Page 12 - Chapter18sample

ESTATE PLANNING SMARTS
Bad health. With any luck you will never need the information under this heading, but keep in mind that it’s here, and come back to it if you do.
The diagnosis of a degenerative disease or terminal illness throws families into crisis. Between doctors’ visits, prolonged hospital stays and seemingly end- less waits for what often turn out to be unfavorable test results, each new day can challenge our coping mechanisms. These are all things we can’t control.
During the rare calm moments in the eye of the storm, some people take comfort in getting their estate plans in order. This is the time to have your lawyer review any documents and bring them up to date. If estate taxes are a concern, you can use the annual exclusion that allows you to give up to $14,000 ($28,000 for married couples) each year to as many recipients as you would like without incurring gift tax.
Often a power of attorney (see Chapter 1) authorizes your agent to make these gifts if you can no longer write the checks. Since transfers under the annual exclusion are not considered taxable gifts, they are not subject to the general rule, contained in the Internal Revenue Code, that if you do not survive more than three years after making a gift, any gift tax you paid on the transfer will be counted as part of your estate.
Annual exclusion gifts are the most common form of planning when a death is imminent. Checks need to be cashed before the death occurs, or the assets are considered part of the estate. To alleviate this problem, wise donors make deathbed gifts using certified or cashier’s checks.
Another relatively simple estate planning device is available if someone who is ill survives for more than a year. It involves transferring an asset (such as a house) that has appreciated in value from a healthier person to an individual (typically a spouse) who is expected to die first. Assuming the person receiving the asset is a U.S. citizen, spouses are entitled to an unlimited gift-tax exemption when they make such transfers.
Why would you want to do this? When the healthy person inherits the as- sets, he is entitled to a basis adjustment to their value on the date of death. If the house has appreciated, the basis step-up could reduce or eliminate the capital gains tax your heirs have to pay if the property is sold.
There are two other more complicated techniques that lawyers sometimes recommend for people who are in poor health. One is the private annuity. It involves a sale of assets in exchange for an unsecured promise to pay an annu- ity for the rest of the seller’s life. Another is selling assets to family members or to a trust for their benefit in exchange for a self-canceling installment note. These wealth transfer techniques are discussed in greater detail in Chapter 15.
ff308