Underestimating Exposure to Estate Taxation
Often people do not believe they are worth enough to be subject to Federal
Estate Taxation. If your estate is larger than $1,000,000, the estate tax
begins at 41 percent! It is common to hear a person undervalue real estate,
especially in this portion of the country (Bergen and Passaic counties in
New Jersey rank as the 6th most expensive residential areas in the United
States, with 20 percent appreciation per year). Also, life insurance, IRA’s
and the value of your business must be considered.
Not Balancing Ownership of Assets
Too often people own most of their assets jointly. At the death of the first
assets pass directly to their surviving spouse. If all assets are held
jointly, one Unified Credit may be lost—that’s a $345,00 loss and mistake!
Choosing The Wrong Executor or Trustee
Frequently a person wants to choose a friend or family member. The jobs of
Executor and Trustee are very critical; numerous fiduciary obligations must
be performed, and performed correctly. Is your chosen fiduciary competent
and willing? More importantly, the person appointed to a fiduciary position
should be asked??
Wrong Beneficiary and Distribution Elections of Retirement Plans
A retirement plan is subject to estate taxation (when the unified credit is
met), then the remaining funds are subject to Income Taxation; this could
represent a 50 percent Estate Tax exposure in addition to a 38.6 percent
Income Tax. Please review the website “Article“ published May 14, 2001
addressing IRA Income Distribution Rules.
Owning Life Insurance
Many times people purchase life insurance “dedicated” to pay estate
taxation. While this may represent a wise method of “paying the bill”, too
often people fail to realize that the same life insurance will be subject to
estate taxation. If the life insurance proceeds become an asset of the
estate, the same life insurance intended to “pay the bill” just increased
the bill. Also, having the life insurance policy owned by the other spouse,
results in keeping the policy proceeds out of one estate while assuring that
the proceeds ARE INCLUDED in the surviving spouse ‘s estate and therefore
subject to Estate Taxation. The best method of assuring that the proceeds
are not included in the estate of either spouse is the use of a “third
party”—a Life Insurance Trust. An Irrevocable Life Insurance Trust can
provide for the “other spouse”, pay estate tax bills, and provide for
beneficiaries without any Estate Taxation.
Lack of Estate Planning Documentation
Not addressing the subject of Death or Disability, or perhaps
procrastination, results in not having the necessary documentation, this is
exactly what the IRS wants, 70 percent of the people in this country die
without a will!! Too often the estate planner prepares the Trust but it is
never funded. The estate plan should include, but not necessarily be limited
to, the following documentation: Will, Trusts, Durable Power of Attorney,
Health Care Proxy. As an estate becomes more complex, or if the desire is
to aggressively remove assets from Federal Estate Taxation exposure,
additional documentation may be required, possibly the use of a Qualified
Personal Residence Trust would be appropriate.
Lack of Liquidity
Whether federal or not, every estate will have some expenses to honor.
Providing liquidity for the estate can be accomplished in many ways; a
frequently used method of generating liquidity is the life insurance policy,
sometimes the “second to die” policy is appropriate. Unfortunately, the
estate plan that does not address this issue results in liquidation “sale”
of perhaps the wrong assets within the nine month “window” to settle the
estate and file the Estate Tax Return.
Loss of Tax Credits and Gifting
Too many people do not realize that an UNLIMITED amount of gifts can be made
every year up to $11,000 per recipient. This gifting ability is in addition
to the utilization of the “unified credit” or “exemption amount” that
permits the transfer of $1,000,000 without estate tax or gift tax
consequence during the calendar years 2002 and 2003. The “exemption amount”
or “unified credit” can be used either during life or at death. Remember
however that taxable gifts made within three years of death will be
“returned” to your estate and taxed accordingly.
Need for a Master Plan, and Keeping it Current
Stale documents are dangerous! Unfortunately, stale documents cost too much
in tax dollars. It is wise to have your estate plan reviewed every two
years, as well as every time the estate tax laws change—REMEMBER OUR PRESENT
LAW CHANGED JANUARY 1st OF THIS YEAR!! Also, it is wise to review your
estate plan as changes occur in your health as well as family life; a change
of intention means a possible change of documentation. When “changes” occur
which are not addressed in estate planning, the wrong person “inherits” the
wrong property, and this can lead to very expensive litigation.
Courtesy of: Steven W. Tarta, Attorney at Law. 45 N. Broad Street Ridgewood, NJ 07450 PHONE 201-444-8448 E-MAIL: [email protected] Fax 201-612-0827Please be sure to check out www.tartalaw.com for estate planning learning center information.