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Giving away assets during your life will help reduce the size of your taxable estate, which is beneficial if you have a large estate that could be subject to estate taxes. For 2016, the lifetime gift and estate tax exemption is $5.45 million (twice that for married couples with proper estate planning strategies in place).
Even if your estate tax isn’t large enough for estate taxes to be a concern, there are income tax consequences to consider. Plus it’s possible the estate tax exemption could be reduced or your wealth could increase significantly in the future, and estate taxes could become a concern.
That’s why, no matter your current net worth, it’s important to choose gifts wisely. Consider both estate and income tax consequences and the economic aspects of any gifts you’d like to make.
Here are three strategies for tax-smart giving:
1. To minimize estate tax, gift property with the greatest future appreciation potential. You’ll remove that future appreciation from your taxable estate.
2. To minimize your beneficiary’s income tax, gift property that hasn’t appreciated significantly while you’ve owned it. The beneficiary can sell the property at a minimal income tax cost.
3. To minimize your own income tax, don’t gift property that’s declined in value. Instead, consider selling the property so you can take the tax loss. You can then gift the sale proceeds.
For more ideas on tax-smart giving strategies, contact us at 952-979-1140.
Powers of attorney are critical components of an effective estate plan. After you’ve executed powers of attorney, it’s important to review them periodically — at least every five years and preferably more frequently — and consider executing new ones.
A sound estate plan should include two types of powers of attorney:
- Financial power of attorney. Also referred to as a power of attorney for property, this document appoints someone to make financial decisions or execute transactions on your behalf under certain circumstances. For example, a power of attorney might authorize your agent to handle your affairs while you’re out of the country or, in the case of a “durable” power of attorney, incapacitated.
- Health care power of attorney. This document, which also may go by other names, appoints someone to make medical decisions on your behalf in the event an illness or injury renders you unconscious or otherwise incapacitated and unable to make decisions for yourself.
4 reasons to review
Here are four reasons to review your powers of attorney regularly:
- Your wishes may have changed.
- The agent you designated to act on your behalf may have died or otherwise become unavailable. Or you may no longer trust the person you chose.
- If you designated your spouse as your agent and later divorced, you probably want to designate someone else.
- If you’ve since moved to another state, your powers of attorney may no longer work the way you intended. Certain terms have different meanings in different states, and states don’t all have the same procedural requirements. Some states, for example, require durable powers of attorney to be filed with the local county recorder or some other government agency.
Even if nothing has changed since you signed your powers of attorney, it’s a good idea to sign new documents every few years. Because of liability concerns, some financial institutions and health care providers may be reluctant to honor powers of attorney that are more than a few years old. We’d be pleased to review your powers of attorney today and, if necessary, assist in executing new ones.
With the gift and estate tax exemption at $5.45 million in 2016, you may be less concerned about these taxes. But if you don’t take advantage of making tax-free direct payments of tuition and medical expenses, you’re missing a valuable opportunity to reduce your potential gift and estate tax exposure down the road.
Leveraging the break
Federal tax law allows you to pay tuition and medical expenses on behalf of your children or other loved ones without incurring gift tax or using up any of your gift and estate tax exemption. This may not seem like much if your net worth is well under the current exemption amount. But what if your wealth grows beyond the exemption amount in the coming years and decades? Or, what if lawmakers decide to reduce the exemption? Either way, your estate could end up with a hefty tax bill, leaving less for your family after your death.
You may already be making $14,000 per recipient annual exclusion gifts to your children, grandchildren or other loved ones, which can help minimize your taxable estate. But if estate tax is a concern, also consider paying some or all of their tuition and medical expenses. Unlike the annual exclusion, there’s no limit on the amount of tuition or medical expenses you can pay tax-free. It’s a powerful technique for transferring wealth gift-tax-free while also reducing the size of your estate.
Making direct payments is critical
A few caveats: This strategy works only if you make payments directly to a qualifying educational institution or medical provider — advancing the funds to a loved one or reimbursing previously paid expenses doesn’t count. The break covers tuition at all grade levels, but not payments for room and board, books, supplies, or other nontuition expenses. And it doesn’t apply to medical expenses reimbursed by insurance.
We can help ensure that you’re taking full advantage of your $5.45 million gift and estate tax exemption. Get in touch with us today.