While
this site contains a significant amount of information on
revocable living trusts and the resulting benefits of
probate avoidance and potentially large federal estate tax
savings, such advanced estate planning is not appropriate
for everyone. Typically, an estate with assets worth more
than $100,000 can benefit financially from use of a trust,
and everyone, regardless of the size of the estate, can
benefit from the peace of mind a living trust offers. It
does seem appropriate, however, to discuss a few alternative
methods of estate planning:
1)
Lifetime Gifting
2)
Transferring Ownership of Your Home to Your Children
3) Wills
4) Powers
of Attorney
5) Living
Wills
6)
Anatomical Gift Donation Forms
Lifetime
gifting
Lifetime
transfers, or "inter vivos gifts," are taxed to
the donor at the time of the gift and at the same tax rates
applied to estates, according to the federal gift and estate
tax chart. The value of all gifts made during your lifetime
is added back to your estate at death and the amount of any
gift tax you paid becomes a credit against your resulting
estate tax. Currently, there is a federal gift tax exclusion
of $11,000 per year per donor to an unlimited number of
donees. What this means is that you can give $11,000 each
per year to an unlimited number of people and not have to
pay federal gift taxes on these gifts. This can be an
effective way of transferring property to one’s heirs now
and thereby reducing your future estate tax liability.
Additionally, a married couple can effectively give $22,000
to each donee per year, as each spouse has a $11,000
exclusion available per donee. Any gift to someone that is
over the $11,000 exclusion goes toward reducing your
lifetime federal gift and estate tax exclusion of $1,500,000
(for 2004).
This issue would resurface upon your death in the
calculation of estate taxes due. See living
trusts for
more information.
One advantage of
inter vivos gifts is that the value of the gift is locked in
at the value of the gift at the time it was made. Any
appreciation in the value of the gift will be excluded from
your taxable estate.
One thing to
consider that people are often unaware of is the issue of
capital gains taxes being due on certain transfers. Briefly,
capital gains becomes an issue when an appreciated asset is
transferred for less that it’s true market value. For
example, suppose that you decide to give each of your
children a gift of $11,000 worth of a stock that you
purchased 15 years ago. The day you make the gift, that
stock is worth $11,000. Now, suppose that the day after you
give the stock to your son, he decides to sell the stock and
he sells it for $11,000. On his next income tax return, he
is going to pay capital gains tax on the difference between
what he sold it for minus what you paid for the stock 15
years ago. To use the legal terminology, he takes the stock
at your cost-basis (what you paid for it). If, however, you
did not transfer the stock to him during your lifetime, but
rather passed it upon your death through your will, or
preferably, your living
trust, he (or whoever receives the stock) will take it
at a stepped-up cost basis of its value at the date of your
death, thereby avoiding or greatly reducing capital gains
taxes. To make an appointment to go over your particular
situation, click
here.
If you have
highly appreciated assets, please visit the section on Charitable
Remainder Trusts to
learn about a method of increasing your estate while
avoiding capital gains taxes.
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Transferring
ownership of your home to your children
Many people inquire
about transferring their home to their child(ren) during
their lifetime in anticipation of the possibility of needing
future nursing home care and wanting to meet Medicaid
eligibility standards. There are issues associated with such
a transfer that need to be considered before such a move is
taken. This type of transfer carries with it important
consequences that many people are unaware of. Such
considerations include:
* capital gains
taxes
* loss of homestead
exemption upon sale
* liability issues
* creditor claims
* possible unequal
distribution to heirs
* property tax
re-valuation
* Medicaid
look-back period
Sometimes, a piece
of property has been in the family for a long time and a
client wants to ensure that the property will remain in the
family for several more generations. There are tools
available that can carry out this wish, as a regular
transfer by deed with no accompanying documents will NOT
necessarily accomplish this desired outcome.
If you are
considering such a transfer, make sure that you sit down
with an attorney and go over all of these issues before
making a decision. Several clients have told me, "But
lots of people I know are doing this." That is not the
basis on which your decision should be made; make sure that
you know exactly what the consequences of such a decision
are before you make it.
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Wills
Many clients ask
what decisions they need to make before seeing me about
their will. There are only a few basic questions that need
to be answered for a simple will. These two main question
that need to be answered are:
1. Who do you want
to leave your estate to? You need to decide to whom and in
what proportion you desire your estate to be distributed to
your heirs. This can vary from all to one person to small
amounts to many people.
2. Who do you
want to serve as the executor of your estate upon your
passing? The executor is the person who will take your
estate through probate and be in charge of distributing
assets to the beneficiaries of your will. To learn how to
avoid probate, visit the living
trust section of this site. Additionally, there are
other issues that may be appropriate in some wills, such as
the following, although this list is not exhaustive:
3. If you have
minor children, who do you want to serve as guardian of your
child(ren) if both you and the other parent die before the
child(ren) reach the age of majority (18 in Ohio)? This is
the person who will be legal guardian of the child, making
all the decisions that parents typically make for their
children regarding such things as medical decisions,
schooling decisions, etc.. While the court is not legally
bound to follow your wishes, the court will follow such
wishes unless a good reason is brought forth for why the
person you have named would not be a suitable guardian. I
strongly recommend naming an alternate guardian in case for
some reason your first choice is unable to serve as
guardian.
4. If you and the
other parent predecease your child(ren), I normally include
a testamentary trust provision which creates a trust for
assets to be held for minor children. You need to determine
at what age you want your children to have full access to
the money and also who you want to be the trustee of the
trust. The trustee is the person in charge of dispersing the
money to the children for things such as educational and
medical needs that arise while the child is underage.
Obviously, you want to choose someone you feel is
responsible and would follow your wishes in this regard. I
strongly recommend naming a successor trustee in case for
some reason the first person named is unable to serve as
trustee.
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