Even the most successful families create disasters for their heirs. Unless you are a tax lawyer or estate planning attorney, chances are you don't know how to properly plan for the taxes that are due on the sale of assets. A report from Fox 61 News, "Tips to avoid an income tax and estate planning time bomb," discusses how important planning and timing are to helping your heirs avoid inheriting a tax bomb.
For example, if parents decided to deed a home to their son while they are alive to protect it from long-term care costs or to avoid probate, the child may not pay the parents the fair market value of the place. If so, it's considered a gift, and a gift tax return may be required depending on the value of the home. The more the property is worth at the time of its sale, the greater the gain and the larger the tax bill would be.
These parents would unknowingly plant an income tax bill bomb for their children by gifting property during their lifetimes instead of allowing the children to inherit the property after their deaths.
However, if the parents use a revocable trust to own the home, then the residence would be passed on after death. In this scenario, the heir might not owe any income tax, provided the property was sold for what it was worth at the date of death. Speak with an estate planning attorney to look at different planning techniques to make sure your assets pass the way you intend.
Young or old, if you don't have an estate plan, have one created now. Start with the basics, and speak with an experienced estate planning attorney. Find one with an ongoing maintenance program. That way, your plan will be reviewed regularly and changes in assets, your family situation, and the law will be addressed and your family will be taken care of at your death. In addition, keep these tips in mind:
- Review and update your beneficiary designations. These will be what determine whether your assets go through the probate process. If you wish to keep down costs, minimize the time it will take to execute your plan, and keep the process out of the public record, take the time to review beneficiary designations with your estate planning attorney. For more on the importance of beneficiary designations, be on the lookout for our next blog post!
- Review and update your insurance policies. Check the amount of coverage and make sure it still meets your family's current needs. You should also check with your estate planning attorney to ensure it is included in your estate plan in a tax-efficient way and that the beneficiary designations align with your plan.
- Consider purchasing long-term care insurance to help pay for the costs of long-term care in case you and/or your spouse ever need it due to illness or injury and make sure to mention any concerns about long-term care to your estate planning attorney. You may be able to incorporate some planning protections into your estate plan if you speak with your attorney.
At a bare minimum, everyone over the age of 18 needs a Health Care Proxy and HIPPA authorizations. Our office strongly recommends revocable living trusts in many cases because trusts avoid the court's control over your assets. And while you are at it, review and update your will, including the guardian designation for any minor children.
All of these issues can be resolved with an experienced estate planning attorney. Be sure to discuss all relevant aspects of your life, including anticipated changes in health, finances and those of family members.
For more information, explore our website and contact us to schedule a consultation today!
Reference: Fox 61 News (January 4, 2016) "Tips to avoid an income tax and estate planning time bomb"