Most, if not all of us, are feeling the need to tighten our belts in the current
economic climate. Perhaps you simply are less wealthy as you see equity
in your home or the value of your 401(k) and IRA dwindle. Despite the
feeling that our belts are getting tighter, the tight economic climate is the
appropriate time to review and be sure your estate plan still makes sense.
Just because the economy is still recovering, that does not mean you get
away with putting your long-term estate planning on the shelf.
Just as you see yourself cutting costs in your day-to-day lifestyle
(shortening or canceling vacations, clipping coupons, eating out less,
driving at the speed limit to save gas), you can take steps to cut costs that
your estate might face if you neglect to plan properly. Most of these tips
apply in economic boom times just as equally as they do in economic gloom
Though you might be gone when the time comes to administer your estate,
your loved ones will still be here to clean up the mess. If you take the right
approach while you still can, you can tidy up that mess and prevent most
of your assets from the probate process which can tie up your money
and property for an extended period of time, causing headache on top of
heartache for your surviving heirs. To make matters worse, if you are the
primary source of income for your family, your accounts might be frozen
after your death, making it very difficult for your loved ones to handle their
One way to eliminate the concern over how your surviving spouse, partner,
or children will pay the bills (or how they will survive at all, given the
massive decline in many of our retirement accounts) is through a life
insurance policy. If you’re in a marriage or long-term relationship, chances
are you own your home jointly. However, if the house is mortgaged, your
survivor will still be on the hook to make the payments. Purchase enough
life insurance to cover the balance of the mortgage, and what is most likely
your largest purchase (and therefore your largest expense) can be paid off
as soon as the insurance pays out.
If you have a revocable trust, are all of your assets included in it? If you
purchased a new home or vacation property after forming your trust, be
sure the deed shows the trust as the owner. Keep in mind that a trust can
help you avoid probate for most of your assets, but it is difficult to avoid it
entirely. And avoiding probate does not mean avoiding taxes, necessarily.
Your goal in avoiding probate should be to avoid headache, not your legal
duty to pay taxes.
To that end, check the beneficiary designations on your retirement plans
and brokerage accounts. If you were recently married, divorced, or had a
child, this is very important. It is most likely that you do not want to see
your nest egg go to your remarried ex-spouse or partner, nor do you want
to neglect one or more of your children.
Review your will, as well. Are there any specific gifts that you have made to a loved one that no longer exist or that have severely depreciated? If to produce extra cash in this economy, you sold that 1963 Corvette that you left to your oldest son in your will, he will not receive any other gift in its place unless you make a revision to your will.
Do your current assets still suit your plans for distributing your estate? If you thought your husband would have enough money of his own to live on after you were gone and decided to leave your kids all your brokerage holdings, does that plan still hold water? Or is it time to reconsider?
In 2014, you can gift up to $14,000 ($28,000 if you are married) without
using any of your lifetime exemption or paying gift tax. If you’re thinking
about gifting, you need to be aware of both the possible gift tax and capital
gains consequences of doing so. Let’s say you have a stock that’s now
worth $12,000 but that cost you $5,000. If you gift that stock to your
daughter, if and when she sells it she will pay capital gains tax based upon
your original cost of $5,000.
Let’s say that instead you have a stock worth $12,000 that cost you
$17,000. If you sold that stock, you would have a $5,000 capital loss. If,
however, you gave that stock to your son and then he sold it, he would have
no capital loss. Why? There’s a special heads-I-win-tails-you-lose rule in
the Internal Revenue Code that says when you give away property that has
declined in value, in calculating a capital loss the beneficiary’s cost basis
is the lower of (1) the original cost of the property or (2) the value of the
property when it was gifted. For that reason, in the case of property that
has declined in value, you should consider selling the property first so that at least you can claim the capital loss, and then gift the proceeds to your son.