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Take Advantage of the $5.12 Million Dollar Gift Tax Exemption. . . Before It’s Too Late.

9/27/2012

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There has been a lot of media coverage about the Bush tax cuts that are set to expire on December 31, 2012 and whether they will be extended for all taxpayers or if they will be discontinued for top earners. But not nearly as much has been said about the current estate and gift tax rates that are also due to expire on December 31.
 
What we have for the next few months is, indeed, an historic opportunity in estate planning, one we have never had before and likely will never see again.
 
You may remember that, at the end of 2010, Congress put in place a two-year estate tax provision, probably with the assumption that two years would give it time to do something more permanent. In this provision was a huge gift that no one had been expecting: a $5 million gift and estate tax exemption, the highest it has ever been. It was indexed for inflation for 2012, making it even higher—$5.12 million—but for this year only.
 
Not nearly enough people have taken advantage of this. Some think it doesn’t apply to them because their net estate is less than $5.12 million, and others think they can’t use it because they don’t plan to die in 2012. But they are mistaken, and are likely missing the chance of a lifetime when it comes to estate planning.
 
Here’s why 2012 is such an incredible year for estate planning:
  • This is a combined gift and estate tax exemption, so you don’t have to die in 2012 to use it. You can use it to make gifts in 2012 and still exclude up to $5.12 million from estate taxes when you die, regardless of the amount of the estate tax exemption at that time.
     
  • This exemption is per person, so a married couple can give twice this amount, or up to $10.24 million.
     
  • Under current tax law, the $5.12 million exemption we have in 2012 will decrease to just $1 million on January 1, 2013. In addition, the top tax rate will increase from 35% in 2012 to 55% in 2013. This means that if your estate is over $1 million and you don’t plan now, more of your estate will go to pay estate taxes if you die in 2013 or later, leaving less for your loved ones.
     
  • The generation-skipping transfer (GST) tax exemption is another reason to plan this year. This tax applies when you transfer assets (by gift or inheritance) to a grandchild, great-grandchild or other person more than 37.5 years younger than you. It is equal to the highest federal estate tax rate in effect at the time and is in addition to the federal estate tax. In 2012 the exemption for the GST tax is also $5.12 million ($10.24 million for married couples) and the tax rate is 35%. Next year, the exemption will be about $1.4 million and the top tax rate will be 55%. Planning now lets you leave considerably more to grandchildren and future generations without paying this tax—or gift or estate taxes.
     
  • Current law also has income tax rates increasing in 2013.
     
  • In 2012, we have options that estate planners have come to rely upon as “standards.” For example, currently you can make gifts using life insurance, various trusts, family limited partnerships and others—often using discounted values that make your exemption go even further--and still keep control. But these may soon be history as lawmakers search for more ways to generate revenue and close perceived loopholes.
     
  • Lastly, interest rates are at historic lows and thus there has never been a better time to do intra-family loans and other interest-rate-sensitive planning.
In short, 2012 is a very favorable time for estate planning. In 2013, the laws are not nearly as favorable.
 
Of course, Congress could change the laws before January 1, but we only have to look at recent history to see how likely that may be. Starting in 2001, Congress increased the amount exempt from estate and gift taxes, from $675,000 in 2001 to $3.5 million in 2009. The intent was to give Congress time to reform these tax laws. A “stick” to motivate them was included: if Congress did not act, there would be no estate tax in 2010. Congress did not act in time, so in 2010, for one year, there was no estate tax. As a result, there were some very wealthy people who died that year (including George Steinbrenner, owner of the New York Yankees) whose estates paid no estate tax.
 
Keep in mind that even if Congress does change the law, we have no idea what the new law will look like. And it’s best to plan based on what we know—not on what we think might happen.
 
Those who have sizeable resources, and their families, stand to benefit the most from the $5.12 million exemptions. But, remember, those with net estates of more than $1 million can also benefit.
 
This once in a lifetime opportunity is about to expire. You don’t want to miss it. 

Source: EstatePlanning.com.

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Yes, Time IS Running Out to Save Unprecedented Amounts in Taxes

9/20/2012

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For the rest of 2012, every American can transfer up to $5.12 million free of federal gift, estate, and generation-skipping transfer tax. In the estate planning community this is a big deal, and estate planners are doing everything they can to motivate you to act before year end so you can take advantage of this unprecedented opportunity.
 
To understand why it is such a big deal, we only have to look at recent history. From 1987 through 2001, the federal estate tax exemption—the amount of assets an individual can leave to others without having to pay estate taxes—increased from $600,000 to just $675,000. Then the Bush tax cuts went into effect, and the exemption increased from $1 million in 2002 to $3.5 million in 2009. When Congress failed to change the law, the estate tax was repealed in 2010, so there was no estate tax on estates of those who died that year.
 
