Estate Planning in an Uncertain Tax Environment

FAIRFIELD, N.J., Feb. 25 /PRNewswire/ -- Although Ben Franklin famously quipped that there are only two guarantees – death and taxes, 2010 has begun without an estate tax because Congress failed to pass a new estate tax law before the 2009 sunset of the Economic Growth and Tax Relief Reconciliation Act of 2001.

"The House of Representatives passed an extension of the 2009 estate tax rate, however the Senate, failed to act," says independent advisor, Brad Bofford. "While Congressional leaders have pledged to enact a retroactive fix early this year, if they don't, estate taxes will be reinstated in 2011 at a rate of 55 percent for estates valued at more than $1 million."

But rather than worry about what might happen with estate taxes, Bofford suggests concentrating on what can be controlled within an estate plan.  

Bofford says it's important to remember that there are assets that pass outside of the will directly to beneficiaries. Proceeds from life insurance, investments in Individual Retirement Accounts (IRAs), annuities, qualified retirement plans (such as 401(k)s, 403(b)s, and SEPs), as well as trust property pass directly to named beneficiary, bypassing probate. Jointly owned property like homes, cars, and bank accounts also automatically pass to the surviving co-owner, avoiding probate.

Often overlooked is that the beneficiaries named for assets such as IRAs and 401(k)s take priority over will instructions. "I've seen instances where a 50 year-old woman with a husband and family still has her father listed on the beneficiary account of the 401(k) from her first job," says Bofford. "If her father is dead when she passes away, the 401(k) would be directed to her father's heirs, not her family." As such, Bofford recommends reviewing beneficiary forms at least every two years.

The following tips can help ensure proper designation of beneficiaries:

• Do not list "my estate" as the beneficiary. IRA beneficiaries should be named people because estates and other legal entities don't have life expectancies.
• Name the beneficiary carefully. A spousal beneficiary has the greatest flexibility for delaying IRA distributions that are subject to income tax. In addition to rolling the IRA into his or her IRA account, a surviving spouse can decide to treat the IRA as his or her own IRA. This can provide greater flexibility for long-term tax planning. "Also consider whether or not you could be increasing the size of your spouse's estate beyond any applicable future exclusion amount," says Bofford.
  • If a non-spousal beneficiary is named, he or she will not be permitted to co-mingle the inherited IRA with another account without taking a complete distribution and triggering taxes. However, as a designated beneficiary, a non-spouse beneficiary can stretch out distributions over their life expectancy. Some financial institutions still restrict beneficiary options in their IRA custodial agreements or annuity contracts and might not allow the stretch IRA, so it's wise to check those details. If the non-spousal beneficiary is a minor, name a guardian because the courts' view is that money left to a minor should be put in a savings account until that person is 18.
• Attend to the per stirpes designation. Pay attention to whether or not assets are left to a blood relative — such as a child or grandchildren rather than a child's spouse. Many fund companies have a separate form for the per stirpes designation, so ask for it by name.
• Review plans in light of the recession. Market downturn presents both challenges and opportunities for estate planning. "A quick to-do list should include reviewing your will and beneficiary forms to ensure that losses in asset values of your real estate holdings or investment accounts have not resulted in an unintended, disproportionate distribution to your heirs," says Bofford. "In addition, if gifting is part of your estate planning strategy, now could be a good time to gift assets whose values have plummeted to minimize transfer taxes."

About Financial Principles

Financial Principles understands the importance of planning – whether it's for retirement, saving for college or charitable giving.   Two senior partners, Brad Bofford and Mike Flower, bring more than 30 years of combined financial services experience to their clientele. Both are recognized as qualifying life members of the prestigious Million Dollar Round Table, "The Premier Association for Financial Professionals®". As representatives of Securities America, Inc., Bofford and Flower provide comprehensive services and advice in all areas of personal finance. They have contributed to articles in several leading publications including Investment News, Financial Advisor, and Research magazine as well as BusinessWeek, Money and New Jersey Business magazine. Learn more at www.financialprinciples.com.

SOURCE Financial Principles