| TEN COMMON MISTAKES REGARDING ESTATE PLANNING
A carefully designed estate plan will allow your client to transfer property
to his or her family, friends, and charities with minimum shrinkage due to
estate tax and other costs.
There are a number of common estate planning errors that may result in more
money going to the IRS than is necessary and in disagreeable family
situations, which might have been avoided. It is essential to avoid these
mistakes. Only then can someone be reasonably assured that his or her loved
ones will be taken care of after death.
With the start of a new year, make it a priority to conduct an estate planning review.
Here's a list---with brief commentary---of the most common estate planning
1) SIMPLE (“I LOVE YOU”) WILL-OVER-UTILIZED MARITAL DEDUCTIION
Perception: Leaving everything to your spouse is, in concept, a trusting,
loving decision. (Hence the term, "I Love You" will). There is no federal
estate tax because of the unlimited marital deduction. Therefore, the cost of
this plan is minimal.
Problem: Leaving everything to your spouse denies you the use of certain tax
credits. The wasting of the unified credit, which shelters $675,000 of your
estate from tax, means you're eventually giving the IRS more than $250,000
extra. Thus, the IRS gets the money instead of your family.
2) ASSETS HELD BY ONE SPOUSE
Perception: While many couples own property jointly, only one spouse holds
most of the assets not held jointly. It doesn't matter that the property is
not split between husband and wife.
Problem: In analyzing the total estate tax burden on both a husband and a
wife, it will matter if only one party holds the bulk of the assets. If the
other spouse dies first, that spouse's unified credit will be wasted.
3) ALL PROPERTY OWNED JOINTLY WITH SPOUSE
If your property is jointly owned, your surviving spouse will
receive the property without the necessity of probate proceedings. No wills
Problem: When the surviving spouse dies subsequently, the assets must pass
through probate. A will (either the one you draft or the state's will) is
needed for this distribution. If your surviving spouse still owns the
property at his or her death, it may be entirely included in the estate for
federal estate tax purposes. Simultaneous deaths may cause jointly owned
property to pass to persons other than those to whom you intended it to go.
Jointly held property limits the possibility of distributions to
beneficiaries other than the joint owner. Finally, once again, the unified
credit is being wasted.
4) LACK OF LIQUIDITY
Perception: My executor can pay all of my bills with assets from my estate.
Problem: Most bills, including the most significant one, the estate tax, must
be paid in cash. The IRS will collect the estate tax within nine months after
death. If the executor must convert assets (e.g. your business) to cash,
there can be a significant reduction in the estate being passed to your
family because of the reduced price that this asset will obtain on a forced
sale and because the funds go to the IRS and not to your family.
5) IMPROPER PLANNING FOR BUSINESS CONTINUATION
The business will take care of itself, or my partner will take
care of my family.
Problem: Failure to fix a value for your closely held, non?family business by
means of a "business will" (buy sell arrangement) can result in a substantial
increase of federal estate taxes due at your death and a decrease in the
amounts passing to your beneficiaries.
6) FAILURE TO CONSIDER THE IMPLICATIONS OF GENERATION SKIPPING TRANSFER
There's only one federal transfer tax system. I can beat the
system, in part, by making large transfers to my grandchildren. That will
avoid taxes that would have been due if I had transferred the property to my
kids and then they transferred the property to my grandchildren.
Problem: There's not one federal transfer tax system, but two. The second is
called the Generation Skipping Transfer Tax. Lack of awareness of the GSTT (a
55% tax on any generation skipping transfer) may dramatically reduce the
amount actually going to your grandchildren.
7) IMPROPERLY ARRANGED LIFE INSURANCE
It doesn't matter who owns my life insurance. The major benefit
is getting large amounts of cash to the family at the insured's death.
Problem: Insurance is one of the best sources of cash available at your
death. However, in large estates, it will be more efficient for a third
party, such as a trust, to own the insurance. That way, the death benefit is
not included in your taxable estate and the family gets all the money instead
of sharing it with the IRS.