Then, at the end of 2010, just before the exemption was scheduled to revert to $1 million in 2011, Congress and the President reached an unexpected agreement. The result: a $5 million exemption for 2011 and 2012 only that applies not just to estate taxes but also to lifetime gifts and the generation-skipping transfer tax. This is important because even under the original Bush tax cuts, when the highest estate tax exemption was $3.5 million, lifetime gifts were limited to $1 million. (The amount for 2012 was adjusted for inflation, so that is how we came to have a $5.12 million exemption.)
 
Now, here’s what this means to you—and why it really is important for you to plan this year.
 
  • This law was only for 2011 and 2012. If Congress does not act to change the current law by the end of this year, the gift, estate and generation-skipping tax exemptions in 2013 will be just $1 million.
  •  very American has a $5.12 million exemption in 2012, so a married couple can transfer up to $10.24 million out of their estates.
  • You do not have to die in 2012 to use this exemption. You can use it to make gifts now, while you are living.
  • You do not have to make the transfers in cash or liquid assets or completely give away your assets. You can transfer illiquid assets like your business, or your home or other real estate, to a trust. If you transfer your home, you can continue to live there and take the tax deductions. If you transfer your business, you can do it in a way so that you can keep control and receive the income. Future appreciation of these assets will not be subject to estate tax, and current depressed values will result in favorable valuations.
  • You don’t have to use the full $5.12 million exemption to benefit. Those with $1 million to $5 million in assets can save substantial amounts. And those with less than $1 million should consider some planning to prevent future tax liability.
  • There are proven estate planning techniques available now (discounting, family limited partnerships, grantor trusts, etc.) that may soon be eliminated as Congress looks for more ways to raise revenues. Coupled with the $5.12 million exemption and historic low interest rates, families can transfer significant assets at little or no tax.
 
No one knows what will happen with the law in the future, but it is likely that the gift taxexemption will fall significantly, probably to $1 million. This is true even if the estate taxexemption stays the same or falls to a lesser number, like $3.5 million.
 
Bottom line, this really is a unique estate planning opportunity to transfer substantial assets tax-free, and it will very likely be gone on January 1, 2013. You owe it to yourself and your family to meet with your estate planning attorney as soon as possible to find out how much youcan save by planning before the end of the year.

Source: www.estateplanning.com.

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Naming A Guardian for Your Minor Child(ren)

9/17/2012

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If you have a minor child, you need to name someone to raise your child (a guardian) in the event that both parents should die before your child becomes an adult.  While the likelihood of that actually happening is slim, the consequences of not naming a guardian are great.
 
If you don’t name a guardian, a judge (a stranger who does not know you, your child, or your relatives) will decide who will raise your child without knowing whom you would have preferred.  You can’t assume the judge will automatically appoint your mother or sister to raise your children; anyone can ask to be considered and the judge will select the person he/she deems most appropriate.
 
If you have named a guardian in your will, the judge will still need to appoint the guardian, but will usually go along with your choice.  If you are divorced, the judge will usually name the other parent, but will appreciate knowing if you have any concerns about his or her parenting capabilities.
 
Choosing a Guardian
The person you name as guardian does not have to be a relative, so consider all of your options. You may, in fact, be very close with another family with whom your child is already comfortable, and you may agree to be guardian for each other’s kids if something happens to either of you.
 
As you begin to list and evaluate your candidates, consider the following:

  • Parenting style, values, and religious beliefs should be similar to your own.  If your candidates have children, observe how they are raising and disciplining them.  If they don’t have children, find out all you can about how they were raised; people tend to parent how they were parented.
  • How far away from you do they live?  Would your child have to move far away from a familiar school, friends, and neighborhood at an emotionally difficult time?
  • How comfortable with them is your child now?
  • How prepared emotionally are your candidates to take on this added responsibility?  Someone who is single may resent having to care for someone else’s children.  Someone with a houseful of their own kids may not want more around or they may welcome the addition.
  • Do they have the time and energy?  Your parents may have the time, but consider if they would have the energy to keep up with a toddler or teenager.  Someone who works long hours may not seem the ideal candidate at first, but they may be willing to change their priorities if needed.
  • If your candidates have children of their own, would your child fit in or feel lost?
  • Consider the age of your child and of your candidates.  An older guardian may become ill or even die before your child is grown.  A younger guardian, especially an adult sibling, may be concentrating on finishing college or starting a career.  If your child is older and more mature, he or she should have some input into your decision.
  • Is your selection willing to serve?  Ask.  Don’t assume they will take the job if it comes to them.
The Financial Side
Raising your child should not be a financial burden for the person you select as guardian and a candidate’s lack of finances should not be the deciding factor in your decision.  You will need to provide enough money (from your own assets, from life insurance, or both) to provide for your child the way you want.  You may even want to help the guardian buy a larger car or add onto their existing home, if needed.
 
Consider naming someone else to handle the finances.  Naming one person to raise the children and handle the money can make things simpler, because the guardian would not have to ask someone else for money.  The best person to raise your child may not be the best person to handle the money and it may be tempting for them to use this money for their own purposes.
 
Many parents set up a trust for the child’s inheritance (so the child will not inherit everything at age 18) and name someone other than the guardian to be the trustee of the trust.  There can be disagreements over expenses (for example, whether the child should go to public or private school), so be sure to name two people who can work together for the best interests of your child.
 
