financial forum
Estate Planning
Estate planning is a complex subject, so take the necessary steps to protect yourself from potentially high estate and related taxes.
By Capt. Bud Schneeweis, USCG (Ret), CFP®
It’s difficult to plan an estate if no one knows what the guidelines will be. I hoped to report Congress had updated the rules for estate, gift, and generation-skipping taxes before this column went to press — wishful thinking on my part. These and other tax issues still are hanging fire, and if Congress fails to act before January 2013, many Americans will see higher tax bills beginning in 2013. Still, it’s worth discussing what sensible estate planning you can do while waiting for Congress to act.
The first thing to realize is estate taxes affect only about 2 percent of the population. The public has been frightened about the effect of estate taxes (death taxes to some), but only a small percentage of our population dies holding estates that might be affected by federal estate taxes.
Estate and gift tax exclusion amounts, which had been set at $5.12 million in 2012 (double for a couple), will revert to the pre-Bush era exclusion levels of $1 million in 2013 and beyond (double for a couple). This could result in a federal estate tax liability for members who have accumulated substantial wealth over their lifetimes. Those who die before Congress acts may shelter only $1 million from federal estate or gift taxes. Furthermore, “portability” (the ability to pass along any unused portion of an estate or gift tax exemption to the surviving spouse) will disappear as well. After December 2012, the deceased’s unused exclusion is lost.
Estate tax rates also are scheduled to rise from the current 35 percent to up to 55 percent for estates worth more than $1 million. Keep in mind, this rate does not include any state estate or inheritance taxes, which can be significant.
An often-overlooked part of estate planning is ensuring your important documents are up-to-date and still reflect your wishes. Pay careful attention to beneficiaries for IRAs and retirement accounts such as 401(k)s; those pass outside of probate directly to beneficiaries. If the beneficiary listed isn’t around anymore, these funds become part of your estate.
Don’t ignore the impact of life insurance on your estate. Many owners of life insurance policies will have the death benefit added to their estates when they die, unless they arrange for a credit-shelter or bypass trust. It isn’t far-fetched that many homeowners with modest savings and investments can accumulate an estate worth $1 million or more once life insurance proceeds are included. Also, while $500,000 of gains from the sale of a home may be excluded from a couple’s income taxes, half of the home value may be included in the estate.
MO
— Capt. Bud Schneeweis, USGC (Ret), CFP®, Certified Senior Advisor®, is director, Benefits Information and Financial Education. To speak with a financial planner, contact USAA at (877) 913-6622 or
www.usaa.com/moaa, or visit
www.moaa.org/financialcenter for other resources.
Additional Advice Make sure you’re taking an appropriate required minimum distribution (RMD) if you are at least 70.5 years of age. The penalties for getting that wrong are severe — there is a 50-percent tax on any amount required to be distributed by the end of the year but not withdrawn. Check with your custodian to make sure your RMD is correct.
*online: For additional estate-planning tips and resources, visit
www.moaa.org/estate.
46 MILITARY OFFICER DECEMBER 2012
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