December 2011 Topics
With the end of the year approaching, the timeframe for last-second estate planning shrinks. Not making a move could have financial ramifications - both major or complex and simple moves should be considered.
The most basic end of the year estate planning step is gifting money. If you want to gift money for 2011, you need to accomplish that by December 31, 2011. In 2011, you can gift away $13,000 to another person tax free and not consumer your lifetime gift exemption amount. You can read more about that here. Further, until the end of 2012, you have the ability to give away up to $5.0 million without any gift tax ramifications. There is less than 13 months before gift tax rules return to a $1.0 million lifetime exemption based on the December 2010 tax compromise.
If you're age 70˝, or older, you can arrange to transfer up to $100,000 of otherwise taxable IRA money to a charity. Such a transfer is federal-income-tax-free to you, but you don't get to claim a charitable deduction on your Form 1040. However, the tax-free treatment equates to a 100% write-off, and you don't have to itemize your deductions to get it. One restriction: the funds must be transferred directly from your IRA to the charity.
The end of the year also means you should take a look at your investment portfolio to check for "tax harvesting." That is a fancy word I have learned from financial advisors that means selling your loser assets to reduce your gains from your winner assets.
Some of the more popular additional steps you can take include:
Make sure you speak with your tax advisor because you could be eligible for some less well-known or additional moves.
- Retirement Account Contributions - IRAs, SEPs, Roth IRAs. Due before April 15, 2012.
- Make sure you have fully contributed to your 401(k).
- Education Savings Plan Contributions - 529 plans, GET, Coverdell ESA
- Make any additional charitable donations before December 31, 2011. Make sure you collect all your receipts.
- Take advantage of any energy efficiency credits.
Estate Planning Review
The end of the year is also a good time to analyze your estate plan documents. You need to review them to see if they meet your current needs. One of the more important areas of a person's estate plan is to check that your beneficiaries are still alive. Seems pretty obvious but you might want to change your plan because your inheritance may go to your beneficiaries' heirs if the original beneficiaries are deceased. Also, maybe you have had a falling out with a beneficiary and want to change your plan.
You also want to determine if your personal representative, trustees or guardians of your minor children are still alive and still want to hold those duties. A change circumstances could warrant you changing what roll that person has in your estate.
There could also be changes in the circumstances of your living heirs that might warrant changes in your estate plan. Maybe one heir has won the lottery. Wouldn't that be great? Maybe your assets could be more efficiently directed toward the non-winning heirs. Or, maybe the reverse has happened and an heir is down on their luck and would need more assistance.
Also review your estate plan to determine if you have acquired or divested assets that might warrant changes to your plan. Or, a newly acquired asset may need to be transferred to your Revocable Living Trust .
While you are reviewing your estate plan, also check to see if your beneficiaries are listed correctly in other various financial documents including:
If your powers of attorney are a few years old, you might want to
consider executing new ones. You might also want to see if your Advanced
Medical Directives take into account any new medical conditions.
- Life Insurance Policies
- Bank Accounts (POD)
- Brokerage Accounts/Mutual Funds (TOD)
- Retirement accounts - - IRAs, SEPs, Roth IRAs, 401(K)s, Pensions
The end of the year is filled with seeing old friends, relatives and loved ones. Making sure your estate plan meets the needs of those people should also be on your list of things to do. But, the Holidays is a good time to share your plans and talk to family about your estate plans.
Last month, I described several of the introductory clauses that can be found in a typical Last Will and Testament. This month I will provide further definitions to some basic clauses found in your Will.
Next Month I will wrap up this topic by describing personal representative's
powers and the importance of the execution aspects of a testator's
Last Will and Testament.
- Tangible Personal Property. Tangible personal property generally consists of a person's clothes, furniture, dishes and the like. You can state whether a specific beneficiary should be entitled to a specific item like "Jane should get my good China," or can speak in general terms e.g. "The executor should split up my property equally among my heirs."
- Real Property. If you
own property as a tenant-in-common or by yourself, the Will controls
to whom the realty is given. In the alternative, you could have
a clause confirming any realty owned by joint tenancy with the
right of survivorship.
- Cash Bequests. If you are lucky enough
to have assets that can be distributed to heirs, the decedent
can create cash bequests to heirs. It can be given to a specific
person, e.g. "I give Jane $10,000," or it can be given to a class.
