March 2008

Article Tools

ESTATE PLANNING

ESTATE PLANNING
Use ‘preventive medicine’ to avoid 2 costly mistakes
By David B. Mandell, JD, MBA, and Jason O’Dell

Like many successful people, chiropractors are often so busy dealing with their practices and personal lives that they never take the time to deal with the important challenge of creating a tax-wise estate plan for their families.

And, unfortunately, they often make two significant mistakes when creating (or ignoring) their family’s estate plan. These mistakes can be avoided, however, with proper planning.

Mistake 1: Losing half of life-insurance proceeds to taxes. Many people think proceeds from life insurance are estate-tax exempt. Wrong! The proceeds are income-tax exempt, but are subject to federal and state estate taxes.

Federal estate taxes are levied at a rate of 46 percent on estate assets in excess of $2 million. Many states have state estate taxes of another 16 percent.

Solution: Set up an irrevocable life-insurance trust (ILIT). An ILIT is simply an irrevocable trust that owns a life-insurance policy. The ILIT can save you estate taxes because it, rather than you personally, owns the life insurance policy.

Because the policy is not owned in your name, the policy proceeds will not be part of your net estate when you die (as long as you survive three years from the transfer to the trust). Thus, the proceeds will not be subject to the estate tax.

This can save your family a great deal of money.

The ILIT also gives you much more control of what happens to the policy proceeds than you would get from a bare insurance policy. With an insurance policy alone, your only decision is to whom you will leave the proceeds (the beneficiaries) — the insurance company simply pays these people when you die. 

With an ILIT, on the other hand, you can control not only who gets the proceeds, but what happens to the funds when you die. You can have the trustee pay the beneficiaries directly or pay them during a period of months or years.

You can incorporate spendthrift provisions and anti-alienation provisions to protect against your beneficiaries’  financial problems or their spouse’s financial woes. In fact, an ILIT gives you all of the benefits of a trust arrangement — while allowing you to provide for your family just as you would with a bare insurance policy.

Of course, an ILIT has a significant drawback: Once a cash-value policy is transferred to a

Note: If you have already purchased a life insurance policy or are presently making payments on an existing policy, it is not too late to transfer the policy to an ILIT. You may experience some gift-tax issues associated with this maneuver, but they are likely to be minor compared to the potential tax savings your family could ultimately enjoy.

Mistake 2: Leaving property to the IRS. While no one intentionally leaves property to the IRS, this can happen if you have not implemented a gifting program during your lifetime.

Simply put, after the exemption amount, any property not given away “in title” during your lifetime will likely be taken in part by Uncle Sam.

Solution: To prevent giving property to the IRS, in addition to implementing an ILIT, gift property to family members.

When you gift property, you do not necessarily have to give up control of its underlying assets. Instead, you can use legal entities to remove asset values from your estate, while maintaining 100 percent control of the assets during your lifetime.

Through such entities as family limited partnerships (FLPs) and family limited liability companies (FLLCs), you can share ownership with family members yet maintain control. In this strategy, you and your spouse gift ownership interests to children throughout a period of time (using your combined annual $22,000 per donee gift-tax exclusions). This removes those interests from your estates for tax purposes.

As long as you and your spouse are the FLP general partners or FLLC managers, you will maintain control of the underlying assets.

Many otherwise-sophisticated clients put their families in an estate-planning mess because of these mistakes. Clients with larger estates have even more potential pitfalls to avoid in their planning.

David B. Mandell, JD, MBA, is an attorney, lecturer, and author of the books The Doctor’s Wealth Protection Guide and Wealth Protection, MD. Jason O’Dell is a financial consultant and author of Financial Planning for Physicians: Strategies for Saving Money and Securing your Financial Future. They can be reached at 800-554-7233 or through the Web site, www.ojmgroup.com.

Avoid common pitfalls when you plan your estate. Go to www.ChiroEco.com/estatepitfalls.

Click here for a handy calculator to help you estimate your estate tax liability for 2008.  You can also use it to project the value of your estate and the associated estate tax for the next 10 years.

Comments

Be the first to comment on this Article

Post Your Comment

Name

Location

Comment

To submit your comment, please type the security word shown in the picture.

.

Remember information