Hugh F. Doherty, DDS, CFP
Thanks to recent tax changes, a bigger chunk of your estate should escape federal estate taxes. Even so, it is advisable to develop a plan with an estate-planning attorney quickly. As sweet as some of the changes appear to be, there still is a big sting to estate taxes, where rates run as high as 55 percent on taxable estates of $3 million or more. The threshold for the top estate-tax bracket is lower than you think.
After doctor and spouse add in their IRA amounts, qualified retirement plans, home equity and other assets, a $3 million estate can be easily reached even by doctors who do not consider themselves affluent. Most changes to the estate-tax law are mild, but welcome.
1. Gifting strategy
You have long been able to trim your estate by tax-free gifting of as much as $10,000 a year each to as many people as you like. Doctor and spouse could give joint gifts of $20,000. But, beginning in 1999, these amounts will increase with inflation. In addition, you now have the lifetime exclusion for federal gifts and estate taxes of $625,000 ($1.25 million for married couples), up from $600,000 in 1997. This amount gradually rises until it reaches $1 million ($2 million for married couples) in 2006.
2. Generation-skipping transfer
Beginning in 1999, the new tax-law indexes for inflation ($1 million for a single; $2 million for spouses giving jointly) are excluded from the federal Generation Skipping Transfer Tax. The 55 percent GSTT applies when you give property to your grandchildren or great grandchildren instead of to your children, so you can reduce the number of times it is subject to estate tax.
3. Retirement-account withdrawals
Our friends on the Potomac have eased rules on big withdrawals from retirement accounts. The law repealed the 15 percent excise tax on distributions from tax-deferred retirement plans that exceed $150,000 in any year and on excess accumulations remaining at death. So, now you can withdraw more money from your retirement accounts during your lifetime and use the cash to give bigger gifts to your children, thereby reducing your estate.
4. The charitable remainder trust
Many estate-planning tools received no enhancements from Congress, but remain attractive nonetheless. For doctors inclined to downsize their estate through donations, The Charitable Remainder Trust is a nifty option. With it, you can make charitable gifts while you are alive, with the stipulation that you receive income from those assets donated to charity for a specified period. There are limits to how much you can draw from the trust (the limits were recently tightened), but the trust is a smart way to downsize your estate.
5. The credit shelter trust
Another popular tool is the Credit Shelter Trust, which also allows some access to assets that have been moved out of your estate. If doctor and spouse have a $2 million estate, the doctor could put $1 million of the property he owns into the trust and leave the other million to his spouse. She could then draw income from the trust during her lifetime. When she dies, the property she received would pass to her heirs, tax-free, because of her $1 million exclusion for gift and estate taxes. The trust would not be part of her estate, so her heirs would receive its principal, tax-free, as well.
6. Family limited partnership
It is recommended that doctors establish a Family Limited Partnership to achieve tax benefits. Using a properly structured Family Limited Partnership, you can realize substantial estate tax and federal and state income tax savings. Other benefits are: protection of assets, tax-free retirement income, protection of assets from creditors and control over funds held for your children`s benefit.
Ask yourself: "Do you really want your heirs to face a possible 55 percent tax from Uncle Sam?" I cannot stress enough the importance of all doctors and spouses taking time to go to an estate-planning attorney and drawing up the necessary documents to properly protect the ones you love: your family!
Hugh F. Doherty, DDS, CFP, is a national lecturer, financial advisor to the health-care profession and CEO of Doctor`s Financial Network. For personal financial consultations or to have Dr. Doherty speak to your study club or dental society, call (800) 544-9653.