When it comes to estate plan­ning, women have unique con­cerns.  The fact is women live longer than men.  That’s impor­tant for sev­er­al rea­sons.  First, you’ll not only need your assets to last longer, but you’ll also need to plan for poten­tial inca­pac­i­ties due to declin­ing health.  Sec­ond, it means that if your hus­band or sig­nif­i­cant oth­er dies before you, you’ll like­ly inher­it their estate.  Final­ly, though, it means that to a large extent, you will prob­a­bly have the last word about the final dis­po­si­tion of all the assets you’ve accu­mu­lat­ed dur­ing your rela­tion­ship.  

What is an estate plan?  An estate plan is a map that reflects the way you want your per­son­al and finan­cial affairs to be han­dled in case of your inca­pac­i­ty or death.  It is espe­cial­ly need­ed if you have minor chil­dren; your net worth exceeds the fed­er­al trans­fer tax exemp­tion amount ($5,250,000 in 2013) or, if less, your state’s exemp­tion amount; you own prop­er­ty in more than one state; finan­cial pri­va­cy is a con­cern; or if you own a busi­ness.  

Basic estate plan­ning calls for

  • A health-care direc­tive, where you decide who will be respon­si­ble for mak­ing sound deci­sions about your health when you are unable to. 
  • A liv­ing will that cov­ers the types of med­ical treat­ment you would want, or not want, under cer­tain cir­cum­stances.  
  • A durable pow­er of attor­ney for health care (health-care proxy) that lets one or more fam­i­ly mem­bers or oth­er trust­ed indi­vid­u­als make med­ical deci­sions for you.  
  • And, if you choose, a DNR (do not resus­ci­tate) order that is a legal form, signed by both you and your doc­tor, that gives hos­pi­tal staff per­mis­sion to car­ry out your wish­es.  

Healthy Wealthy and Wise womenThere are also oth­er legal devices that should be includ­ed in an estate plan to help oth­ers man­age your prop­er­ty when you are unable to includ­ing; joint own­er­ship, durable pow­er of attor­ney and liv­ing trusts.

For high net worth tax­pay­ers, a more assertive estate plan­ning strat­e­gy may be a con­sid­er­a­tion in order to pro­tect their assets from poten­tial­ly exces­sive tax­a­tion.   You’ll want to con­sid­er whether these con­cepts and strate­gies apply to your spe­cif­ic cir­cum­stances.   

 

  

Transfer Taxes

When you trans­fer your prop­er­ty dur­ing your life­time, or at your death, your trans­fers may be sub­ject to fed­er­al gift tax, fed­er­al estate tax, and fed­er­al gen­er­a­tion-skip­ping trans­fer (GST) tax.  (For 2013, the top estate and gift tax rate is 40%, and the GST tax rate is 40%.)  Your trans­fers may be sub­ject to state tax­es. 

Fed­er­al gift tax

Gifts you make dur­ing your life­time may be sub­ject to fed­er­al gift tax.  How­ev­er, not all gifts are sub­ject to the tax.  You can make annu­al tax-free gifts of up to $14,000 per recip­i­ent.  Mar­ried cou­ples can effec­tive­ly make annu­al tax-free gifts of up to $28,000 per recip­i­ent.  You may also make tax-free gifts for qual­i­fy­ing expens­es paid direct­ly to edu­ca­tion­al or med­ical ser­vice providers.  And you can also make deductible trans­fers to your spouse and to char­i­ties.  There is a basic exclu­sion amount that pro­tects a total of up to $5,250,000 from gift tax and estate tax in 2013.  

Fed­er­al estate tax

Prop­er­ty you own at death is sub­ject to fed­er­al estate tax.  As with the gift tax, you can make deductible trans­fers to your spouse and to char­i­ty, and there is a basic exclu­sion amount that pro­tects up to $5,250,000 from tax in 2013.  

Porta­bil­i­ty

The estate of some­one who dies in 2011 or lat­er can elect to trans­fer any unused applic­a­ble exclu­sion amount to his or her sur­viv­ing spouse; a con­cept referred to as porta­bil­i­ty.  The sur­viv­ing spouse can use this decreased spousal unused exclu­sion amount (DSUEA), along with the sur­viv­ing spouse’s own basic exclu­sion amount, for fed­er­al gift and estate tax pur­pos­es.  For exam­ple, if some­one dies in 2011 and the estate elects to trans­fer $5,000,000 of the unused exclu­sion to the sur­viv­ing spouse, the sur­viv­ing spouse effec­tive­ly has an applic­a­ble exclu­sion amount of $10,250,000 to shel­ter trans­fers from fed­er­al gift or estate tax in 2013.  

Fed­er­al gen­er­a­tion-skip­ping trans­fer (GST) tax

The fed­er­al GST tax gen­er­al­ly applies if you trans­fer prop­er­ty to a per­son two or more gen­er­a­tions younger than you (for exam­ple, a grand­child).  The GST tax may apply in addi­tion to any gift or estate tax.  Sim­i­lar to the gift tax pro­vi­sions above, annu­al exclu­sions and exclu­sions for qual­i­fy­ing edu­ca­tion­al and med­ical expens­es are avail­able for GST tax.  You can pro­tect up to $5,250,000 with the GST tax exemp­tion in 2013. 

 

Income Tax Basis

Gen­er­al­ly, if you give prop­er­ty dur­ing your life, your basis (gen­er­al­ly, what you paid for the prop­er­ty, with cer­tain up or down adjust­ments) in the prop­er­ty for fed­er­al income tax pur­pos­es is car­ried over to the per­son who receives the gift.  So, if you give your $1 mil­lion home that you pur­chased for $50,000 to your broth­er, your $50,000 basis car­ries over to your brother—if he sells the house imme­di­ate­ly, income tax will be due on the result­ing gain. 

