gifts are not likely to produce estate and gift tax problems because they are counted against what used to be called the “Unified Credit”, now called the Applicable Exclusion Amount. From 1987 – 1997 the value was limited to $600,000 and the amount free of tax crept up to a heady $1,000,000 in 2002. So it is unlikely that many American families will be exposed to the estate tax since they won’t transfer more than that total amount of exempt wealth either while alive as outright gifts or at death as an inheritance. However, middle class families with increasing portfolio values in family businesses, farms, expected inheritances and large insurance or retirement plans will more frequently slide into a tax trap once reserved for the ultra wealthy. If they only know what most families of wealth knew, namely that estate taxes are paid only if you fail to plan. The estate and gift tax is a straight-forward tax that is easy to avoid if you start early and make good choices about your planning options.

As the end of the year rolls closer, take a look and see if this introductory checklist of estate planning actions makes sense, and set up a time to review them with your professional advisors:

  1. Review your current will and trusts. With recent tax law changes, almost all tax planning wills and trusts are now out of date. If estate tax planning isn’t a factor, make sure your trustee and successor trustee designations are accurate.
  2. Is your Durable Power of Attorney current? Is there an updated living will on file with family members and health care providers? Have funeral arrangements and decisions on anatomical gifts been discussed with family?
  3. Inventory and make a written record of contents of any safe deposit box with a trusted family member, remove will and codicils, trust instruments, insurance policies on your life, burial instructions, cemetery plot deeds and any property which does not belong to you. File them elsewhere.
  4. Review and update your life insurance policy and retirement plan beneficiary and contingent (back-up) designations and settlement provisions. If you have a taxable estate, have you considered shifting ownership of your life insurance to a trust or to your heirs?
  5. Have you gone down to your bank and named designated heirs to receive account proceeds at your death? Generally, naming them as “joint owners” is too risky and it doesn’t solve tax problems; instead, consider using a “Payable on Death” (POD) designation to redirect the account without unnecessary probate problems. This still doesn’t solve tax problems, but at least it’s uncomplicated and a functional way to see that the account isn’t tied up needlessly.
  6. Review, and if necessary, revise existing business buy-sell agreements; prepare agreements if there are none; re-value purchase price under those agreements that require periodic review. Buy-sell agreements are critical to preserve the value of a family business and provide liquidity at a time when family members are often too distracted to make sound business judgments. Do you have the necessary liquidity, and if not, are you insurable?
  7. Should annual exclusion gifts be made to your heirs? Remember, gifts of appreciated assets pass at your tax basis, so there may be an income tax due if the asset is eventually sold by your heirs. However, the $11,000 annual exclusion gifts are one of the few meaningful tools to reduce the value of an appreciating estate and it’s a shame so few families use it correctly. If you write checks to heirs, make sure they’re issued far enough ahead of time so they will be cashed before the end of the year.
  8. If there are family medical or educational expenses to be paid, make any checks payable directly to the institution, not to the individual. This action allows you to also make their $11,000 gifts without creating an unnecessary tax.

Not all year end tax planning is estate oriented, sometimes there are good reasons to act and save on income taxes too.

  • Maximize your IRA, or if you have a pension then defer additional salary as many employers make a matching contribution to their plans; those extra deferrals may also increase your employer’s contribution.
  • Make charitable contributions before December 31. Remember, the deduction is usually recognized on the date the charity receives the gift, not the date on the check.
  • Defer income, if you have the option of recognizing it next year.
  • Prepay deductible expenses, make an added mortgage payment or prepay your property tax. Bunch up your medical expenses (maybe it makes sense to get elective procedures, eyeglasses or dental work done now) to itemize every other year. Consider taking the standard exemption one year and then push two year’s charitable and any medical deductions into the alternate year.
  • Offset your capital gains with losses, as volatile as the market is many portfolios will have both. You may be able to offset other passive income up to $3,000 and those gains will be tax-free when you match up losses as the portfolio is rebalanced.

Tax planning is a complex process, and you should seek qualified advice to make the best choices about the control of your estate. Craft a plan, review it annually and exercise your own options. For more information, check our Internet web-sites for free articles and software, starting at –

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