With only a few weeks remaining in 2014, it’s time to begin planning your financial strategy for the new year. Reevaluating your current estate plan to ensure that it continues to meet your needs is a vital part of the process. Making time for the task can be difficult when you’re dealing with the chaos of the holiday season but it’s not something you can afford to put if off. As 2015 gets closer, here are four things you’ll want to tackle when assessing your estate plan.
1. Review your documents
Wills and trusts are important components of estate planning but having these documents doesn’t do you any good if they’re outdated or they no longer reflect your wishes. Before the year winds down, you should take some time to go over the terms of each document included in your estate plan to ensure that no modifications are needed and the provisions you’ve included still fit with your overall goals.
For example, if you have a durable power of attorney or healthcare power of attorney, you may want to consider whether you’re still comfortable with the person you’ve chosen to act as your agent. If you’ve established a living trust and transferred property into it that has since been sold, revising the document may be necessary. You’ll also need to take a second look at any documents that are part of your estate plan if you got married, finalized a divorce or had a child at some point during the year.
2. Double-check beneficiaries
Writing out a will or trust allows you to determine who will receive your assets after you’re gone and what percentage of your estate they’ll inherit. While that seems simple enough, there are certain assets that require you to name a specific beneficiary. That includes things like life insurance policies, pension plans and qualified retirement accounts.
When your estate plan includes these types of assets, your choice of beneficiary can override the terms of your will or trust. That can lead to conflicts when it’s time to determine how your estate should be divided up. The situation can be even worse if you haven’t yet named a beneficiary for a particular asset. If you’re not clear on who stands to inherit what or your preferences have changed, you shouldn’t delay in updating your beneficiary designations.
3. Take advantage of gift tax exclusions
If you’ve accumulated a sizable estate, you can reduce the potential future tax liability for your heirs by making financial gifts during your lifetime. The key is to ensure that the money you give doesn’t put you on the hook for the gift tax. Fortunately, the IRS allows an annual exclusion for gifts up to a specified amount, as well as exclusions in situations involving medical or education expenses.
For 2014, you can gift up to $14,000 to any number of individuals without having to pay the tax. Married couples have the ability to combine their gifts, for a total of $28,000 per gift to each individual. They can also take advantage of gift-splitting, in situations where one spouse gifts an amount that exceeds the annual exclusion limit. Those limits are set to remain in effect for 2015. Keep in mind that even if you’re not responsible for paying the tax, you may still need to complete Form 709 to report the gift when you file your return.
You can also circumvent the gift tax by making payments that qualify as a medical or education exclusion. These exclusions are available on top of the $14,000 annual limit and there’s no cap on the amount you can pay. The catch is that any payments must be made directly to the institution providing medical or educational services. For instance, if you give your son $20,000 to pay their tuition instead of writing a check to their school, the money counts as a gift for tax purposes.
4. Don’t overlook charitable donations
Making monetary donations to charity can offer some significant tax benefits, both in the short and long-term. The IRS allows you to deduct donations made to qualifying charities up to an amount equaling 50 percent of your adjusted gross income. If you saw your salary increase significantly over the past year, donating some of what you’ve earned to charity can help to reduce your income tax bill.
Establishing a charitable remainder trust into your estate plan is a smart choice if you want to make continuing donations and reap additional tax rewards in the meantime. Once you establish the trust, you transfer the assets you plan to donate and the charity acts as trustee. The charity manages the assets on your behalf and pays you a part or all of the income they produce. After a set period of time or at your death, whichever you specify, the assets become the property of the charity permanently.
Setting up this type of trust offers several advantages. First, the assets you transfer aren’t considered for federal estate tax considerations once you die, which can significantly reduce your estate tax if you’ve built up a sizable amount of wealth. Second, if the assets you’re planning to transfer have appreciated in value over time, you can avoid the capital gains tax by putting them in the trust. Finally, you can still claim an income tax deduction for the donations you make, less any income or dividends paid to you by the charity acting as trustee.
If you’d prefer to have the assets revert to your heirs after you’re gone, you can opt for a charitable lead trust instead. With this type of arrangement, the charity receives a percentage of the assets in the trust over a set period of time and the rest passes on to your heirs once the trust is terminated. Essentially, you miss out on the steady income from the trust during your lifetime but your beneficiaries are able to retain the assets.
When you’re not sure where to begin with getting your financial affairs in order before the new year, consulting an estate planning professional can get you started on the right path. Whether you need guidance on which documents to create or you have questions about how making financial gifts affects your yearly tax filing, contact knowledgeable estate planning attorney Jessica Grace today at (612) 326-5291 for help.