- End of Year Tax Planning Must Include Review of Estate Plan Due to Tax Changes -
(BLOOMFIELD, CT)- December 7, 2015- In addition to holiday gifts, December is also the month to wrap up the tax year. Higher income tax rates that were ushered in under the American Taxpayer Relief Act of 2012 (ATRA) have not only changed yearly tax liability, but many people may be unaware that estate planning has been dramatically changed as well.
“The ATRA has shifted the focus of estate planning to a new frontier: income tax basis planning,” explains Attorney Henry Weatherby, Founding Principal of Weatherby & Associates, PC in Bloomfield, CT. “Simply stated, the tax levied for an asset can be drastically different depending on when the asset was given to an heir.”
Weatherby uses the example of parents who deed a residence to a child while they are alive to avoid probate. If the child did not pay the parents anything for the residence, then the parents have made a taxable gift to the child. If the property is worth $100,000 at the time of the gift and the parents die years later when it is worth $500,000, then the child will owe capital gains tax on $400,000 if they sell it. If instead the parents had used a revocable trust or a payable on death deed so that the residence would be passed on after death, then the child would not owe any capital gains tax ($500,000 sales price - $500,000 stepped up basis = $0 gain).
“Basically, parents may unknowingly create an income tax bill for their children by gifting property during their lifetimes instead of allowing the children to inherit the property after death,” said Weatherby.
As tax laws are constantly changing, Weatherby advises everyone to review his or her estate plan, particularly if the plan is more than five years old. To avoid surprises, Weatherby created the LifeBridgeTM program, which includes regular check-ins with the client and regular updating of planning components.
Weatherby shares the top things to do before the end of the year according to estateplanning.com:
- If you don’t already have an estate plan, get it done. Start with a will, power of attorney, health care documents and additional planning as it applies to your situation.
- Make tax-free gifts. Under current federal law, you can give up to $14,000 to as many people as you wish each year. This is a great way to reduce the size of your estate (and potentially save estate taxes) over time. Charitable gifts are unlimited. So are gifts for tuition and medical expenses, if you give directly to the institution.
- Secure/update health care documents. At the minimum, everyone over the age of 18 needs 1) a Durable Power of Attorney for Heath Care, which gives another person legal authority to make health care decisions for you if you are unable to make them for yourself 2) a living will for end of live decisions when you are terminal or in a persistent vegetative state (think Terri Schiavo’s situation) because you are unable to make them for yourself; and 3) HIPPA Authorizations, which give written consent for doctors to discuss your medical situation with others, including family members. In addition, a Revocable Living Trust is preferable over a Will at incapacity because it can prevent the court from controlling your assets.
- Review/update guardian for minor kids. It is quite likely that the person you name as guardian for your children when they are small will not be the best choice as they get older. If you haven’t named a guardian who is able and willing to serve and something happens to you, the court will decide who will raise your kids.
- Review/update beneficiary designations. This is especially important if your beneficiary has died or if you are divorced.
- Review/update your insurance. Check the amount of your life insurance coverage and make sure it meets your family’s current needs. Consider getting long-term care insurance to help pay for the costs of long-term care (and preserve your assets for your family) in the event you and/or your spouse should need it due to illness or injury.
“For most people, the 2012 Tax Act has removed the emphasis on estate tax planning and put it back on the real reasons to do estate planning: taking care of ourselves and our families the way that we want to,” said Weatherby.
For over 20 years, the attorneys at Weatherby & Associates, PC have helped Connecticut families set goals and turn them into reality, creating a better, more secure future through estate planning and asset protection strategies to probate, business succession planning and estate administration. Weatherby & Associates, PC takes a close look at the unique needs of every individual, family or business to develop a truly individualized strategy that is sure to achieve their objectives. Visit: www.weatherby-associates.com.
