By ALAN S. NOVICK
Scripps Howard News Service
24-JUL-06
As the summer winds down many of us begin to realize that life is getting on and it's time to review our estate plans and tax plans.
There are those of us who decide at least once a year to think about tax planning. While there are always income tax aspects of year-end planning which are important and get a lot of publicity in November and December, it is also important to take a look at estate taxes and gift taxes that may impact upon your spouse and children.
In the review of an estate plan, special attention should be given to any benefits that will pass to others outside of the provisions of the will and trust. Qualified retirement plan distributions can be included in an estate for tax purposes under Internal Revenue Code. In addition to the estate tax hit on retirement plans, the beneficiary of the plan's payments is usually subject to income taxes on the withdrawals or distributions from the plan. The planning of distributions and the naming of a beneficiary for these plans is one of the most crucial decisions to be made in any estate.
Insurance benefits can also be included in the estate and beneficiary designations and should be reviewed and updated if necessary. It may also be possible and advisable to transfer the ownership of the insurance policy to an irrevocable trust that will eliminate the proceeds from any estate taxes.
If the total estate is over $2 million, it is possible to take steps now to minimize estate taxes and to ensure that the greatest possible share of the estate goes to taking care of the surviving spouse and children rather than to the IRS. For married couples, the marital deduction produces the largest amount of estate tax savings. An estate owner may avoid federal taxation on the value of his or her estate if the surviving spouse is the recipient of the property.
There is no limit on the amount of property that can pass from one spouse to another tax free through use of the estate tax marital deduction and or the lifetime gift tax marital deduction.
Gifts can also result in future income tax savings because the top income tax rates of the donor may be higher than the donee's income tax rate. However, the impact of the so-called "Kiddie Tax" must also be considered if the child is under 14 years of age.
Current transfers pay off in later years. A program of annual gifts to your children can both decrease the eventual size of the taxable estate and also reduce income taxes on the future income from the securities transferred.
Finally, the end of the year is a good time to take an inventory of all of estate planning documents, and to make sure that your spouse and/or children know where they are and who your advisors are. The family lawyer, broker, banker, trust officer and/or financial planner should be known to both spouses and children and not be a stranger to the survivor. They can tell them in more detail what services they will provide and how they will be responsive and responsible to the survivor.
Whether the estate plan is a simple "all to my wife" will or a sophisticated plan with pour-over wills and trusts for wife and children, both spouses should understand the terms of the bequests and trusts and how they work. The survivor will probably work with the lawyer who wrote the documents, and the trustees of any trusts. If the plan involves reciprocal or similar provisions for both spouses, then both spouses should know who all the major "players" are and how to contact them.
(Attorney Alan S. Novick is a wills, trusts and estates lawyer. E-mail estate planning questions to an304@aol.com.)
