A carefully thought out and executed estate plan can allow you and your loved ones to minimize taxation and build and preserve wealth. An estate plan not only allows you to determine the future distribution of your assets, it can also potentially reduce or eliminate estate taxes. There is no bad time to plan your estate..
Generally, a will is the foundation of any estate plan. In your will, you decide who receives your assets (and when they receive them) after you die. With a will, you choose who will serve as guardian for any minor children if both you and your spouse were to die. Without a will, a court makes that decision. You can also designate a personal representative (executor) for your estate.
Power of Attorney
You can name a person as your “attorney-in-fact” to handle your financial and legal affairs when you are no longer able to. For example, the person or institution you name would have the authority to sign checks, make deposits, pay bills, and essentially perform the day-to-day financial transactions you would normally do.
Trusts Under Will
Federal tax law generally allows you to leave an unlimited amount to your spouse free of estate tax. (Requirements apply.) However, leaving everything outright to your spouse may not be the optimal planning approach since estate tax may be due upon his or her death. Sometimes, it’s better to use a combination of trusts under will for the benefit of a spouse and your children in order to realize estate-tax savings. The proper use of these trusts can help make sure estate taxes are minimized in both spouse’s estates.
Life Insurance Trusts
Life insurance death benefits are typically paid out free of income taxes to the beneficiaries of your policies. However, the death benefit of a life insurance policy is generally included in the overall value of your estate when it comes to figuring estate taxes.
One strategy for reducing the size of your taxable estate involves transferring the ownership of your life insurance policy(ies) to a life insurance trust. Alternately, a life insurance trust can take out a new policy on your life. Tax law requirements must be met. When all the requirements are satisfied, the policy’s death benefit will not be included in your taxable estate.
You can name the person(s) you want to serve as trustee of the trust. Your trustee must follow the instructions you put in your trust. However, once you transfer ownership of the policy, you can’t exercise any of the typical ownership rights over the policy.
In 2013, the tax law allows you to give cash and other assets (must be “present interest” gifts) worth up to $14,000 per recipient without any federal gift-tax consequences. Your spouse can do the same, and between the two of you, $28,000 can be gifted in 2013. By making annual-exclusion gifts to your family members, you are removing the gifted assets from your estate. In addition, all future earnings and appreciation associated with the gifted assets are removed — potentially a significant estate tax advantage.
Contact Bob Baldassari, MCB’s Medical Practice tax and consulting leader, for a best practice review of your medical practice and tax planning and compliance services.