8) FAILURE TO CONSIDER IRREVOCABLE TRUSTS PERCEPTION
Irrevocable trusts are bothersome and require the grantor to give
up control of the asset.
Problem: Lack of knowledge of the effectiveness of an irrevocable living
trust funded with life insurance and/or other assets can deprive you or your
estate of the opportunity to eliminate some or all estate and gift taxes on
the trust property. There are methods that may make such trusts flexible
enough to satisfy you.
9) HOLDING ON TO ALL OF YOUR PROPERTY UNTIL DEATH ALLOWS YOUR ESTATE TO USE THE MAXIMUM UNIFIED CREDIT
Problem: The "saving" of the unified credit until death should be weighed
against the earlier use of the unified credit as part of a lifetime gift
giving strategy aimed at removing appreciating assets from your estate and
thereby reducing federal estate tax consequences. Sometimes the credit can
be "leveraged" during your lifetime by using it to purchase life insurance
outside of your estate.
10) WILL ERRORS
Perception: Minor "mistakes" probably don't matter. They can always be fixed
or will be unimportant.
Problem: Unfortunately, mistakes in your will can't be fixed once you die.
This is really a one shot deal; you can't come back and put things right. For
instance, does your will indicate your proper domicile? Your choice of
domicile as opposed to the correct domicile may cause excessive state death
taxes. Does your will revoke all prior wills? Have you included a
simultaneous death clause? Are the provisions in your will referenced and
coordinated to your dispositive instruments such as your life insurance, your
irrevocable trust, and your buy sell agreement?
The information given here is designed to be of a general nature. It is
given with the understanding that if legal, accounting, or other professional
advice is required, the services of a competent professional practitioner
should be sought.
| New Passed Legislation
Economic Growth and Tax Relief Reconciliation Act of 2001
On Saturday, May 26, 2001, the U.S. House of Representatives and Senate passed legislation (H.R. 1836, the Economic Growth and Tax Relief Reconciliation Act of 2001) that promises to reduce taxes by $1.35 Trillion over the next decade. The legislation easily passed the House (where no Republicans opposed the bill). The Senate vote was 58 to 33 with 12 Democrats voting in favor of the bill and only 2 Republicans opposed (Mr. McCain of Arizona and Mr. Chafee of Rhode Island). It is a near certainty that President George W. Bush will sign this legislation into law. This bill represents the most extensive tax cut since Ronald Reagan’s historic tax cut in the early 1980s.
Among the highlights of this legislation is a reduction in the individual income tax rates, relief from the “marriage penalty,” and a gradual phase-out of the estate tax. However, when considering this tax bill, it is important to remember that this bill will “sunset” on December 31, 2010.
The follow summary sets forth some of the more important provisions of the Act:
I. Sunset Provision (Section 901)
The Act provides that the entire bill will expire on December 31, 2010. After that date, all provisions of the Internal Revenue Code impacted by the Act will revert to the law in effect prior to passage of the Act. Obviously, that means that the top marginal estate tax rate will revert to 55% (plus a 5% surtax on certain large estates) and the amount exempt from estate taxes will be only $1,000,000 (i.e., the amount that the exemption is scheduled to be in 2006 under current law). In this summary, we will make reference to years after 2010. However, please keep in mind that no changes can remain after 2010 without subsequent legislation that is passed by both houses of Congress and signed into law by the president.
II. Reduction in Estate and GSTT Rates (Sections 501, 511, and 541)
Beginning in 2002, the 5% surtax on certain large estates will be repealed. Also, beginning in 2002, the top marginal estate tax and rate will be reduced to the following:
2007 through 2009: 45%
2010 and thereafter: Estate Taxes and GSTT are Repealed
After the estate tax is repealed in 2010, the rule allowing the basis step-up at death will be replaced with carry-over cost basis for most bequests at death. The executor of a taxpayer’s estate can increase the cost basis of decedent’s property by no more than $1.3 million. This amount is $3 million for transfers to a spouse.
