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Financial Planning > Trusts and Estates > Estate Planning

An estate planning primer for 2011

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“There are reasons other than minimizing estate taxes to get an estate in order.”

Current tax laws have made estate planning more complicated. The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 reinstated the estate tax in 2011. Here are some tips to help you plan your estate and the estates of your clients with respect to these evolving tax laws.

Plan the estate, even if it won’t be subject to estate taxes. The amount one can distribute to heirs other than a spouse without paying estate taxes is $5 million in 2011 and 2012 (indexed for inflation in 2012). However, there are reasons other than minimizing estate taxes to get an estate in order. For instance, parents with minor children should name guardians and provide for their children’s support, while individuals with previous marriages may want to protect children from prior unions. Clients may also need a will, durable power of attorney and health-care proxy.

Leave written instructions for heirs. This can provide heirs with important financial and personal information and clarify requests made in other legal documents.

Name executors, trustees and guardians with care. An executor administers an estate through probate court, locates and values all assets, pays the estate’s obligations and distributes the estate to heirs. A trustee manages the estate and distributes income and principal. A guardian takes physical care of minor children and handles their finances. All three roles significantly impact an estate, so these individuals should be chosen carefully to ensure they can handle the responsibilities.

Review the distribution of assets that bypass a will. Jointly owned property will transfer directly to the co-owner, while assets with named beneficiaries will transfer directly to those beneficiaries. If you don’t keep this in mind, some heirs could receive a higher percentage of the estate than you or your client intended. Beneficiaries of assets such as life insurance policies, 401(k) plans and IRAs should be reviewed after major personal changes, such as marriage, divorce or death.

Implement an annual gifting program. A person can make annual gifts up to $13,000, or $26,000 if the gift is split with a spouse, to any number of individuals without paying federal gift taxes. This strategy removes assets from the taxable estate as well as any future appreciation on or income generated from those gifts. Over a number of years, an annual gifting program can remove substantial assets from the estate.

Consider making charitable contributions during one’s lifetime. While charitable contributions made after death are free of estate taxes, that may not provide any benefit due to higher exemption amounts. Charitable contributions made during one’s life will still lower the taxable estate and provide a current income tax deduction.

Understand when a revocable living trust is appropriate. Living trusts can provide substantial estate planning benefits, such as removing assets from probate and preserving the use of the estate tax exclusion.

Shelter life insurance proceeds from estate taxes. While lifeinsurance proceeds are always free from federal income taxes, owning the policy oneself will cause the proceeds to be included in the taxable estate. Instead, you or a client may want a trust to own the policy, so the proceeds are excluded from the
taxable estate.


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