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Andrew D. Schwartz CPA Was
Recently Interviewed by Smartmoney.Com and Elegant Bride Magazine
Andrew Schwartz, CPA, the editor of the MDTAXES.COM website, was
interviewed by Smartmoney.Com and Elegant Bride Magazine during the
month of May. Andrew was asked to provide information and insight on
the topic of basic financial planning for newlyweds. The
Smartmoney.Com article, entitled Marrying Your Financial Lives,
appeared on their site May 26th and the Elegant Bride Magazine
article will appear in one of their future publications.
Both of these interviews stemmed from the fun and informative
www.newlywedfinances.com that Andrew Schwartz
has put together. If you are a newlywed, this website will help you
and your spouse work through an initial financial plan.
The Basics of Basic Estate Planning
Just as most people have at least a basic understanding of income
taxes, it is fair to say that most people lack a basic understanding
of estate planning. What people find to be most surprising about the
estate tax system is that, upon the death of an individual, the
government can take as much as 55% of that person's wealth in the
form of estate taxes. (I guess they figure a dead person can't
complain too much about paying taxes.) You don't even need to be that
wealthy to find yourself in the 40% marginal estate tax rate. When
you factor in your home, retirement plans, and life insurance, the
fair market value of all of your assets that will be taxed upon your
death probably add up to more than you think.
How does the estate tax system work?
Anyone who dies this year or next year, the first $675,000 of their
assets will not be subject to estate taxes. If a person's assets
exceed that threshold, the excess is taxed at the following rates:
Marginal Estate Tax Rate
Up to $750,000
$750,001 to $1,000,000
$1,000,001 to $1,250,000
$1,250,001 to $1,500,000
$1,500,001 to $2,000,000
$2,000,001 to $2,500,001
$2,500,001 to $3,000,000
$3,000,001 to $10,000,000
Assume an unmarried individual dies with the following assets:
A home worth $250,000 with a mortgage of $100,000
Retirement accounts and IRAs worth $300,000
Non-retirement savings worth $50,000
Life insurance with a death benefit of $500,000
The total taxable estate for this individual will be worth $1,000,000
and the estate taxes on $1,000,000 will equal $125,250!! ([750,000
- 675,000]*.37 + [1,000,000 - 750,000]*.39).
What if you are married?
If you are married, the rules allow you, upon
your death, to transfer everything to your spouse estate tax free.
Known as the marital deduction, this is a nice short-term solution,
as the surviving spouse can take ownership of all of the assets
without paying any estate taxes to the government.
Taking advantage of the marital deduction,
however, could cause the estate of the surviving spouse to be hit
with a huge estate tax bill. For example, assume a married couple who
owns the following assets:
A primary residence worth $250,000 with a
mortgage of $100,000
Each spouse has retirement accounts worth $300,000
Total non-retirement savings worth $100,000
Each spouse has life insurance with a death
benefit of $250,000
When the first spouse dies, all of the assets transfer to the second
spouse. When the second spouse dies, the taxable estate is worth
$1,350,000 and the estate will be subject to estate taxes of $270,750.
([750,000 - 675,000]*.37 + [1,000,000 - 750,000]*.39 + [1,250,000 -
1,000,000] * .41 + [1,350,000 - 1,250,000]*.43) By taking
advantage of the marital deduction, the spouse that died first did
not benefit from the $675,000 exclusion available to him.
What can be done to minimize the estate taxes?
One of the principals of basic estate planning is to make sure that
each spouse takes maximum advantage of the $675,000 exclusion. To
minimize the estate taxes that will be paid upon the death of you
(and your spouse), there are three steps that you need to take.
If you are married, you and your spouse must each have your own will.
As part of the will, trusts should be established and funded upon
If you are married, you should not hold any of your assets jointly.
Instead, each asset should be held by either you or your spouse.
(Holding assets jointly will make them unavailable to fund the trusts
upon your death.)
If you hold significant life insurance, the insurance should be
owned by an irrevocable trust with the beneficiary of the life
insurance being the trust. (Insurance held in an irrevocable
trust avoids being part of your taxable estate.)
Let's work through another example. This time,
assume the married couple has two assets: stock in Company A worth
$675,000, and stock in Company B worth $675,000. Earlier this year,
this couple met with capable estate planning attorneys, had two wills
drafted, and changed the ownership of Company A to the husband's name
and Company B to the wife's name.
Two weeks after all the documents were properly
executed, the husband died. Instead of having the stock of Company A
go to his wife via the marital deduction, the will instructed that
the stock be used to fund a trust. If necessary, the wife can use the
income and assets of the trust to maintain her lifestyle, but
otherwise, the trust will stay intact and will go to the husband's
heirs upon the death of the spouse. Since the amount that funded the
trust was worth $675,000, the husband's estate was not subject to any
Two weeks after the husband dies, the wife
unfortunately dies as well. As instructed by her will, the stock of
Company B passes to her heirs. Since the value of the stock is only
$675,000, there are no estate taxes to pay. In addition, the stock of
Company A, which is in the trust, also passes to the heirs estate tax
free. By having two wills, and making sure that no assets are held
jointly, a married couple with assets of $1,350,000 can avoid paying
any estate taxes. If you look at the earlier example in which the
couple took advantage of the marital deduction, the estate of a
couple with assets of $1,350,000 who did no estate planning ended up
paying $270,750 in estate taxes.
Good News for
People Who Live Beyond 2001
The estate tax threshold will continue to increase until it tops off
at $1,000,000 in 2006. Below, is a table detailing how much wealth a
person can pass to his heirs without being subject to estate taxes:
Year of Death
Assets Not Subject to Estate Taxes
2002 - 2003
to think about
While you're meeting with your estate planning attorney, you should
ask him to draft a durable power of attorney and a health care proxy.
Durable Power of Attorney: These allow a specific named person
to make financial decisions on your behalf in the event you become
mentally or physically unable to do so.
Health Care Proxy: These allow a specific named person to make
medical related decisions on your behalf in the event you become incapacitated
Disclaimer: This issue of estate planning is extremely
complicated. Do yourself a favor and meet with a qualified professional.
TO DO LIST FOR JUNE, 2000
Saving and Investing
1999 & 2000 TAX FACTS
For 1999, the standard deduction for a single individual is $4,300
and for a married couple is $7,200. A person will benefit by
itemizing once allowable deductions exceed the applicable standard
deduction. Itemized deductions include state and local income taxes,
real estate taxes, mortgage interest, charitable contributions, and
unreimbursed employee business expenses. For 2000, the standard deduction for a single person
will be $4,400 and for a married couple will be $7,350.
- For 1999, the personal exemption is $2,750. Individuals
will claim a personal deduction for themselves, their spouse, and
their dependents. For 2000, the personal exemption has been
increased to $2,800.
- The maximum earnings subject to social security taxes
has been increased to $76,200 in 2000 from $72,600 in 1999.
- The standard mileage rate has been increased back to
$.325 per mile as of January 1, 2000 from a rate of $.31 per
mile as of April 1, 1999.
- The maximum annual contribution to a 401(k) plan or
a 403(b) plan has been increased to $10,500 in 2000 from
$10,000 for 1999.
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