Financial Plan – Estate Taxes

The final component of the outline to the basic financial plan is going to be estate planning.  For the average married couple federal estate taxes will not be an issue.  As for state estate taxes it is best to check your states laws on estate taxes or seek the advice of a professional financial planner or estate lawyer.  As far as federal estate taxes go they do not start until an individual has over $5.34 million dollars for 2014.  That amount doubles for married couples to $10.68 million but there are no estate taxes for a married couple when one spouse dies and leaves their estate to the surviving spouse.

If you exceed the federal limits for estates there are certain ways to reduce your possible estate taxes.  If you are lucky enough to be in this position of having more than $5.34 million if you are single or $10.68 million if you are married is by gifting assets while you are alive.  But you must be careful in the manner in which you gift as to avoid gift taxes or generational skipping taxes.  You can reduce your estate prior to your death by gifting up to $14,000 to any person regardless of age, relation, or reason.  If you are married you can do a split gift and that will allow you to gift double the amount to $28,000 per person per year.

Other ways to reduce your taxable estate is to give to charity which is always a good things no matter what your intentions are with regards to your estate.  It is best to donate assets that have appreciated in value and the more they have appreciated the better.  This way you are able to reduce your taxable estate by the value of the donation and you are also able to reduce your income tax for the year in which you made the donation.  And the final reason it is advisable to donate in this manner is to reduce your overall taxes as your cost basis in the assets is low and as it has appreciated in value you will not have to pay capital gains on the increased value in the assets.  Remember you get to take the value when you donate the asset not the value of what you paid for it.

And if you have grandchildren or nieces and nephews you can pay for their college education in addition to gifting them assets every year.  This is done by paying the educational institution directly for college expenses and not by gifting the funds to the child.  If you do it this way you can actually gift more than the allowed $14,000 or $28,000 a year depending on your marital status.  This exclusion also applies when you pay for someone’s legitimate medical expenses when the funds are paid directly to the medical institutions such as a hospital.  If you pay for either of these two items in this manner, it does not matter if the ultimate recipient is a relative or a complete stranger.  They key to avoiding triggering a gift is that the funds are paid directly to the institution.

As you can now see creating a financial plan is a very detailed and most likely time consuming endeavor.  It also requires that you provide a comprehensive list of all sources of income, all expenses, all assets, all liabilities, all insurance policies, and you must determine your desired asset allocation based on your tolerance.  Once you have accomplished all of these basic steps and many that I did not go over you will begin to see the beginnings of a comprehensive financial plan take shape.

Feel free to contact me if you have any questions or concerns from any of these six blogs on financial planning.  Also I welcome the opportunity to discuss the financial planning process with you at any time.  If you would like a preliminary financial plan feel free to contact me as well.

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