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Estate Planning

Making The Most of Your Efforts

Estate planning is the process of preserving your assets to maximize the benefits to you and your heirs. Due to its complexity, estate planning is often misunderstood. The following information represents a summary of eight of the more common myths associated with estate planning that will help make these difficult concepts easier to understand

Myth 1: New tax laws have eliminated the need for estate tax planning.

The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (the 2010 Tax Act) enacted some of the most dramatic, unexpected, and significant changes in the estate tax system’s history. The 2010 Tax Act raised the exemption amount (the amount one can pass estate tax-free to a non-spouse) to $5 million ($10 million if married). The American Taxpayer Relief Act of 2012 (the 2012 Tax Act) made these changes permanent and indexed the exemption amount for inflation. As a result, the estate tax will affect very few estates. While many of the provisions under the 2012 Tax Act are considered permanent, it does not mean that these provisions cannot be changed by Congress in the future. Therefore building flexibility into your estate plan is critical.

Myth 2: Estate planning-it’s only for wealthy people.

While the financial aspects of estate planning may not apply to everyone, the “people” aspects of estate planning do, such as:

• Who will take care of my children if something happens to me?
• How will the special needs of a disabled child or elderly relative be handled?
• Who will take care of my affairs if I am incapacitated?
• How can I ensure that my wishes about medical care and life support are respected?

All of these issues can be addressed through estate planning and are concerns that most people have, not just the wealthy. With proper estate planning, you can substantially reduce or eliminate your estate tax liability. In addition, you may be able to minimize probate costs and administrative expenses.

Myth 3: If I give everything I own to my children before I die, I won’t have to worry about estate taxes.

Many people are unaware that there is a federal gift tax, as well as an estate tax. The lifetime gift tax exclusion was increased to $5 million under the 2010 Tax Act, and the 2012 Tax Act made the increase permanent and index it for inflation. Additionally, there is an annual gift tax exclusion available that allows substantial amounts of property to be given away without incurring gift tax. To be successful, a gifting strategy should begin early since no more than $14,000 (in 2016; adjusted for inflation periodically) per year can be given to any one person without exceeding the annual gift tax exclusion ($28,000 if your spouse chooses to participate in the gift either by making annual exclusion gifts of his/her own or by “gift splitting” if he/she does not have sufficient assets.)

If a gifting program is in effect for several years, or if gifts are made to a large number of individuals, it is possible to transfer significant amounts of wealth to succeeding generations with no gift or estate taxes.

Myth 4: I don’t have to worry about estate taxes-everything I own is either in joint tenancy or has a named beneficiary.

While the increased Federal estate tax exemption may eliminate the estate tax as a worry for most. state estate taxes may apply. The titling of an asset may not remove the asset from being included in your estate. While some of your assets are not subject to probate, all assets that you own are included in your estate. For example, a home held in joint tenancy with a child would pass free of probate, but the home’s value would still be included in the gross estate, unless the child had provided the money to purchase and maintain the home. Similarly, proceeds of your life insurance policy pass to the beneficiary outside of the probate process, but are still includible in your gross estate for tax purposes. The same is true of assets you own that have a named beneficiary, such as individual retirement accounts and pension plans. Consider too, ownership of property in joint tenancy can present a difficult situation if you become incapacitated. In this instance, it is probable that without court approval, the other joint tenant will not be able to liquidate those assets to pay for your expenses. Protection from this can usually be provided by naming a financial representative with durable power of attorney for property or by placing your property in a living trust.

Myth 5: A husband and wife can wait until after one dies to worry about saving estate taxes.

An effective way to reduce estate taxes is to take advantage of the applicable exclusion allowed by the Internal Revenue Code. When the exemption was lower, it made sense for married couples to plan so each spouse’s exemption would be used no matter who passed away first. A new concept called “Portability” was introduced under the 2010 Tax Act and was made permanent under the 2012 Tax Act. Portability allows a spouse to use the unused exclusion of his/her predeceased spouse. As a result. a couple may decide that they don’t need to do planning to make sure each spouse’s exemption is used. However, portability must be elected. The election to transfer the unused exemption amount must be made on a timely filed estate tax return. This means that many individuals will need to file an otherwise unnecessary return merely to make the election. If a couple does not plan and relies on the portability provision after the death of the first spouse, portability may not be available and the first spouse’s exemption can be lost. Therefore, it is best to review your estate plan with a qualified attorney while both spouses are alive to be sure the best plan is put in place no matter what the estate tax law is.

Myth 6: I have a living trust, so I don’t need a will.

This myth is simply not true. While trusts are valuable planning tools, you still need to have a will. These two documents accomplish very different things. For example, only a will can appoint an executor for your estate and designate a guardian for your children. Even if a living trust is part of your estate plan, you still need a will to “pour over” any assets remaining in your estate (that have not been previously transferred into a living trust) into your living trust.

Myth 7: I already have a will, so I don’t have to worry about estate taxes.

Wills are very important documents and are part of any comprehensive estate plan. But. wills do not shield your estate from having to pay taxes. Remember, regardless of which assets pass through probate, everything you own at your death (your gross estate) is counted when calculating the estate tax liability.

Myth 8: I’m single, so I don’t need to consider estate planning.

Actually, single people should be just as concerned about estate planning as married people. For most married people, there’s a sense of obligation to support the surviving spouse and children, and the state intestacy statutes reflect that obligation. However, a single person may have no clear obligation to support any particular person. therefore, you need to specify exactly to whom you’d like to pass your assets. Single parents need to be concerned with custody issues, as well as who will manage the property left for minor children. In these cases, it’s even more important to consider the use of trusts, and to evaluate each asset to make sure the appropriate beneficiary has been selected (especially for life insurance, pension plans, etc.).

Allstate is committed to helping provide peace of mind through managing the risks you face. We believe that a proper estate plan is a critical element in the management of your risks. And, for this reason, we encourage you to periodically review any existing estate plans. Your financial professional can get you started by providing a complimentary and objective estate tax analysis. Together you’ll discuss your estate liquidity needs based on the information provided concerning your individual situation. Under no circumstances are you obligated to purchase anything from us as a result of receiving an estate analysis, but an analysis today can be worth much more tomorrow!