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Estate Planning Update

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We regularly get questions from clients about estate planning, so I thought it would be good to revisit some of the basics.

Estate Tax: The current federal estate and gift tax exemption is $5,450,000 per person. If your taxable federal estate (essentially all the stuff you own at your death) is less than this, you owe nothing in tax. That is quite a large number and most of you reading this, fortunately or unfortunately, don’t have to worry about your heirs paying estate tax when you die. Combine that with the “portability” rules that are now in effect, which says that if you are married, then essentially you can double it ($10,900,000). You may or may not face estate taxes in the state you live in. Ohio has no estate tax, Florida has no estate tax, but a number of states have retained some tax structure. What all that really means is that for most Americans, estate planning to save estate taxes is no longer the reason to do estate planning. The reason has shifted to primarily making sure your assets get to the right people, at the right time, and in the right way. That is still a very important reason to give some effort to your estate planning.

Gifting: The current annual gift tax exclusion is $14,000 per recipient. That means you can give $14,000 to as many people as you want, you don’t have to report it to the IRS, and it has no impact on your estate or gift tax exemption. A married couple can give $28,000. So, a married couple with 3 married kids, who were willing to make gifts to in-laws (I know, a bit of a stretch), could give away $168,000 each year ($28k times 6 “kids”). Annual gifting is the simplest and most effective ongoing estate tax savings strategy. If you think you will have a taxable estate someday, and you are comfortable that you won’t run out of money in your lifetime, then you should be considering annual gifting to kids, grandkids and others. Practical note: If you give someone stock or other securities, be sure to give them a written summary of the tax cost basis (your tax basis carries over to them). They will need that if and when they sell the security.

Special Gifting Rule: You can directly pay the tuition costs and medical expenses for anyone else, and regardless of the amount, it is not considered a gift. The person whose expenses you are paying, does not have to be a relative or dependent. But be careful – you must pay the expenses directly to the institution or medical provider to qualify. If you think you want to do this, check with your attorney or tax advisor to do it correctly. The rules can be tricky.

In the "for what it’s worth" department, the two Presidential candidates have very different estate tax proposals (what a surprise). Trump would like to repeal it, and Clinton would lower the exemption to $3.5m and increase the top rate to 45% (from 40%).

As touched on above, estate planning is still very important and should not be neglected just because the tax issues have become more favorable. If your estate tax documents are more than 5 years old, it is time to give them a fresh look. At a minimum, it would be wise to update your health care power of attorney and your financial power of attorney.

I hope this brief summary provides you some good and useful information!