"The real reasons to do estate planning are to take care of ourselves and our families the way that we want to."
In a review of their finances for the New Year, many well-meaning parents may unknowing plant a tax bomb for their children in their estate plan. Fox 61 News' recent report, "Tips to avoid an income tax and estate planning time bomb," explains how timing is critical to gain the most from an inheritance. Simply put, the taxes due on the sale of an asset can be drastically different depending on how the asset was inherited by an heir.
For example, parents may decide to deed a home to their son while they are alive to protect it from long-term care costs or to avoid probate. Because the child didn't pay the parents the fair market value of the place, 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 will be.
These parents unknowingly planted 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 had used a revocable trust to own the home, then the residence would be passed on after death. In this scenario, the heir would not owe any income tax, provided the property was sold for what it was worth at the date of death. This works regardless of how much the property is worth at the time of the parents' passing.
Young or old—it doesn't matter—if you don't have an estate plan, have one created now. Start with the basics, and if you need to, do the additional planning as it applies to your situation. Speak with an experienced estate planning attorney. In addition, remember these tips:
- Review and update your beneficiary designations.
- Review and update your insurance policies. Check the amount of coverage and make sure it still meets your family's current needs.
- 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.
Plus, at a bare minimum, everyone over the age of 18 needs a Power of Attorney for Heath Care, a Living Will, and HIPPA authorizations. Also, a Revocable Living Trust may be better than a will at incapacity because it avoids the court's control over your assets. And while you are at it, review and update the guardian designation for any minor children.
It's critical to work with an estate planning attorney who can keep your estate plan up-to-date with all of the changes in the law, changes in your finances and health, and changes in the health and finances of family members.