In addition, the state death tax credit will be reduced by 25% in 2002, 50% in 2003, 75% in 2004 and will be repealed in 2005. It will be replaced with a deduction for state death taxes paid – having a negative impact on the revenues of states that rely upon a “pick-up” or “sponge” type inheritance tax system (with, by the way, is most states). This could lead to a reintroduction of state inheritance taxes to make up for this loss
III. Increase in the Estate and Generation-Skipping Transfer Tax Exemption (Section 521)
2002 and 2003: $1,000,000
2004 and 2005: $1,500,000
2006 through 2008: $2,000,000
2010 and thereafter: Estate Taxes and GSTT are Repealed
IV. Increase in the Gift Tax Exemption (Section 521)
2007 through 2009: 45%
2010 and thereafter: Top Gift Tax Rate is Equal to Top Individual Rate (i.e., 35%)
V. Modifications to GSTT Rules (Sections 561 – 564)
The Act makes several technical changes to the GSTT provisions. These provisions, effective retroactively to January 1, 2001, were sought by the American Bar Association to resolve perceived problems with some of the GSTT rules.
VI. Reduction in Individual Income Tax Rates (Section 101)
The bill reduces the individual income tax rates beginning this year. A new 10% rate is carved out of the current 15% bracket. The 10% rate applies to the first $6,000 of taxable income for individuals ($7,000 for 2008 and thereafter) and $12,000 for couples filing joint returns (increasing to $14,000 for 2008 and thereafter). For 2001, taxpayers that timely filed income tax returns for 2000 will receive a check issued by the Department of the Treasury before October 1, 2001 to reflect the impact of this new 10% rate (i.e., checks of $300 for individual taxpayers and $600 for married taxpayers filing a joint return).
The other regular income tax rates are also reduced beginning on July 1, 2001. These other changes are gradually phased-in during the next decade.
Current Rates: 28% 31% 36% 39.6%
June 30, 2001 through 2003 27% 30% 35% 38.6%
2004 through 2005 26% 29% 34% 27.6%
2006 and thereafter 25% 28% 33% 35%
VII. Phase-Out of Itemized Deductions and Personal Exemptions (Sections 102 and 103)
Under current law, itemized deductions and the personal exemptions are phased-out for high-income taxpayers. The phase-out of the itemized deduction and personal exemptions is gradually eliminated over the life of the Act. The elimination of the phase-out is as follows:
2006 and 2007: 1/3 of the Previously Lost Deduction and Exemptions are Available
2008 and 2009: 2/3 of the Previously Lost Deduction and Exemptions are Available
2010 and thereafter: All of the Previously Lost Deduction and Exemptions are Available
VIII. Increase and Expand the Child Tax Credit (Section 201)
The child tax credit, currently $500, will be phase-in to $1,000. Beginning in 2001, a portion of the credit will be made refundable for certain lower-income taxpayers. The phase-in is as follows:
2001 through 2004: $600 per child
2005 through 2008: $700 per child
2009: $800 per child
2010 and thereafter: $1,000 per child
IX. Increase the Adoption Tax Credit (Section 202)
The maximum adoption expense credit is increased to $10,000 per eligible child. The beginning point of the phase-out for this credit is increased to $150,000.
X. Increase in Dependent Care Tax Credit (Section 204)
The maximum amount of eligible employment-related expenses is increased from $2,400 to $3,000 for one qualified individual. The increase is from $4,800 to $6,000 if there are more than one qualified individual.
XI. Marriage Penalty Relief (Sections 301 and 302)
Under current law, some married couples pay more in taxes than they would pay if they were not married to each other. The Act introduces provisions that will gradually decrease this so-called “marriage penalty.” One such provision is doubling the basic standard deduction for a married couple filing a joint return to twice the basic standard deduction for an unmarried individual filing a single return. This change is phased-in from 2005 through 2009.
