Estate Planning: Are You Prepared for Incapacity?

Not too long ago, estate planning was all about the estate tax tail wagging a sometimes reluctant dog. That was unfortunate for a number of reasons, among them, the focus on estate taxes caused planners to look beyond all those who had no estate tax problem. Likewise, those without that estate tax problem walked around unaware that they probably should do some planning nonetheless.DSC02461

Did I just describe you? If so, maybe it’s time think again about the need to do some estate planning.

Though avoiding estate taxes still motivates some (very well off) people to plan, the driving force behind estate planning these days for most people is one or more of the following. The desire to

  • Maintain control of their property while they’re alive and well;
  • Provide for themselves and their loved ones if they become disabled or incapacitated;
  • Give what they have
    • To whom they want,
    • The way they want,
    • When they want, and
  • Minimize the impact of professional fees, court costs, and taxes–typically income taxes first, then estate.

That second item, the one about providing for your family if you’re disabled or otherwise  incapacitated, is a big one. Did you know that a 20 year old has a 1 in 4 chance of becoming disabled before they retire? It gets worse with age. According to a 2005 AARP study,

The lifetime probability facing a 65 year old of developing a disability in at least two primary activities of daily living for at least three months or becoming cognitively impaired is 44 percent for males turning age 65 and 72 percent for females. Therefore, women face a 64 percent higher risk than do men.

A well-drafted estate plan will address those probabilities and ensure that you and your loved ones are better able to deal with a disability or mental incapacity should it happen. That plan will include

  1. The designation of a trustee and/or agent to manage your property while you’re unable;
  2. A living will, so your doctor and loved ones will know what you want done when you’re unable to communicate; and
  3. A health care power of attorney, so your health care agent can do what you would do in the same circumstances–if you were able.

Those last two items collectively are known in Utah and Wyoming as an advance health care directive by the way. Do you have one in place? Do you have a trustee or agent to manage your property in case you no longer can? Then maybe it’s time to do some estate planning.



Tax Savings: Estate Planning “Coupons”

Under current gift and estate tax law, if you pay a gift or estate tax, it will be at a flat rate of 40%. Forty percent. But most people will never pay that rate, or any rate at all, because their estates are not large enough and what estate or gift taxes they could have to pay, they can pay with coupons.

Now, the IRS doesn’t call them coupons, but coupons they are. Here’s how they work.

couponsSay you and your spouse have four children. Together, you could give each of them $28,000 a year, and you would pay no gift tax on those gifts. That’s because the IRS grants each of you a coupon worth $14,000 each year, a coupon the IRS calls an “annual exclusion.” You can use as many of those $14,000 coupons as you want ($28,000 if done jointly as spouses). Got 10 friends? You’ve got 10 coupons. Got 20? You’ve can give away $280,000 total to them and pay no gift tax.

But what if you want to give your favorite son or daughter $50,000 one year? Surely there’s a tax there, right? Probably not. You see, Uncle Sam has also given each of us a lifetime, but reducing, coupon of $5,450,000 (in 2016; it’s adjusted for inflation each year), a coupon the IRS calls the Applicable Exclusion Amount or AEA. Thus, the math in the example I just described would be $50,000 – $14,000 – $14,000 = $22,000. You could either pay the gift tax on the $22,000 or subtract it from your lifetime coupon: $5,450,000 – $22,000 = $5,428,000 remaining on your lifetime coupon. That is, the AEA reduces each time you have to use some of it to cover gifts in excess of your annual exclusion amounts.

You can use your lifetime coupon while you’re alive or save it all till you die to pay any estate tax you may yet owe. As I said at the beginning, that won’t be much if any for most people because we won’t have estates that large. (And if you’ve been paying attention, you’ll realize that for a married couple, their estate would have to be almost $11,000,000 before they’d have to pay any estate tax under current law.)

There are other coupons as well. A gift to charity? Use an unlimited coupon. A gift to your spouse? Unlimited as well–unless your spouse is not a citizen of the United States, then it’s only $145,000 per year. Pay your children’s education and medical expenses directly–that is directly to the school or hospital–use an unlimited coupon.

Neat, huh? And I haven’t even discussed portability yet. I’ll save that for later.

Quote for the Day

“If you get up early, work late, and pay your taxes, you will get ahead–if you strike oil.”

J. Paul Getty

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