As we enter the holiday season, many of you may be looking ahead to 2012 as an opportunity to implement an exercise program or take what you have been doing up a notch. We would like you to consider this the appropriate time to also make sure your estate plan is current and in the best shape possible. Between trips to the mall and watching holiday specials, take a few minutes to test your estate plan’s fitness against Novare Capital Management’s basic and advanced regimens.

Basics to Have in Place

Will, Revocable Trust, Financial and Health Care Powers of Attorney and Advanced Care Directives

The workout starts by confirming that you have the very important documents listed above. As our returning class members know, significant changes occurred in December 2010 that raised the exemption amount per person to $5 million for the estate tax, gift tax, and generation skipping transfer (GST) tax. At the same time, the rate for all three taxes was reduced to 35%. These are temporary provisions that are set to expire in January 2013 when the exemption decreases to $1 million and the tax rates return to 55%.

Many of you have worked with us in 2011 on your estate plan reviews, and we have confirmed that your plans are in good shape. However, some of you (and you know who you are) have not shared your planning documents yet. If you do not want to get in trouble with the instructor, call your Novare team member soon to set up an appointment for your estate plan review.

Extra Credit: Confirm that your retirement plan and insurance policy beneficiary designations are also up to date. The transfers of these non probate assets are not handled through your estate planning documents and can easily become outdated as circumstances change.

Annual Exclusion Gifts

An individual may give $13,000 per year to an unlimited number of individuals without filing a gift tax return. This may take the form of cash or marketable securities.

Extra Credit: Forgive $13,000 of an existing inter-family loan that you may have previously made to the person. This saves your remaining assets for other purposes.

Direct Payments to Medical and Educational Service Providers

As long as the payments go straight to the provider, and not to another family member, they are not treated as taxable gifts to person who benefited from the service.

Extra Credit:  Medical insurance premiums are included in this provision.

529 Education Plans

Income and earnings in these plans are not subject to income taxes. Also, there are tax benefits when the proceeds are used for education expenses.

Extra Credit: Under current law, a donor can use 5 years of annual exclusion gifts ($65,000 this year) without being charged with making a taxable gift.

Charitable Planning

Use appreciated securities for your gifts to charities. You will likely get to deduct the full market value of the gift on your income tax return. If you sell the stock, pay capital gains tax and then give the after-tax cash proceeds, you get a smaller deduction and the charity gets a smaller donation.

Extra Credit: If you are over 70 ½ and have an IRA, you may direct that a portion of your required minimum distribution go directly to a charity. While you do not receive a charitable deduction, these funds also are not taxed to you as income. You are always better using this technique than taking a taxable distribution yourself, paying the tax, and getting a deduction.

Advanced Planning for Those Who Have Completed Basic Training

Use of Grantor Trusts

A Grantor Trust is one in which the grantor has certain powers that cause him or her to be the owner of the trust for income tax purposes but not for estate tax purposes. Within this structure, the grantor is required to pay the income taxes due for the trust. This payment of the trust’s income taxes is a tax-free gift to the trust beneficiaries.

Extra Credit: Grantor Trust status permits the grantor to sell assets to the trust without recognizing capital gains.

Use of Your $5 Million Gift Tax Exemption During Life

For individuals with estates well in excess of $5 million, the use of the temporary $5 million gift tax exemption presents a unique planning opportunity. Unlike past years (and what is scheduled to again be the case in 2013) no gift tax will be due on the gifts up to $5 million. Failing to use this amount before 2013 could result in the unused amount being subject to higher gift and/or estate tax rates later. As has always been the benefit of lifetime gifts, all future appreciation on the amount gifted will also escape later taxation in the individual’s estate. We know that giving up control over such a large amount is a difficult decision and one that needs to be analyzed carefully. We will be happy to work with you and your other trusted advisors on a thorough analysis of a gift of this magnitude.

Extra Credit: While an outright gift is always the simplest, a “leveraged” gift that uses valuation discounts can remove additional value from your taxable estate.

Techniques to Take Advantage of Historically Low Interest Rates

Several estate planning techniques such as Grantor Retained Annuity Trusts (GRATS) and Inter-Family Loans are more likely to accomplish the grantor’s intent when interest rates are low. A GRAT is a trust that names the grantor as the beneficiary for some period of time. The remainder beneficiaries receive whatever is left over after the grantor has been paid his or her equivalent contributed value back.

As anyone with a checking account earning .01% knows, interest rates are at historic lows. These low rates could change if the economy picks up in 2012. We will be happy to discuss the variety of planning opportunities that may be appropriate for you and your family in the current interest rate environment.

Extra Credit: A person can allocate GST exemption to a GRAT if someone two generations younger than the donor (i.e. a grandchild) is the beneficiary.

We want you (and your estate plan) to be fit and healthy heading into 2012. Please call us when you are ready for us to help you accomplish these objectives. Best wishes for a Happy Holiday Season and for a Prosperous and Fit New Year!