An example of class gifts would be: "I give all my grandchildren
- Tax Apportionment Clause. This directs the inheritance
and estate taxes to be paid from the remainder of the estate after
your property and money are distributed to named beneficiaries.
Look at this closely. Without this clause the beneficiaries will
likely pay a share of taxes based on the amount they receive from
- Payment of Debts and Taxes. Prior to the personal
representative distributing property to heirs, debts and taxes
must be paid.
- Survival Clause. This clause is important when
a testator is married and distributes all of the estate to the
spouse. For example, if the married couple dies from the same
incident, but one member survives a bit longer, than the other,
normally probate would occur twice on the same assets. Double
probate means additional probate and legal fees. To avoid these
additional costs, it is advisable to have a clause that states
how long a survivor should live before that survivor can inherit
- Residuary Clause. This clause will distribute any assets
that might have been missed in the will or if a bequest fails
for a particular reason i.e. the heir has died and is not survived
by any issue. Typically, this clause will state that assets should
be distributed to the spouse or heirs. If they are not alive,
then the assets will be distribute according to the intestate
laws or to some specific entity.
- In Terrorem Clause. An in terrorem
clause is also known as a no-contest clause. This clause "threatens"
to disinherit a beneficiary of the will if that beneficiary challenges
the terms of the will in court and losses. Generally, the courts
will allow for a no-contest clause so long as the person challenging
the will does not have probable cause to do so.
The story of Viola Drath takes a strange turn and probably confirms that her alleged killer might not be completely stable. The Washington Post reported on November 18th that Albrecht Muth, Drath's husband, fired his attorneys and decided to represent himself in Drath's murder trial. You can read the start of this story here.
Muth was interviewed by the Judge to determine whether he had the mental capacity to "represent" himself. I certainly wonder if his request to wear his Iraqi Army uniform is a sign of instability. I am also reminded of the old proverb "A man who acts as his own attorney has a fool for a client."
If anything interesting changes arise in this matter, I will certainly keep everyone updated.
My eye's pop up. My wife has just nudged me awake. It is 2 AM, the morning of December 27, 2010. I roll over and she says:
"I think I am in labor but you should go back to sleep until the contractions get closer."
Gee, thanks, I think to myself. But, I close my eyes. My mind begins to race.
Our son is not due for another two weeks. We are definitely within the timeframe of him coming but we are not ready. I don't mean the crib wasn't built or his room wasn't painted, like it was when our was born several weeks early. That was all done.
We had a problem with our plan on who was going to care for our daughter when we went to the hospital. We had people ready to help us out before the 27th and after the 29th. However, everyone that was going help on December 28th was either working the next day or was out of town for the holidays. To top it off, the pre-school our daughter attends was closed until December 28th in celebration of Christmas. Coverage for December 27th and 28th just seemed to slip our minds with the holidays.
I was trying to figure out if surgical gear came in size 4T for our daughter when my wife said her contractions stopped, and it was only severe Braxton-Hicks contractions. The next morning, my wife and I immediately bolstered our safety net of potential babysitters, just in case. Luckily for us, we did take those additional steps because our son was born just a few days later. He was still early, but we had a back-up babysitter come over to watch our daughter until a family member arrived.
How does my story apply to estate planning? Very simple. I hear a number of stories on why people do not plan their estate. Most reason that they do not have enough money or they are single and have no dependents or they believe that intestate statutes will be adequate for their estate.
When I have these conversations, almost every single person has a "yeah, but" moment when they describe why they have not planned their estate. For example, a person that thinks intestate will be a good enough estate plan but still wants to set aside a portion of that money for charity. Or a single person has not taken steps to designate someone to speak for them if they become incapacitated. Or an allegedly "non-affluent" person runs a small business worth $2 million and has several employees that depend on that person for employment. Each person needs to take planning steps for different reasons and ignoring it is akin to my wife and I forgetting about December 27th and 28th.
What's the moral of the story? In essence, planning is important for everything you do. Sure, some things need less planning but, overall, life-altering events should not create massive havoc because of the lack of planning. For my wife and I, it all worked out with a beautiful, healthy, baby boy but I wonder a little what might have been…
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