Disclaimer: Information contained below was accurate as of the date of publication. Due to frequent tax law changes, information may no longer be accurate. For the latest tax information, please contact a member CPA.

BASIC ESTATE PLANNING

by Attorney Neil Cohen

There are four basic estate-planning documents: a Will, a Revocable Trust, a Durable Power of Attorney and a Health Care Proxy.  While the terminology in your state might be a little different, the basic concepts should be the same.

The Durable Power of Attorney and the Health Care Proxy are important documents no matter the size of your assets or your marital status.  In general, the Durable Power of Attorney nominates someone to make a variety of financial decisions on your behalf when you are out of town or incapacitated and, in either case, unavailable to make a decision or sign a document.  The Health Care Proxy nominates someone to make medical decisions on your behalf.  The Health Care Proxy also includes a Living Will, which makes your medical preferences known.  A husband and wife generally name each other to serve as their Attorney and Health Care Agent, while unmarried people may name parents, siblings or close friends to whom they are comfortable giving these powers.  It is also important to chose a backup for both documents in the event the person you names is unable to serve.

A Will allows you to determine how your property is distributed at your death.  A person who dies without a Will is said to be intestate, and everything they own is distributed to their family as determined by the intestacy statutes of the state where they reside.  In Massachusetts, a “pour-over” Will is most common; it simply pours all assets to a Revocable Trust.  The Will is also used to appoint an executor and nominate guardians for young children.  Family members are usually chosen to serve as executors and guardians, and although the courts are under no obligation to appoint the people named as guardians, they usually do what is in the best interest of the children.  By naming a guardian and making your preference known, potential family conflict and the resulting court proceedings, which could deplete the estate, can be avoided. 

The Revocable Trust is the most important document for several reasons: 

1. It allows you to avoid probate

2. It holds assets for your minor children

3. It allows you to do in-depth estate tax planning. 

In the first instance, if assets are already in the name of the Trust they are held for or distributed to family members without ever having to pass through the Will.  Assets that can pass without a Will are non-probate assets and therefore avoid the probate process.  This saves time and money and provides privacy for the family.  The probate process is public record and should be avoided whenever possible. 

In the second instance, if both parents die in a common accident leaving young children, the Trustees of the Revocable Trust will gather the parents’ assets, invest the funds, provide for the young children and distribute funds to them as they mature.  If such an arrangement is not in place, the courts become involved in the method and manner of holding, investing and distributing the assets which may be contradictory to the parents’ wishes. 

In the last instance, a married couple with significant assets can use their Revocable Trusts to avoid estate taxes until the death of the second spouse.  This last point deserves further explanation.

Generally at death, the Revocable Trust will split into two or more sub-trusts.  This has been referred to as the A/B trust, the bypass trust or the credit shelter trust.  The credit shelter amount, currently $1,500,000, can be sheltered from the estate tax until the death of the children.  This means a husband and wife can shelter a total of $3 million.  In addition, on the death of the first spouse, there is an unlimited marital deduction that allows the first spouse to transfer the balance of his or her assets to the surviving spouse without an estate tax.  On the death of the surviving spouse, the total of those assets and the assets in the spouse’s own name that exceeds $1.5 million will be subject to the estate tax. 

The signing of a Revocable Trust is only the first step, however, and the desired tax savings will probably not occur if all assets remain in the name of one spouse.  For example, if all the assets are in the husband’s name (which is very common) and the wife dies first, her estate will not get the benefit of her $1.5 million credit shelter.  The wife’s credit shelter dies with her and cannot be recovered.  The husband still has his $1.5 million credit shelter but only that amount can bypass the estate tax and go directly to the children as opposed to twice that amount.  If the husband dies first the plan will work but trying to predict which spouse will outlive the other is risky.  The second step in this process, therefore, is to allocated the assets between the spouses as equally as possible to get the full benefit of both credit shelter amounts.

Family members are generally named to serve as Trustee, but if assets are going to be held in trust for an extended period (for the benefit of minor children, for example), it is a good idea to employ a professional to serve as co-Trustee.  The professional, who may be an attorney, CPA, bank trust department officer or financial advisor, is a valuable resource and can guide the family members on such issues as appropriate investment choices and distribution decisions, as well as discharging any income tax requirements.

Neil Cohen is an attorney with the Boston office of Broude & Hochberg, LLP.  Neil specializes in the area of estate and gift tax planning, and can be reached at (617) 748-5100.  For more information, please visit the firm website at www.broude.com. 

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JOINTLY OR SEPARATELY

by Andrew D. Schwartz, CPA

Your marital status on December 31st determines the filing status you'll use on your tax return.  If you're legally married by the time the ball in Times Square finishes dropping, you generally have only two options for that year's tax returns - either "married filing jointly" or "married filing separately".  The days of filing as a single individual or a Head of Household are over. 

For most couples, filing jointly is the way to go.  Unless you want to keep your finances completely separate from your spouse, there are only a few instances when you'd be better off tax-wise by filing separately. 

Generally, if you each earn a similar amount of money, and only one spouse incurred significant medical expenses or unreimbursed business expenses during the year, filing separately might save you taxes.  That's because both of these items are only deductible to the extent they exceed a certain threshold.  For medical expenses, the threshold is 7.5% of your adjusted gross income (AGI), and for your miscellaneous itemized deductions (which includes your unreimbursed professional expenses), the threshold is 2% of your AGI.

Let's look at an example where both you and your spouse earn $50,000, and only you incurred $10,000 of medical expenses during the year.  If you file jointly, you could deduct $2,500 of your medical expenses ($10,000 - 7.5% of $100,000).  By filing separately, your deduction jumps to $6,250.

In most instances, however, you end up paying more taxes by filing separately.  As a rule of thumb, the larger the disparity in income between you and your spouse, the more you'll save by filing a joint return.

Plus, by not filing a joint tax return, you might limit some of your tax saving opportunities, including:

• No claiming student loan interest paid during the year.

• The two educations credits (Lifetime Learning Credit and Hope Credit) aren't allowed.

• Can't contribute to a Roth IRA in most instances.

• Lose out on making a deductible contribution to a traditional IRA on behalf of a spouse not covered by a retirement plan during the year.

• Allowable capital losses are cut in half to $1,500.

• The maximum rental losses you can claim are limited to just $12,500 per year versus $25,000 if you file jointly. 

If you decide to file separately, the government gives you three years to amend your tax returns and file jointly.  I have some clients who initially file separately every year, and then amend their returns to file jointly.

People who file jointly, however, aren't allowed to change their minds and re-file separately.  If you prepare your own tax returns, make sure to click the button on the tax program you're using to check if you're in the minority of married couples who would save taxes by filing separate returns.

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