Estate planning affects women more profoundly than men. Thus it is important for women to take charge of this process, or at least be equal participants. Women’s longer life expectancy means they are far more likely to see their living standards compromised in retirement if estate planning isn’t done properly. Here are the questions financially savvy women should be able to answer:
What is Portability?
A surviving spouse can add any unused estate tax exclusion of the just-deceased spouse – the amount an individual can leave to heirs without paying federal estate tax – to her own $5.43 million exclusion. This is called portability. So a widow can pass on as much as $10.86 million, untaxed, through either lifetime gifts or her will. But portability is not automatic. To get it, the executor of the estate of the first spouse to die must file an estate tax return within nine months of death, even if no tax is due. Surviving spouses should see to it that the form is filed, so they can claim the deceased spouse’s unused estate taxes.
Nine months is also the deadline if you plan to disclaim (turn down) any portion of what you inherited from a spouse so it can go directly to your children or other family members or into a trust for their benefit. The survivor may choose to sign a form saying she is putting the money into a family trust or bypass trust, based on her own financial resources, and federal and state estate laws at that time.
The Unified Credit
The lifetime gift-tax exclusion and the estate tax exclusion (also called the Unified Credit) are expressed as a total amount – currently $5.43 million per person (with adjustments for cost of inflation) – and it is possible to use these exclusions to transfer assets both during the spouse’s lifetime or after death. If you exceed the limit, you or your heirs will owe up to 40 percent of taxes.
The IRS expects you to keep a running tally and report the gifts each year so it knows how much has already has been used up when you die. For example, if you have used $1 million of the exclusion to make taxable gifts, the unused exclusion if one dies in 2015 will be $4.43 million, rather than $5.43 million.
Couples can share the basic exclusion during life, called gift-splitting, and give more to the kids now, tax free. But this will reduce how much of the tax-free amount will be available for the surviving spouse when the other dies.
Should you give away assets now to save taxes?
Now that the estate tax exclusion has gone to $5.43 million per person ($10.9 million per couple), this issue concerns very few people. Keep in mind that most methods of saving estate taxes require you to totally give up ownership and control over assets, whether you are giving them to people directly or putting them in a trust. You need to ask: can I afford it? Be sure you are leaving yourself enough, and to be on the safe side, assume you will live to an advanced age.
You can give anyone $14,000 a year (a couple can give $28,000) without eating into your $5.43 million exclusion. If you want to give away more than that, you can either count your gift against the exclusion amount or, if you have used up the tax-free amount, pay gift tax.
Consider other tax-free ways to prune your estate. They include paying tuition and medical expenses for another person (such as a grandchild) directly, funding 529 college savings accounts and converting a traditional IRA to a Roth.
The difference between a Will and a Revocable Living Trust
Confusion abounds when it comes to the differences between a will and a revocable living trust, and when you need one rather than the other. One misconception is that living (revocable) trusts avoid estate taxes, which is not true. Both a will and a living trust can be used to transfer assets, but each has unique uses. For example, a living trust can hold assets for your benefit while you are alive – say, in case you are suffering from dementia. Only a will can be used to appoint a guardian for a child.
In California, living trusts are also used to avoid or limit the costs of probate – the process through which a court determines that a will is legally valid and approves the distribution of assets covered by that will. A revocable trust allows your estate to be shielded from public view regarding your net worth or the identity of your beneficiaries because it is not a public document – unlike a will. Someone leaving assets to a domestic partner may use a revocable trust because it is harder for family members to challenge a trust than a will.
Besides having a revocable living trust and will, your estate-planning documents should include a durable power of attorney for assets and a health care directive (also called health care power of attorney). These documents allow your appointed agent(s) to assist with financial and health considerations.
Advancements in medical science and care may enable us to live fuller, longer lives. But that also means more women are likely to suffer from a diminished mental state. Therefore, it is important for you to include these other documents in your estate plan.
About Your Columnist
C. Tracy Kayser is a featured columnist for Women Taking Charge, the official blog of Connected Women of Influence, where she covers all things estate planning. C. Tracy Kayser is an estate planning attorney where she assists clients with their estate planning needs, probate and trust administration, conservatorships and litigation. She was a former insurance defense litigator for 7 years before opening her own law firm, Kayser Law, in Orange County in 2010 in order to better serve her clients and to provide high end service with compassion and excellence.