Provide a Letter of Instruction
Consider writing a letter to the guardian explaining your expectations and hopes for your child’s upbringing.  Include your desires about your child’s education, activities, and religious training.  Read and update your letter every year as your child grows and interests develop.  You may also want to discuss these with your selected guardian.
 
Having a Hard Time Making a Decision?
If you are having trouble making a decision, list the pros and cons for each candidate.  If you and your child’s other parent are having trouble coming to a mutual agreement, try making your own separate lists of top candidates and look for some common ground. Be sure to name at least one alternate in case your first choice becomes unable to serve.
 
Keep in mind that the person you select as guardian will probably not raise your child.  The odds are that at least one parent will survive until your child is grown.  You are simply being a good parent here and planning ahead for an unlikely, but possible, situation.  Next, realize that no one but you will be the perfect parent for your child, so you are probably going to have to make some compromises in some areas.  Also, you can change your mind.  In fact, you should review and change the guardian as your child grows and if the guardian’s situation changes.
 
Don’t wait too long.  Remember, if you do not name someone to raise your child and the unlikely does happen, a total stranger will decide who will raise your child without your input. 

Source: www.estateplanning.com.

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Life Insurance: How Much Do You Need and What Kind Should You Buy?

9/13/2012

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You probably already know that life insurance can provide for your children, your spouse, a sibling, aging parents and others if you should die while they are depending on you to support them. Life insurance proceeds can provide extra income to help pay ongoing household bills and child care; pay off a mortgage, credit cards and other debts; pay for your children’s college; and pay your funeral costs and other final expenses, among other things.
 
A simple way to determine how much life insurance you need is to take the amount of income you want to replace and multiply it by the number of years you want to replace it. Keep in mind that there will be no personal expenses for you—food, clothing, travel, insurance and even taxes on your income—if you are no longer here. So instead of using the amount you earn, use the amount you actually contribute to your household. If the person to be insured is a stay-at-home parent and does not earn an income, figure out how much will be needed to pay someone to take over those responsibilities.
 
Now, how long will you want to replace this income? You probably want to provide for your family until your children are grown and out of college. You may want your spouse to have enough to last until he/she can collect on social security and other retirement benefits. Let’s say, then, you are 40 and you want life insurance that will provide for your family for 25 years. Take the amount of annual income you want to replace and multiply that by 25. That’s how much life insurance you want. This amount is called the “face value” or “death benefit.”
 
This may be a pretty big number. So, now the issue becomes how much life insurance you can afford and that will depend, in part, on the kind of life insurance you purchase. Basically, there are two kinds: term and permanent. (Permanent can include sub-categories like whole life, universal life and variable universal life, but for now we will keep to a basic explanation of term and permanent.)
 
Term life insurance covers you for a set number of years, or term. It is pure insurance, and is similar to the insurance you have on your car or home. It can be a good choice if you want coverage for a certain number of years, for example until your kids are out of college or your mortgage is paid off. It is also less expensive than permanent insurance, and is least expensive when you are young and healthy. For these reasons, term life insurance is a popular choice for young families.
 
Permanent life insurance, on the other hand, does not expire at the end of a specified term (assuming you continue to pay the premiums, of course). Generally, the coverage stays in effect during your lifetime and the premium, depending upon the type of policy, can either stay the same or fluctuate based upon the financial performance of the policy. Permanent policies also build cash value over time that can be borrowed from the policy (reducing the proceeds paid at your death), can be used to help pay the premiums, or can be refunded to you if you cancel the policy.
 
The amount you pay for life insurance must be an expense you can live with. Buying life insurance to provide for your family for 20 or 25 years may be out of the question, even with term insurance. A viable alternative is to cover five to seven years of expenses, which will give your family time to adjust and cope with your absence. If you can afford more, there will always be a need, like paying for college and paying off the mortgage.
 
Life insurance proceeds are exempt from income taxes and can be exempt from probate. Depending on how much insurance you decide you need, a life insurance trust can keep the proceeds from being subject to estate taxes. Life insurance can also be used in business succession planning (in the event of your disability, retirement, and/or death) and in estate planning. An experienced and qualified professional can help you determine the correct uses and amounts of life insurance for your personal and financial circumstances. 

Source: www.estateplanning.com.

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    Peterson Estate Planning ensures that it remains apprised of current trends that affect its clients' estate planning needs.  Relevant articles written by its attorneys or by authors on the exceptional resource, EstatePlanning.com, are posted on this blog from time to time to inform clients.

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Peterson Estate Planning PLLC provides a full range of professional estate and business planning services to Utah, Nebraska, and California families and business owners. Planning for your future and ultimately your passing is not necessarily an easy or enjoyable undertaking. However, to ensure that your valuables and values pass in the proper fashion, a little planning with a qualified attorney now can save you and your family many problems later. Contact us today to begin the process of establishing greater security and peace of mind for you and your loved ones.

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