Tax Planning After Death?!

Did you read the title of the article and think that I lost my mind? How could a deceased taxpayer plan anything?! Of course they can’t, but the executor of the estate can use various tax planning techniques to save money, and minimize or shift the amount of tax that a decedent’s estate will pay. Here are just a few tips…

Select a Fiscal Year End-one basic thing to keep in mind when considering the taxation of an estate is that the assets held by a decedent when she/he passed away will generally continue to generate income after death. Think of any dividend paying stock or mutual fund, and you’ll see that dividends will continue to be paid, regardless of whether they’re held by an individual or an estate. An estate is one of just a couple of “tax paying” entities that has the ability to choose a fiscal year end, that is, a year end other than December 31. By picking a different fiscal year end, the estate can effectively defer tax on income retained in the estate, or on income distributed to beneficiaries.

Elect to Include Income From the Decedent’s Trust on the Estate’s Income Tax Return-as I mentioned above, an estate is able to choose a fiscal year end, while a trust must use a calendar year end. By electing to include the income from a decedent’s qualified revocable trust on the estate income tax return, the executor can effectively shift the income (and tax) from one taxable year to another.

Consider Distributions to Beneficiaries to Minimize Tax-this “tool” is almost a no brainer, provided there are no issues with an estate’s ability to make distributions to beneficiaries (such as assets tied up due to legal problems, or family issues). The tax brackets for an estate are so small that an estate will be in the maximum (35%) bracket at $11,650 of taxable income. By contrast, a single taxpayer doesn’t hit the 35% bracket until getting to $388,350 of taxable income. So if it’s at all possible, the estate’s income should be distributed out to the beneficiaries.

File an Initial/Final Return-o.k., even though this one potentially means less fees in my pocket, one thing an executor should consider is filing just one tax return for an estate, in which both the “initial return” and “final return” boxes are checked. For smaller estates that are able to take care of business quickly, and make all the required distributions, this is the way to go, since it will save having to file a return for a second year.

These are just a few of many things that an executor can do, to save tax money on an estate. Please pass this article along to anybody you know who may be dealing with an estate, and post any comments you may have, based on your own experience.

Surviving as a Surviving Spouse

In recent past, my wife and I have seen two people we know lose their husbands. I can’t even begin to think about what my life would be like, if Karen (my wife/girlfriend/dive buddy/cooking partner/etc) was gone, as suddenly as the two husbands I mentioned above. After writing last week’s article, my editorial advisor (guess who…Karen) suggested that I write an article about some things that a surviving spouse needs to think about, aside from immediate things, like arranging a funeral. Since there are many details to address, this article isn’t meant to cover every conceivable one, but lays out a few things to ponder, and take care of.

1-Don’t rush

After the death of a spouse, there are all sorts of things running through the surviving spouse’s mind; grief and potentially anger are a couple that come right to mind. Regardless of the range of emotions being felt, thought processes will most probably be more than a bit cloudy and confused, so it’s important to remember that this is not the time to be making any major financial decisions that you’ll be bound to (and will be costly to undo), or will be regretted later on. Additionally, whatever decisions need to be made, a few weeks or even months of extra thought may not make a big difference, compared to the consequences of an incorrect knee-jerk decision. So hold off on big things, like buying or selling a house, or making big changes to your investment portfolio.

2-Get your @#$% together

I couldn’t resist that one (I’m a New Yorker!). The point is, important documents will need to be dug out of filing cabinets or storage, to be used for various purposes, such as transfers and re-titling of assets. Some of these documents are
-will and trust documents
-insurance policies
-death certificates (get at least ten certified copies)
-social security numbers
-marriage license
-military discharge papers
-statements for retirement plans and brokerage accounts

This list isn’t all inclusive, so be ready to dig for other documents, as requested.

3-Get the estate plan into motion

Since you’ve all diligently followed my recommendation from last week, you’ve engaged an estate attorney, and had a will drawn up, and an estate plan put into place. This is something that should be started as soon as practicable. Obviously it’s not meant to be the first call made, after a spouse passes away, but if the wheels are put into motion sooner rather than later, you’ll feel a lot more settled personally, once the estate is settled. Remember that in cases where an estate return needs to be filed, this must be done within nine months of the date of death.

4-Do you have enough money to live?

I know, in #1 above I instructed everyone to not rush into things, but when it comes to having enough money to live on until the estate/finances are settled, it is necessary to figure out whether there are enough liquid assets available to cover at least six to twelve months of living expenses. In this case, if there’s any life insurance, the claims process needs to be put into motion. The deceased spouse may have some unpaid vacation pay or other cash payments due, so check with the employer. Some investments may need to be sold, in order to provide cash, but remember, you don’t need to liquidate the entire portfolio.

There are lots of other details to think about, at what will probably be a time when one least wants to have to think about it. I welcome any thoughts and comments you have, and would be happy to discuss additional details with you. And please forward this article to people you know, who can use the information.

Estate Planning…It’s Not Just For the Dead

Mention estate planning to people and you get all sorts of reactions. A couple of my favorites are “why should I care, I’ll be dead”, and “estate planning is just for rich people”. Given that a majority of the people living in the U.S. are, in fact, alive, and not necessarily “rich” (use your own definition of this), does that mean that we should discount estate planning for just a select few, in the upper echelons of income and net worth? Absolutely not!

Discussing one’s own mortality is a difficult subject for most people, but the truth is, “estate” planning has evolved into something that not only deals with dispositions of assets (and other matters) after death, it also includes matters that arise during lifetime, such as disability and incapacity.

Consider these scenarios:

1-A couple owns a home jointly, with a right of survivorship upon the death of the first spouse. What happens if one spouse becomes disabled or incapacitated (physically or mentally); how can the house be sold (or the mortgage refinanced) if both spouses signatures are needed on various documents? Similarly, what if a single person owns a home, and then becomes disabled or incapacitated; what happens to the house?

2-What happens when a person is clinging to life after a stroke, and life or death medical decisions need to be made immediately? Who gets to decide whether to ’pull the plug’ or not?

3-Mom and dad die simultaneously in a tragic car accident. Who will care for their two children, and decide about their upbringing and education?

What people don’t realize is that if matters are left to the laws of the state where one resides, the results may not be what was expected, or hoped for, and could ultimately cost a lot more money than what the cost would be to put together a comprehensive estate plan. I’m a CPA and not an attorney, but from all the years that I’ve been working on cases with estate attorneys, I’ve seen what happens when decisions are left to the state of residence, and you don’t want that to happen.

You’ve probably heard terms such as “durable power of attorney”, “living trust”, “healthcare proxy”, and “nominating a guardian”. These are some of the tools that are used in putting together an estate plan, to deal with the scenarios mentioned above. A competent estate planning attorney will be able to discuss these things (and more) as part of putting together a plan. It’s one of the best investments you can make, and something that one should not keep putting off. Make sure your wishes are carried out the way that you planned. Whoever you work with, check their credentials and qualifications, since estate planning is a very technical and tax driven area. Be very wary about somebody who has only been practicing estate planning for a couple of years, or who “specializes” in many different areas of law. If your gut tells you that the attorney doesn’t have enough experience, he/she probably doesn’t. I’ve seen the consequences of inexperience. If you don’t know any estate planning attorneys, I can make a referral (at least for the Northern Virginia metro area and New York City).

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