The bill also reduces the impact of the “marriage penalty” by making the 15% regular income tax bracket for a married couple equal to double that of the 15% bracket for an individual filing a single return. This increase in the 15% bracket is phased in as follows:
2005: 180% of the 15% Bracket for an Individual Taxpayer
2008 and thereafter: 200%
XII. Simplification of the Earned Income Credit (Section 303)
The limit for qualification for the earned income credit is increased by $1,000 for joint returns in 2002 through 2004. It is increased by $2,000 for 2005 through 2007 and by $3,000 for taxable years after 2007. This amount will be adjusted annually for inflation after 2008.
XIII. Increase in Education IRA Limits (Section 401)
Beginning next year, the annual contribution limit on Education IRAs is increased from $500 to $2,000. Education IRA contributions will be allowed to cover the expenses of elementary and secondary school expenses. The phase-out for Education IRAs begins at $190,000.
XIV. Modifications to Section 529 Qualified Tuition Programs (Section 402)
Under these new rules, certain prepaid tuition programs established and maintained by certain eligible educational institutions will meet the requirements of Section 529. The penalty on distributions not used for higher education will be modified to match the taxation of Education IRAs.
XV. Increases in Student Loan Interest Deduction (Section 412)
For interest paid on qualified education loans after December 31, 2001, the deduction will be phased-out at $65,000 for single taxpayers and $130,000 for married taxpayers filing a joint return. There is no longer a limit on the number of months for which the deduction can be taken.
XVI. “Above the Line” Deductions for Higher Education Expenses (Section 431)
Taxpayers can take a deduction for qualified higher education expenses. The definition of qualified higher education expenses is the definition used for purposes of the HOPE credit. For 2002 and 2003, a maximum deduction of $3,000 is available for single taxpayers with a gross income of no more than $65,000 ($130,000 for joint returns). In 2004 and 2005, the maximum deduction is $4,000 for taxpayers with a gross income of no more than $65,000 ($130,000 for joint returns). In 2004 and 2005, a deduction of as much as $2,000 is available for taxpayers with a gross income of $80,000 ($160,000 for joint returns).
XVII. Increase in IRA Limits (Section 601)
The maximum IRA contribution will eventually increase to $5,000. The phase-in is as follows:
2002 through 2004: $3,000
2005 through 2007: $4,000
2008 and thereafter: $5,000
After 2008, the $5,000 limit will increase for inflation (in increments of $500). In addition, taxpayers age 50 and older will be able to make additional contributions to their plans beginning next year. The special 50 and over limit will be an additional $500 in 2002 and $1,000 per year in 2003 and thereafter.
XVIII. Increase in 401(k) Limits
The maximum 401(k) and 403(b) limits will phase-in to $15,000 as follows:
After 2006, the $15,000 limit will be indexed for inflation. Taxpayers age 50 and over will be able to make additional contributions of $1,000 next year, $2,000 in 2003, $3,000 in 2004, $4,000 in 2005, and $5,000 in 2006 and thereafter.
XIX. Increases in Pension Limits (Section 611 through 621)
Beginning next year, the compensation limitation for defined benefit pension plans is increased from $160,000 to $200,000. The limitations for 457 exempt plans will be increased from $7,500 to $11,000 and will eventually increase to $15,000. Other qualified plan limit increases are contained in the bill as well.
This material is for informational purposes only. The topics presented may involve legal, tax, accounting, or other issues. No legal, tax or accounting advice can be given by the Siciliano Insurance & Financial services, Siciliano Insurance & Financial Services its agents, employees or registered representatives. You should consult with your own professional advisors to examine the legal, tax, accounting and other financial planning aspects of this legislation.
Annuities & Bonds
Health & Disability Insurance LTC
Various Trust Information