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Estate Planning Misconceptions to Avoid

Posted on June 29, 2012 by

Many people I come into contact with feel they need not worry about estate planning to reduce federal taxes because “they’re not that rich”.  While that may hold true based on remnants of the Bush tax cuts which sunset on December 31, 2012, 2013 is a whole new game.  That game depends upon what Congress does between now and then, and who is in the White House come January.  Consider these examples:  If one of my clients passes away during 2012, his/her estate is exempt from the estate tax so long as the estate does not exceed $5 million dollars.  Every dollar beyond the $5 million is taxed at 35%.  However, if the same client dies in 2013, the figures are quite different:  the estate is exempt from the estate tax so long as the estate does not exceed $1 million dollars, and every dollar thereafter is taxed at the rate of 55%.  While the majority of my clients need not worry about having an estate in excess of $5 million, the $1 million mark is problematic, which leads into the next misconception.  Many clients believe that life insurance proceeds are not taxable.  That is only partly true, and failing to correct this view can really cost one’s beneficiaries.  Life insurance proceeds are not taxable to the designated beneficiary; however, the proceeds of a life insurance policy do count toward the decedent’s gross estate for estate tax purposes.  Considering that most people have a term life policy of at least $500,000 provided by an employer or through a private policy, $1 million dollars is not far away.  You have more than you think!  Adding the value of the decedent’s home and other real estate, bank accounts, stocks, annuities, retirement accounts, and significant personal property quickly adds up, and pushes the decedent’s estate into a taxable situation.  Whether the decedent’s estate is taxed at 35% or 55%, that takes a huge chunk out of what is left to the decedent’s family and other devisees under his/her will.  There are estate planning techniques to mitigate estate taxes, which are not all that difficult to implement, but doing so requires a tax planned will and trust.  None of us knows what Congress will do about the estate tax in the coming months, but it will be a subject of partisan debate during election season. Uncertainty about the estate tax is unsettling, yet we can speculate that one of a few things might happen: (1) Congress will do nothing, and the estate tax will revert to a taxable rate of 55% for estates over $1 million; (2) Congress will vote to keep things status quo until later; (3) Congress will eliminate the estate tax altogether and we can all stop worrying (not likely); or (4) Congress may implement the Obama administration’s position, which is to tax estates in excess of $3.5 million at a rate of 45%.  Trying to read the tea leaves or look into a crystal ball rarely helps, but working with your family attorney to create a custom made estate plan is action that will yield results.  Estate plans, like a football team playbook, need to be evaluated and tweaked on a regular basis to have a winning team.  For estate planning purposes, the team consists of you, your CPA and your attorney.

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