Estate Planning Bits

Important estate and tax planning numbers to know

I thought it may be helpful to provide some numbers and figures for 2007 that will probably not change significantly in 2008. Nevertheless, the following is a list of important numbers relative to every person’s plan:

1. Maximum capital gains rate (long-term): 15%
2. Maximum capital gains rate (short-term): Ordinary income rate of taxpayer
3. Maximum Social Security benefit: $2,116 per month (for an individual who reaches full retirement age in 2007)
4. Income tax threshold on Social Security benefits (single individual): Minimum 25,000
5. Married individual filing joint return: $32,000 (threshold)
6. Social Security Medicare tax: 1.45%
7. Retirement Plan Contributions: Maximum to be deferred $15,500
8. Catch-up contribution if 50 or older: $5,000
9. Maximum annual contribution to a defined contribution plan: $45,000
10. IRA required distributions: Must begin by April 1 following year the IRA owner turns 70½
11. Roth IRA required distribution: Distribution required only after death of the IRA owner
12. Estate tax limitations for leaving to spouse who is a United States citizen: Unlimited
13. Single individual: $2,000,000 (estate tax exemption)
14. Amount a person may gift annually without filing gift tax returns: $12,000 to unlimited number of donees
15. Amount of gift which may be given without any gift tax: $1,000,000 plus annual exclusions
16. Income tax standard deduction:
    Single person $5,150
    Married couple $10,300
    Head of Household: $7,550
    Married filing separately: $5,150
17. Limitation before attaining 28% for income taxes:
    Single person: $77,100
    Married filing jointly: $128,500
    Head of Household: $110,100
    Trust and estates: $5,000

When reviewing these figures, it is important to contact your financial advisor and accountant to ensure that you understand the relationship between the numbers and your tax status for this year as well as next year, so that pre-planning may be attended to.

By: Hyman G. Darling, Esquire

Estate planning issues for blended families

With so many people getting divorced and remarrying, there is a significant need to ensure that planning is completed properly for the so-called blended families. When there are children from each first marriage and then children born of the new union, each child may have different needs which should be properly addressed. In addition, the respective parents of these children may wish a portion of their own funds to be left to or for the benefit of their own children rather than children of their current spouse.

In these situations, it is important to address all personal and financial issues to ensure that your goals are being met, while at the same time addressing all tax related issues. In many situations, you may merely leave funds to a child at the exclusion of your surviving spouse via joint ownership, beneficiary designation, or through a payable-on-death or transfer-on-death designation. However, it may be a better alternative to create a trust that will benefit both your spouse and children. Upon the death of your spouse, the funds will be allocated in proportionate shares to all of your children or possibly only for the benefit of certain children.

For example, if you have younger children, then additional funds or a percentage of the total assets should be allocated for the benefit their education, as older children may already have attended college. In these situations, it is important to not only address the issues and needs of the children with specific allocations, but you must also elect a trustee. This person or entity, such as a trust department of a bank, is charged with the responsibility of investing the funds, distributing funds at their discretion and attending to all other trustee duties in a fiduciary capacity.

Often, a family member is chosen to serve as the trustee, but this person may have a bias toward one of the beneficiaries, and this personal bias could have an adverse affect on the other beneficiaries. Therefore, it may be more prudent to select two or more family members to serve as a committee. In some situations, it may be more prudent to select an independent third party trustee in order to maintain the unbiased and independent process of making discretionary payments to or for the benefit of any beneficiary.

It is also important to select the trustee who will invest the assets of the trust properly, prepare and file the necessary income tax returns and also determine the most appropriate tax related investments for the assets of the trust.

You should also review the beneficiary designations of your life insurance, retirement plans, annuities, and other assets to be sure that these assets will be left to the individuals you select within your estate plan rather than merely naming your surviving spouse, who may then leave assets to his or her children to the exclusion of your own children from a first marriage. In some jurisdictions, a Contract to Make a Will is a legal document that prevents your surviving spouse from reallocating the assets by Will to his or her children. In other cases, a Prenuptial Agreement or Postnuptial Agreement may be completed to conclusively establish the ultimate distribution of your assets upon your and your spouse’s death.

In addition to all of the financial issues, there are also emotional issues which must be sorted out before making final decisions. Oftentimes, a counselor may be needed to assist your attorney and accountant in the most appropriate emotional and financial decision-making process in order to prepare a plan that will be successful for you and the next generation.

By: Hyman G. Darling, Esquire

2007 Year End Tax Update

With all of the recent media coverage relative to the primary elections in 2008, one can hardly dismiss the potential for change in taxes. While it is impossible to predict what will occur, many forecast that there will be changes that will affect most individuals.

The first potential change is in capital gains rates. Currently, the maximum capital gains rate is 15% for long-term gains. The maximum rate has only been in effect since 2003, but if a change in the law does not get enacted, the capital gains rate could effectively be as high as 39.6%.

The next issue is that dividends currently cap at a 15% maximum capital gains rate if they are qualified. Again, unless legislation is enacted to change the sunset provision of the current law, capital gains rates will also drift back to 39.6%, at the highest bracket.

Estate tax rates are also anticipated to change, and decedents dying in 2007 and 2008 currently have a $2 million exemption in most situations, (when the spouse is a United States citizen.) The maximum rate in 2007 and 2008 is 45%, which also carries through into 2009.

However, the exemption in 2009 rises to $3.5 million. And in 2010 there is no estate tax that would be due on any size estate, regardless of who the assets are left to upon death. But in 2011, the exemption drops (or “rises”) to $1 million per person, with the effective highest rate reverting to the 55% tax bracket, which was in effect in 2001.

While again, it is impossible to predict what will happen in any other future year, it is anticipated that there should be some legislation to continue the credit of at least $2.5 million, if not higher, for all decedents rather than providing them with only a $1 million exemption, which is quite regressive from where the tax exemption was in prior years. Also, whether the Congress is controlled by Democrats or Republicans, it is generally hoped that the tax rates will also fall, since it is highly unlikely that they will be eliminated.

Therefore, it is very important to maintain close contact with your estate planning attorney and your accountant to ensure that whenever a change occurs, you will have the opportunity to adjust your estate plan accordingly.

As for income tax planning, it is also important to be aware of the proposed changes so that options, such as shifting of income from one year to another, the payment of deductions at the end of the year, or the beginning of the following year and the deferring of income may be reviewed to maximize tax reductions.

By: Hyman G. Darling, Esquire