In con­trast, in you leave prop­er­ty to your heirs at death, they get a “stepped-up” (or “stepped-down”) basis in the prop­er­ty equal to the property’s fair mar­ket val­ue at the time of your death.  So, if the home that you pur­chased for $50,000 is worth $1 mil­lion when you die, your heirs get the prop­er­ty with a basis of $1 mil­lion.  If they then sell the home for $1 mil­lion, they pay no fed­er­al income tax.  

 

Lifetime Giving

Mak­ing gifts dur­ing one’s life is a com­mon estate plan­ning strat­e­gy that can also serve to min­i­mize trans­fer tax­es.  One way to do this is to take advan­tage of the annu­al gift tax exclu­sion, which lets you give up to $14,000 to as many indi­vid­u­als as you want gift tax free in 2013.  As not­ed above, there are sev­er­al oth­er gift tax exclu­sions and deduc­tions that you can take advan­tage of.  In addi­tion, when you gift prop­er­ty that is expect­ed to appre­ci­ate in val­ue, you remove the future appre­ci­a­tion from your tax­able estate.  In some cas­es, it may even make sense to make tax­able gifts to remove the gift tax from your tax­able estate as well. 

 

Trusts

There are a num­ber of trusts that are often used in estate plan­ning.  Here is a quick look at a few of them.  

Revo­ca­ble trusts.  You retain the right to change or revoke a revo­ca­ble trust.  A revo­ca­ble trust can allow you to try out a trust, pro­vide for man­age­ment of your prop­er­ty in case of your inca­pac­i­ty, and avoid pro­bate at your death. 

Mar­i­tal trusts.  A mar­i­tal trust is designed to qual­i­fy for the mar­i­tal deduc­tion.  Typ­i­cal­ly, one spouse gives the oth­er spouse an income inter­est for life, the right to access prin­ci­pal in cer­tain cir­cum­stances, and the right to des­ig­nate who receives the trust prop­er­ty at his or her death.  In a QTIP vari­a­tion, the spouse who cre­at­ed the trust can retain the right to con­trol who ulti­mate­ly receives the trust prop­er­ty when the oth­er spouse dies.  A mar­i­tal trust is includ­ed in the gross estate of the spouse with the income inter­est for life. 

Cred­it shel­ter bypass trusts.  The first spouse to die cre­ates a trust that is shel­tered by his or her applic­a­ble exclu­sion amount.  The sur­viv­ing spouse may be giv­en inter­ests in the trust, but the inter­ests are lim­it­ed enough that the trust is not includ­ed in his or her gross estate. 

Grantor retained annu­ity trusts (GRAT).  You retain a right to a fixed steam of annu­ity pay­ments for a num­ber of years, after which the remain­der pass­es to your ben­e­fi­cia­ries, such as your chil­dren.  Your gift of a remain­der inter­est is dis­count­ed for gift tax pur­pos­es. 

Char­i­ta­ble remain­der uni­trusts (CRUT).  You retain a stream of annu­ity pay­ments for a num­ber of years (or for life), after which the remain­der pass­es to char­i­ty.  You receive a cur­rent char­i­ta­ble deduc­tion for the gift of the remain­der inter­est.  

Char­i­ta­ble lead annu­ity trust (CLAT).  A fixed stream of annu­ity pay­ment ben­e­fits a char­i­ty for a num­ber of years, after which the remain­der pass­es to your non-char­i­ta­ble ben­e­fi­cia­ries, such as your chil­dren.  Your gift of a remain­der inter­est is dis­count­ed for gift tax pur­pos­es.  

 

Life Insurance

Life insur­ance plays a part in many estate plans.  In a small estate, life insur­ance may actu­al­ly cre­ate the estate and be the pri­ma­ry finan­cial resource for your sur­viv­ing fam­i­ly mem­bers.  Life insur­ance can also be used to pro­vide liq­uid­i­ty for your estate, for exam­ple, by pro­vid­ing the cash to pay final expens­es, out­stand­ing debts, and tax­es, so that oth­er assets don’t have to be liq­ui­dat­ed to pay these expens­es.  Life insur­ance pro­ceeds can gen­er­al­ly be received income tax free. 

Life insur­ance that you own on your own life will gen­er­al­ly be includ­ed in your gross estate for fed­er­al estate tax pur­pos­es.  How­ev­er, it is pos­si­ble to use an irrev­o­ca­ble life insur­ance trust (ILIT) to keep the life insur­ance pro­ceeds out of your gross estate. 

With an ILIT, you cre­ate an irrev­o­ca­ble trust that buys and owns the life insur­ance pol­i­cy.  You make cash gifts to the trust, which the trust uses to pay the pol­i­cy pre­mi­ums.  (The trust ben­e­fi­cia­ries are offered a lim­it­ed peri­od of time to with­draw the cash gifts.)  If struc­tured prop­er­ly, the trust receives the life insur­ance pro­ceeds when you die, tax free, and dis­trib­utes the funds accord­ing to the terms of the trust.  

Know­ing what options are avail­able and how each of these options can impact you and your finan­cial plans are crit­i­cal in mak­ing the right deci­sions.  A finan­cial pro­fes­sion­al can review your cir­cum­stances, help you sort through your options, and help devel­op a plan that’s right for you. 

Read the Worth­while Women Series