Estate Planning Guide
A man and woman holding a toddler and a baby up the air
investing
Estate planning in uneasy times

Those who are still above the exemption and give gifts to heirs and charities to avoid taxes might now want to lower those gifts. "One of the things we have been revising is gifting to heirs, beneficiaries and charities," Pearson says.

The law allows people to give away up to $13,000 a year tax-free to heirs. In addition to that amount, you can give away $1 million tax-free over the course of your lifetime. But, obviously, if your estate is shrinking, you'll want to give away less each year.

"We need to go back and revise life expectancies and cash needs, especially with the value of securities going down and potentially high inflation," Pearson says. "People need to determine how much they will need from a cash-flow standpoint. They aren't giving away as much or being as free with it as in the past."

One benefit of lower asset values is that what is valued at $13,000 now may have been valued much higher before and soon will be again. So you are able to give away assets tax-free that may appreciate greatly.

"One thing we noticed very quickly is that one of our larger clients said he was thinking about gifting some of his business, whose value has dropped significantly," says Sachs. "Gifting a business, real estate or an investment portfolio is much more attractive now based on valuations. That may be the biggest nugget you see out of this."

Trusts and insurance

The current climate of near-record low interest rates makes Charitable Lead Trusts, or CLTs, attractive estate-planning vehicles, experts say.

A CLT lets you donate the income stream from an asset to a charity for a set number of years. At the end of the period, you can give the asset to your heirs. You can set up the trust to lower the value of your estate (a nongrantor trust) or to take a tax deduction (a grantor trust).

When interest rates are low, the tax deduction is larger on a grantor trust. So now is a good time to form one. "If you want to get something to your kids, you can practically give it away," says Boone.

Many wealthy people buy life insurance as part of estate planning. The idea is that after the estate owner dies, the insurance policy will finance estate tax payments and perhaps living expenses for the heirs.

Azis says that with estate values dropping as a result of slumping financial and real estate markets, "I am seeing a decrease in interest to buy life insurance. Before you may have needed a $10 million policy. Now you may only need $6.5 million."

Social Security and income taxes

The weak economy is having an indirect effect on estate planning through Social Security. Low inflation has led to a two-year freeze in the cost of living adjustment for Social Security benefits. That means some people may have to maintain a higher estate value to make up for the income they would have received from increases in Social Security payments.

Another issue affecting estate planning is general income tax policy. President Barack Obama hopes to increase the top tax rate, now 35 percent. "One thing is fairly certain," Azis says. "We will at least see higher income tax rates for the wealthy."

So if you're giving money to charity to protect your estate from taxes, you may want to wait until next year, when you will receive a larger deduction for the charitable contribution, assuming your tax rate indeed rises.

News alert Create a news alert for "taxes"

advertisement

          Connect with us
advertisement
CD & INVESTING NEWSLETTER

Learn the latest trends that will help grow your portfolio, plus tips on investing strategies. Delivered weekly.

CDs and Investment

Should lucky gambler play the market?

Dear Dr. Don, I recently got lucky at a casino and won $8,000. I have a car loan and carry balances on my credit cards, but I never miss a payment. I don't want to blow all the winnings by paying down unpaid debt for my... Read more

advertisement

Blog

Sheyna Steiner

Guess who hates state auto IRAs?

In December, Illinois passed a bill to roll out automatic IRAs for workers not covered by a workplace plan. You won't believe who hates the idea.  ... Read more

Partner Center
advertisement

Connect with us