Previously printed by Medicine in Oregon, a member publication of the Oregon Medical Association, Fall 2008 edition.

Earl Hines

Proper Estate Planning Can Protect Your Legacy

Okay, you’ve enjoyed a long and full career, made wise decisions with your money, and set aside plenty for retirement. Security feels pretty nice and knowing that you have the wealth to sustain you and your loved ones through life’s future challenges is a bit like wrapping up in a warm blanket. If you’ve also planned your estate to arrange how your assets will be transferred after your lifetime, you are a step ahead of most. But if you haven’t, consider taking the time now to ensure that your hard-earned wealth is directed as you see fit in the future. 

I Have a Will, Isn’t That Enough?

No, it isn’t. You may not know that your heirs could encounter legal hassles, even if you have a will in place. A will tells the world what you’d like to have happen, but all of this only occurs after your estate goes through a legal process known as probate. While your will may state who your beneficiaries are, those beneficiaries may still have to seek a court order to have assets transfer from your name to theirs, and in such a case, those assets won’t lawfully belong to them until probate concludes. Meanwhile, the costs associated with probate can be considerable and they come directly out of your assets. Proper estate planning will include items like properly prepared wills and funded trusts, which help your heirs avoid the time and cost of probate.

Death and Taxes

You’ve heard the old adage thatthe only two things that are certain are “death and taxes.” It’s a myth.  Yes, the transfer of your assets can indeed trigger different types of taxes: income tax, estate tax, capital gains tax, generation-skipping transfer tax and gift tax. But with proper estate planning, the expensive process of probate and estate taxes can be largely avoided, and therefore increase the amount of money you can leave to future generations. Regardless of your individual views on taxation and leaving wealth to heirs, you should consider how much you’ll leave behind to loved ones and the charitable causes you care about. Estate Planning simply takes the decisions out of the tax-man’s hands and puts them back into yours.  Let’s look at a few areas you should consider in your estate plan:

The Unified Estate Credit

Estates that exceed a certain value, known as the exclusion amount, may be subject to the Federal Estate Tax. But have you heard of the unified credit against estate tax? Basically, this means you can leave an amount that does not exceed the exclusion amount, currently $1 million, to anyone you choose—federal estate tax free. If you are married, you can leave an unlimited amount to your spouse, tax-free. However, unless you do some proper planning, this credit will not be maximized. For example, with a little reorganization of assets and the possible use of a credit shelter trust, a married couple can maximize the value of the unified credit and increase the tax-free portion of their overall estate.

Giving While Living

You don’t have to die to make a difference. For those with taxable estates, gifting can be an important tool. While many choose to transfer estates after their death, consider transferring assets while you are alive. Married couples can gift an unlimited amount to one another, gift tax-free, as provided by the unlimited marital deduction provision in the federal gift tax law. They can also gift a certain amount, gift tax-free, to anyone of their choosing each year. Currently this amount is $12,000, which means a married couple can give each one of their children up to $24,000 each year without incurring gift taxes. But—this annual benefit expires if you do not use it in the current year.  There are other ways of tax-free gifting, too…including tuition paid directly to an educational institution for your children or grandchildren, or amounts paid to an approved nonprofit institution. By taking advantage of these and other gifting options, you can potentially increase the value of what you’re giving while decreasing your taxable estate.

Trusts

A well-written trust should help your heirs avoid the probate process, thereby saving them money. Spending some time and money up front in legal fees will also alleviate a great deal of stress and confusion for your loved ones after you are gone. If a living trust has been prepared and funded properly, much of the headache in settling your estate can be eliminated.

There are a variety of other trust options depending on your unique circumstances and goals. Perhaps you are worried about leaving too much money to children without having it protected from creditors or divorce?  Perhaps you’d prefer a Dynasty Trust, a long-term trust that benefits future generations, or leave more to charity.  A gift to charity can be a great financial favor to you while you are still alive.

Charitable Remainder Trusts (CRTs) are tax-exempt trusts. As the donor, you transfer highly appreciated assets, such as stocks or real estate into the CRT and in exchange, you get: a) a tax deduction for the present value of your future charitable gift, b) income payments from the CRT for up to 20 years, and c) tax-free compounding of the assets within the CRT. You avoid paying capital gains taxes on the amount of your gift, and you can exclude an otherwise taxable asset from your estate. After you die, some or all of the assets in the CRT will go to the charity (or charities) of your choice.

Getting Started

Proper estate planning is one of the most loving things you can do for your heirs and the causes you care about. Even if you’ve engaged in estate planning in the past, it’s important to review your documents regularly as tax laws are constantly changing. Consider speaking with a qualified legal or financial professional—one with experience in estate planning. Your financial advisor should be able to refer you to a good estate planning attorney and a qualified tax professional, and lead a team effort to assist you in drafting your legal documents.

Original Publication Reprint Available Here.

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