10 steps for your estate plan before year’s end
by F. Keats BoydI received an e-mail the other day:
When Dan found out he was going to inherit a fortune when his sickly father died, he decided he needed a woman to enjoy it with. So, one evening he went to a singles bar where he spotted the most beautiful woman he had ever seen. Her natural beauty took his breath away.
"I may look like just an ordinary man," he said as he walked up to her, "but in just a week or two, my father will die, and I'll inherit 20 million dollars."
Impressed, the woman went home with him that evening and, three days later, she became his stepmother.
It just goes to show that plans with the finest of intentions can go awry. It is vital that you take the time to review your estate plan and make sure it is complete and up to date. Here is a list of 10 steps you can take before year’s end to ensure your revocable trust-based estate plan will work at peak performance:
1. Fund, fund, fund. Always keep your assets within your revocable trusts. Monitor this annually. You must transfer ownership of your assets while you are alive to be able to take advantage of many of the benefits revocable trusts offer. A properly drafted and funded revocable trust can provide for incapacity care planning, testamentary disposition, probate avoidance and estate tax avoidance. For example, changing ownership of a bank account or CD will allow those assets to pass to your heirs without probate. Changing ownership typically involves filling out forms at the bank or financial institution where the assets are held. For example, to transfer a brokerage account to your trust you will need to contact your broker and ask for a new account form. When filling out the new account form, the trust will be listed as the owner of the account and your old account will be transferred into the new account.
2. Review and update your retirement account beneficiary designations. Most people designate their spouse as a primary beneficiary and their children as secondary beneficiaries on the retirement plan. It is often helpful to have your trust listed as a contingent beneficiary to the spouse leaving the children as secondary beneficiaries. This gives the surviving spouse the option of disclaiming the IRA benefits, thereby funding the trust of the deceased IRA owner. This can have favorable estate tax benefits in certain circumstances. However, to take full advantage of this postmortem planning technique, it is imperative that your trust contain language that complies with regulations issued by the IRS in April 2002.
3. Review (or consider obtaining) your long-term-care insurance policy. While not everyone can qualify for one of these policies, for those who do qualify, it can be a much less expensive alternative to paying for long-term care directly or transferring assets in anticipation of qualifying for Medicaid. If you already have a long-term-care insurance policy, it is a good idea to review its attributes, such as the amount of daily benefit, inflation factors and length of coverage. If you do not already have a policy and are over age 55, it is a good time to meet with your insurance adviser to review your options.
4. Confirm your status as a Massachusetts resident – especially if you don’t want to be one! For income-tax purposes, you are considered a Massachusetts resident if you spend more than 183 days here in the commonwealth. Days of travel in and out of Massachusetts count as days in the commonwealth. For those who consider themselves residents of another state, is a good idea to keep a diary or calendar to demonstrate the fact that you're out of Massachusetts more than 183 days. Additionally, keeping financial records that demonstrate the fact that you are out of Massachusetts will also be helpful. For estate tax purposes, even nonresidents are subject to the Massachusetts estate tax if they owned real estate or have personal property located in Massachusetts.
5. Consider a change of domicile. If you are a Massachusetts resident and spend significant time in another state, you may wish to consider a change of domicile. For example, a couple currently spending four months of the year in Florida may benefit greatly by staying an extra two months and changing their domicile to Florida. Florida currently has neither an estate tax nor an income tax, and recently did away with its intangibles tax. In addition to reducing estate tax exposure here in Massachusetts, Florida property owners will get the added benefit of real estate tax reductions available to Florida residents after a homestead has been recorded.
6. Execute an HIPAA release and update your health-care proxy. In 1996, Congress passed the Health Insurance Portability and Accounting Act. A few years ago, the privacy requirements of this law went into effect. These requirements have impacted many estate plans. For any trust or power of attorney which requires a physician’s certification before a fiduciary may be declared incompetent, having a HIPAA release executed in advance by the fiduciary will assist in the smooth administration of your estate plan. Additionally, you should consider updating your health-care proxy so that it recites that your health-care agent is also your HIPAA agent.
7. Gift, gift, gift. Under federal law, each person is allowed to transfer to any individual up to $12,000 per year without any gift-tax consequences. A husband and a wife may join in gifts, so that up to $24,000 may be transferred in any one year to any one person. Gifts in excess of $12,000 require the filing of a federal tax return (Form 709). For anyone with a taxable estate, a gift of $12,000 can result in of approximately $1,200 in Massachusetts estate tax savings and as much as $5,400 in Federal estate tax savings under the current law.
8. Don’t wait until you’re dead to make charitable gifts. Often, a client wishes to leave a gift to a charity as a part of the estate plan. However, it often makes more sense to make the charitable gift while you’re alive. That way, not only is the asset you’re giving removed from your estate, but you are also able to take advantage of the income-tax deduction that is available. Occasionally, a client has concerns about losing the income stream that comes from the asset they plan to donate. This may be resolved by using a charitable remainder trust. An irrevocable trust is established into which you gift an asset (preferably one with a low income tax cost basis). The asset may then be sold with no capital gains tax and the entire proceeds from the sale may be reinvested to provide an income stream for one or two lifetimes.
9. Consider converting your credit shelter trust to a dynasty trust. Did you know that some trusts can subject your heirs to estate taxes upon their deaths – and even to claims of their creditors and divorcing spouses? Use of a dynasty trust can eliminate both possibilities, and still give your heirs the functional equivalent of outright ownership. Dynasty trusts can be set up to last for just a couple of generations, or to go on for hundreds of years.
10. Consider contributing to a 529 plan or making a direct payment of tuition. You are allowed to transfer as much as $60,000 at one time, as a five-year advance of the annual gift exclusion of $12,000, to a Section 529 plan. These funds can grow tax deferred and be withdrawn for college expenses (tuition, fees, room and board) as an income-tax-free distribution. Additionally, under IRC section 2503(e), you are allowed to make gifts of tuition (and prepaid tuition) directly to an educational institution. To fall under this gift tax exception, the gift must be for tuition only, not other expenses. However the gift may be for tuition for preschool, private K-12 and college (a 529 plan can only be for post secondary education). Additionally, the gift must be made directly to the educational institution and must be non-refundable.
Attorney F. Keats Boyd III of Boyd & Boyd P.C. practices in Centerville. He can be reached at (508) 775-7800.
Published in Cape Business November/December 2007
Cape Business Newsletters
Keep up with the latest issues affecting your business and your life! To sign up for any of the Cape Business newsletters, click here.