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Good estate plan minimizes your taxes, maximizes control

Lori Lucas

Estates created in 2010 through 2012 are fortunate to be able to take advantage of applicable exclusion amounts at an all-time high and estate tax rates at an all-time low. The exclusion amount for estates occurring in 2011 and 2012 are $5 million and $5.12 million (indexed for inflation) with a maximum tax rate of 35 percent. The exclusion amount and the tax rates have changed considerably over the past 30 years. In 1981 the applicable exclusion amount was $175,625 with a maximum tax rate of 70 percent. In 1991 the exclusion amount was $600,000 with a maximum tax rate of 55 percent, and in 2001 the exclusion was $675,000 with a maximum tax rate of 55 percent. Unless Congress acts to extend the $5.12 million exclusion and the 35 percent tax rate, the applicable exclusion amount is scheduled to be reduced back to $1 million beginning in 2013 with a maximum tax rate of 55 percent. This will not only increase the number of taxable estates, but it will increase the tax liabilities of these estates.

A married couple can minimize their tax liability in 2011 and 2012 upon their deaths by using the portability provision under the 2010 Tax Relief Act. This provision allows an executor of a deceased spouse’s estate to make an election to allow the surviving spouse to use the deceased spouse’s unused applicable exclusion amount. What this means is that a person’s estate is not subject to estate taxes in 2011 or 2012 if the value of their estate plus their lifetime taxable gifts is less than the exclusion amounts of $5 million or $5.12 million. For example, if the deceased spouse’s taxable estate is worth $3 million upon death in 2011, the deceased spouse would have an unused exclusion of $2 million. The executor can make an election to allow the surviving spouse to use this $2 million exclusion upon their death by making the election on a timely filed Form 706 Estate Tax Return. If the 706 Estate tax return and election are not timely filed, the ability to use the $2 million unused exclusion will be forever lost. If the election is properly made, the surviving spouse would have $7 million available to her to use against lifetime gifts or against transfers upon her death (her $5 million exclusion plus her deceased spouses $2 million unused exemption).

At this point the portability election is quite limited. First of all, the first spouse’s death must occur in 2011 or 2012. Second of all, the surviving spouse must use the unused exclusion by December 31, 2012, based on the fact that the law is scheduled to expire in 2013. However failure to make this election could be very costly if Congress votes to extend the amount of time the surviving spouse has to use the deceased spouses unused exemption past 2012. A decision not to make the election based on the scheduled expiration of this provision could be costly if the surviving spouse’s estate appreciates significantly subsequent to the first spouse’s death and the portability election exemption was not made.

Another consideration to this election is that it only applies to the last deceased spouse. Therefore, if a surviving spouse is predeceased by more than one spouse, the amount of the unused exclusion is limited to the unused exclusion of the last deceased spouse. In addition, the portability exclusion does not apply to a nonresident noncitizen of the United States regardless of whether his or her surviving spouse is a United States citizen.

If someone doesn’t have an estate of $5.12 million they may think their estates are too small to necessitate setting up an estate plan. However, having a good estate plan is important for everyone. A good estate plan is not only a plan to minimize estate taxes, it also allows you to have control over your assets during your lifetime and upon your death, make certain your assets are distributed in accordance with your wishes and not by state statute.

Trusts are essential as part of a good estate plan. Although there are many types of trusts that can be used in estate planning, a commonly used one is the Living Trust. The Living Trust allows you to have control over your assets while you are alive. The Living Trust allows you to predetermine to whom, how and when your assets are transferred upon your death. Unlike a will, you actually transfer title (but not control) of your assets into the trust’s name during your lifetime. By transferring title of your assets in the trust, you maintain your privacy and avoid the cost, time and administrative hassle of going through judicial probate. Although a Living Trust is a useful tool in minimizing estate taxes, avoiding probate and making certain your assets are distributed in accordance with you wishes are important whether you have a taxable estate or not.

Two other important documents in an estate plan regardless of the size are an Advanced Health Care Directive and a Durable Power of Attorney. The Advance Health Care Directive allows you to specify who you want to make health care decisions on your behalf when you are unable to do so. It also allows you to predetermine certain health care decisions such as whether or not to maintain life support. The Durable Power of Attorney is a document that authorizes the person you want to make financial and other decisions on your behalf if you are unable to do so yourself.

There are many other aspects to estate planning too numerous to discuss here. However, as you can see, a good estate plan is vital for all estates, large and small. Hopefully, this discussion is helpful in explaining some considerations in planning your estate. However this is an extremely important and complex area in your overall financial plan. Accordingly, consult your accountant and legal advisor so you can tailor an estate plan that is right for you.

Lori Lucas is a certified public accountant with Albright, Persing & Associates, Ltd. in Reno. Contact her at 826-5432.