Your Portfolio: Your legacy... plus tax

Estate planning is an important subject to think about, especially as you begin to accumulate assets or have family members you want to provide for in the future.

In order to be prepared for the future, you must not only choose the beneficiaries who will receive your assets, but also carefully consider the possible tax implications of those choices. If you fail to plan properly, you could end up with the unwanted consequence of leaving the majority of your assets to the IRS.

Assets in savings vehicles like IRAs, qualified retirement plans and annuities usually avoid probate and pass directly to the people you designate as your beneficiaries.

The person you choose as the recipient of these accounts can make a big difference in the way taxes are applied to these assets.

There are many possible options when it comes to picking who should benefit from your assets. You could choose a trust, name a charity or designate any number of family members or friends. However, it is important to remember that a spouse has the most flexibility in deciding how they will receive assets, usually allowing for a more tax-efficient transfer. In addition, a spouse can usually take advantage of the unlimited marital deduction, which means assets transfer free of gift and estate taxes —regardless of the asset value.

If you don’t want to name your spouse as the beneficiary — or if you don’t have one — a trust may be a good option for you to consider. Trusts provide strong protection for your assets, both during your lifetime and after your death, and can also give you control over their distribution. Trusts do, however, carry a greater administrative burden than simply naming an individual, and they also can have less favorable income tax consequences.

A third option —and one that has very favorable tax implications— is naming a charity to receive certain assets from your estate. Anything passed on to a charity is free from both income and estate taxes.

In order to implement a proper estate plan, it’s important to plan ahead carefully by considering various factors and circumstances that may be out of your control by the time they come into play. Remember, when it comes time to execute your plan, you won’t be around to handle all the details.

One important planning strategy involves naming contingent beneficiaries, in case the primary beneficiary dies before you do. This will prevent the assets from simply being transferred to your estate, which can have the most costly income-tax implications.

After completing your estate plan by naming primary and contingent beneficiaries, it is important to regularly review your choices. Make sure they are up-to-date, as your personal situation may change over time. If you experience a life event such as getting married or divorced, or welcoming children or grandchildren into your family, revisit your estate plan to make any necessary changes. Also, be sure to educate your beneficiaries about your estate plan. They should be aware of the choices available, the tax consequences and any penalties that may apply.

With all the rules and regulations of estate taxation, it’s important to consult with your tax advisor and to choose your beneficiaries wisely. Otherwise, the IRS could receive a large majority of your assets as a result of estate and income taxes, reducing the assets that transfer to those whom you wish to benefit.


This article was provided by Christopher L. Facka, MBA, CFP of A.G. Edwards & Sons, Inc. in Marco Island, Member SIPC. Chris can be contacted at 642-6000.

© 2007 All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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