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Many folks title assets jointly with their children to try to avoid probate. Often, these folks don't realize that a transfer of assets to their children is often irrevocable, meaning it can't be changed without the express written consent of the children that the property was transferred to. In some cases, this may not prove to be a problem, since the client's relationship with their children is good, but there may be other issues that should be considered. For example, let's assume that Frank, a widower, decides to 're-title' his stock or a piece of real estate naming not only him as the owner, but he and his children as joint owners. While this method of titling could potentially avoid probate, there are other possible pitfalls. If Frank transfers ownership in his personal residence, for example, Frank could lose his capital gains tax exemption on the sale of his personal residence.
Additionally, if Frank transfers ownership of a real estate asset or stock to one of more of his children during his lifetime, and the asset appreciates in value prior to Frank's death, the heirs could end up paying capital gains taxes that they would not have paid had Frank no 're-titled' the assets in his lifetime. The bottom line is this: before 're - titling' assets to make one of your heirs a joint owner, be sure to have a clear understanding of the potential negative consequences.
In some cases, parents have regretted making gifts to their children when the children have subsequently divorced and inadvertently given half of the gift to an ex-son or ex-daughter in law. Often, courts will assume that an asset acquired during a marriage is an asset of that marriage. Give your married child a gift and, in many states, you're giving your married child's spouse half of that gift, whether that's your intention or not.
Many folks own assets that will pass to heirs according to beneficiary designations regardless of what a will might suggest. Assets in IRA's, life insurance and annuities will be passed on to the named beneficiary regardless of what a will might say. Even if you have a trust, the beneficiary designation on an IRA, a life insurance policy, or an annuity will supersede the instructions outlined in your trust. Often, this fact is not considered when putting together an estate plan and funding the plan resulting in unintended results at death and the subsequent estate settlement.
Some folks are unaware that life insurance is includable in the value of their estate. If life insurance is owned incorrectly, the policy proceeds will be included in the value of an estate and could cause the estate size to exceed the federal estate tax exemption amount. While life insurance proceeds are federal income tax free, there are circumstances and situations that can cause life insurance proceeds to be subject to estate taxes. Given a choice, many taxpayers would prefer to pay the income tax since in 2007, the top federal income tax rate is 35% and the top federal estate tax rate is 45%.
This fact can confuse many folks who are doing their estate planning and making all the decisions and choices related to doing this type of planning. The current lifetime exemption is $1,000,000 and the current estate tax exemption is $2,000,000.
So what does that mean? A tax payer can transfer $1,000,000 to heirs during his or her lifetime with no federal gift tax, but when assets are transferred at death, $2,000,000 in assets can be transferred with no federal estate tax.
That seems simple enough on the surface, but there may be one other factor to consider, if you have an IRA or other retirement plan, it may be subject to estate taxes and unpaid income taxes. This unpaid income tax is called IRD by the Internal Revenue Service. IRD, is an acronym for 'income with respect to a decedent'. The bottom line is this. Unpaid income taxes need to be paid on an IRA or other retirement plan. Since both income and estate taxes may need to be paid on an IRA or other retirement account in some situations, the IRS and congress allowed for a credit that a taxpayer's heirs can use if this is the case for them. Problem is that often taxpayers and their advisors sometimes miss this credit, resulting in overpayment of taxes.
"The real problem lies in the fact that tax practitioners might overlook the deductibility of IRD-related estate tax on a beneficiary's income tax return. If the CPA was the decedent's long-term adviser and continues in that capacity for the beneficiaries, the return will take the IRD deduction issues into account. However, if the IRD recipient uses a different accountant, he or she could potentially overlook the deduction. Unless the CPA specifically asks about the circumstances of the distribution, he or she is unlikely to handle it correctly. Preparers often simply see a distribution from an inherited IRA, report it and calculate the income tax liability - failing to take into account any associated IRD deductions."
Many folks give away appreciated assets during their lifetime not realizing that the tax basis in the gifted property is transferred with the gift, alternatively the asset could be transferred at death when the tax basis will be increased to fair market value.
Say that Joan owns shares of appreciated stock. The stock has a current market value of $100,000 and Joan has a tax basis in the stock of $25,000. If Joan gifts shares of stock to her children during her lifetime, her children will now 'inherit' Joan's tax basis meaning that if the children decide to sell the stock, they may pay capital gains taxes on the difference between the tax basis of the stock and the market value of the stock. On the other hand, if Joan doesn't gift the stock to her children during her lifetime but rather allows the children to inherit the stock at her passing, the children now get a stepped up basis. Their tax basis in the stock now becomes the market value of the stock as of the date of Joan's death. Assuming the market value of the stock was $100,000 when Joan passed away, the children could now sell the stock for $100,000 with no tax ramifications.
A written estate plan may address any or all of these issues:
In spite of the fact that many folks have a written estate plan in place that uses a vehicle like a living trust to attempt to avoid probate, these plans often fail, due to the fact that the trusts are not properly funded.
When funding a trust, it's important to understand exactly how to hold title to your assets so that these assets 'coordinate' with the trust. Often, after a trust or estate plan is developed, a client makes a change in an asset, buying or selling, and forgets to keep the trust funding in place. Failing to properly fund a trust can result in the original goals of a client not being met.
Let's face it. Not all heirs are savvy with money, or even competent for that matter. If that's not the case in your family, you're fortunate. However, in many families, there are concerns about how an heir might handle inherited assets or wealth. Or, maybe it's not the heirs a client's concerned about, maybe it's the heir's spouse.
