Estate planning is a smart move

My wife and I have a net worth of approximately $1,300,000, all of which is held in jointly owned assets. Recently, I read that the new tax law allows a $1,000,000 exemption per spouse. Currently, I have a simple will and was planning on modifying this before this tax-law change. However, it now looks like I am "home free" so that there is no need for me to spend the time or money to make these changes. Is this correct?

Charles Blair, DDS

John McGill, MBA, CPA, JD

My wife and I have a net worth of approximately $1,300,000, all of which is held in jointly owned assets. Recently, I read that the new tax law allows a $1,000,000 exemption per spouse. Currently, I have a simple will and was planning on modifying this before this tax-law change. However, it now looks like I am "home free" so that there is no need for me to spend the time or money to make these changes. Is this correct?

It is not correct. While the new tax law does increase the exemption equivalent available to doctors from $600,000 in 1997, the increase is phased up to $1,000,000 in 2006. The exemption amount for 1998 is only $625,000. Thus, the net effect of this increase is to provide an adjustment of slightly more than 3 percent a year to the $600,000 exemption amount under prior law.

In addition, the fact that all of your property is jointly owned may hold other problems for you. For example, with most types of jointly owned property, all of these assets would pass to your surviving spouse at your death automatically by operation of law, leaving nothing in your estate to use the exemption amount against. Accordingly, at your wife`s death, unless you remarried, all of the assets above the then applicable exemption amount would be subject to federal death taxes.

We recommend that you consult with a competent estate-planning attorney to review how your assets are titled and to make the changes necessary to protect the maximum amount of assets from federal and state death taxes.

I graduated from dental school about six years ago and still have an outstanding student-loan balance of $75,000. This is costing me interest of about $6,000 annually. I understand that I will be able to write off this interest on my 1998 federal income-tax return. How much of a benefit will this be for me?

While the new tax law provides for an interest deduction on student loans - the maximum deduction in 1998 is $1,000, $1,500 in 1999, $2,000 in 2000 and $2,500 thereafter. Unfortu-nately, the deduction is phased out for doctors whose income levels exceed $40,000, if single, and $60,000, if married. Furthermore, the deduction is allowed only with respect to interest paid on the loan during the first 60 months after interest payments are required to begin. If you have been paying on this loan for the entire time that you have been out of school, none of the interest would be deductible under the new tax law.

I sold my personal residence for a gain of $450,000 after living there the past 20 years. Fortunately, I was able to take advantage of the $500,000-gain exclusion under the new tax law since my wife and I owned the property jointly. Rather than move into another home in the same area, my wife and I decided to retire to our beach home and live there for several years. I have read that it may be possible to sell that home and avoid any gain, provided certain requirements are met. What are they?

Under the new tax law, a seller who has owned and used a home as his or her personal residence for at least two out of the five years prior to the sale can exclude from income up to $250,000 of gain if single, and $500,000 if married and filing a joint tax return.

This exclusion can be used only once every two years. Thus, it is possible to convert what otherwise would be a fully taxable capital gain on your highly appreciated vacation home into tax-free income simply by living there at least two years prior to the sale.

Dr. Blair is a nationally known consultant and lecturer. McGill is a tax attorney and MBA. They are the editors of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes and protect assets. The newsletter ($149 a year) and consulting information are available from Blair/McGill and Company, 4601 Charlotte Park Drive, Suite 230, Charlotte, NC 28217 or call (704) 523-5882.

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