As I mentioned earlier in this report, it's not unusual for divorces to occur. The organization, American Citizens For Divorce Reform, tracks divorce statistics closely. According to a report issued by that organization in November of 2004, 74% of the US population gets divorced every year. That same report revealed that almost 1 in 2 marriages will end in divorce.
If one of your heirs inherits assets and then later divorces, it's often true that those inherited assets are considered to be an asset acquired during a marriage and an ex son-in-law or ex daughter - in - law could end up with up to 50% of those assets.
It's often possible to address these issues in well designed estate plan.
Of course, avoiding probate through a properly funded and drafted trust may allow your estate to be settled efficiently and cost effectively, but have you considered other costs that could be incurred by your estate when it is settled?
Take for example, the cost of estate taxes. Many advisors can help you utilize the current federal estate tax exemption but don't go any further. For example, the current federal estate tax exemption (the maximum value of property that can be passed to heirs) is $2,000,000. It may be possible for a married couple to pass on $4,000,000 in assets provided the proper planning is completed. While this type of planning can be very beneficial to heirs, often it is simply not done. In order for a married couple to be able to pass $2,000,000 each to their heirs with no federal estate tax, they need to each own $2,000,000 worth of property. If a married couple owns their property jointly, this outcome can typically not be accomplished since at the death of the first spouse, all jointly held property now automatically becomes the property of the surviving spouse. This is typically the case with IRA's and other retirement accounts as well. Since spouses often name each other as beneficiaries, the surviving spouse often ends up owning these assets as well, making the estate of the surviving spouse larger than is best for tax purposes. These factors need to be carefully considered when drafting a written estate plan to help insure the desired outcome.
Even if you have an existing estate plan, you'd be wise to review it to make sure that it will perform the way that you want it to when your heirs need it to. Often, an existing written estate plan misses the mark due to the fact that it's a boiler plate document, or client situations have changed, or desired outcomes weren't completely defined when the plan was originally drafted, or an attorney or advisor wasn't aware of these estate plan design possibilities.
It's often possible to improve an estate plan as well as reduce taxes on the assets in your estate both at your passing and during your lifetime. To help you identify the savings and improvements that may exist in your situation, I'd like to invite you to get a free report, "The One Hour Personal Money Master™" report, that identifies these potential areas of savings. On top of this free report that may identify savings on taxes and other financial expenses, I'd also like to offer you a free gift. When you request your free "One Hour Personal Money Master™" report, I'll also present you with a free gift containing: Living Trust Discount Coupon - a $200.00 discount coupon that you can apply toward your legal fee for setting up a Living Trust with one of the most respected authorities on trust and estate tax planning in U.S. today - Dr. Michael Hsu. Attorney Michael Hsu has prepared over 4,000 living trusts, and thetrusts he prepared are quite different than a regular living trust prepared by many other attorneys. Dr. Michael Hsu's living trust contained a very powerful section on "Divorce and Lawsuit Protection for Children", so that your hard-earned assets will not be taken away by your children's spouses in case of a divorce or by their creditors in case of lawsuits! - Retail Value $200.00
To get your gift and your free One Hour Personal Money Master™ report simply complete the enclosed response card and return to me in the postage paid envelope that's enclosed. Let me take a moment to explain how the One Hour Personal Money Master™ report is prepared. First, I need to know a bit about you so I ask you some questions; this takes about 30 minutes. Second, with the information that you provide me, I prepare the One Hour Personal Money Master™ report. This report may identify potential savings on taxes and other financial expenses as it relates to your own personal situation. Third, I give you the report, explain my findings, identify your areas of potential savings, and answer any questions that you might have; this process takes another 25 - 60 minutes or so depending on how many questions you may have.
By now, you're probably wondering why I'm being so generous.
Why on earth would I go to all the effort of preparing a free report that may identify areas of savings on taxes and other financial expenses AND give you a FREE gift? And, why would I do such a thing with no strings attached?
The answer is simple. I know from experience that many folks can significantly improve their estate plan and reduce their taxes. You may be one of them. But, from my experience, simply telling you that isn't usually enough to get you to get up out of your chair and call me to ask me for my help. So, to prove that what I'm saying is often true, I'm willing to make you an offer that I think you'll find irresistible: a free gift and a free report outlining the areas of savings that may exist in your financial situation.
After you receive your report, you may decide to do nothing; if that's your decision, it's perfectly fine. On the other hand, if, after receiving your free gift and One Hour Personal Money Master™ report, you want to learn more about improving your estate plan and identifying areas of tax savings, I may be able to help you there as well. I specialize in helping folks with their finances, and reducing their taxes and outlay for other financial expenses as well. I make this great offer to you because some of the folks that get this gift and report eventually decide to work with me at some level. Others do not.
When you complete the enclosed response card and return it to me in the postage paid envelope that I've also enclosed, I'll give you a call to arrange a time to get the information from you that I'll need to prepare your One Hour Personal Money Master™ report. I can get this information from you either in person or by phone, whichever you choose.
Then, I'll get to work and prepare your One Hour Personal Money Master™ report. When I finish your report, I'll again get in touch to arrange a time to discuss your potential areas of savings with you and answer any questions that you might have. At that time, I'll also present you with your FREE gift.
Once you receive your report, you can take the information that I provide you and leave my office, or, you can decide to work with me at some point. It's totally up to you.
If, after reviewing your areas of savings presented to you as part of the One Hour Personal Money Master™ report, I cannot save you at least $5,000 in either income taxes or estate tax, simply let me know and I'll not only give you the gift I told you about earlier in this letter, but I'll also give you $100 for wasting your time.
I look forward to talking with you soon.