Accounting/Finance
Five Common Estate Planning Mistakes-and How to Avoid Them
Choosing the Wrong People to Fulfill Your Estate Plan
Choosing your fiduciaries is important as creating the plan itself, since your plan won't work as you intended if your fiduciaries aren't capable or unwilling to carry out the tasks required from them. Being the oldest or the smartest child does not necessarily make that child the best choice for executor, trustee, guardian or health care agent; each of these roles has specific expectations that the person appointed must be able and willing to fulfill. Care must also be given to choosing appropriate successors, because the person you name may not be able or willing to fulfill those duties. Avoid this mistake by working with your estate planning attorney to assign the right people or institutions for these different roles.
Not Factoring in Probate
Probate is a legal process that takes place after a person dies. It involves the general administration of his or her estate, including the appointment of an executor, validation of the will, collection and liquidation of assets, payment of debts and taxes, and distribution of the estate’s net assets to beneficiaries. The probate process necessarily involves costs, and can take months, or even years. It is open to public record and overseen by state courts.
Although a simple will must pass through probate, there are several ways to structure your estate plan to avoid probate. One way is by establishing joint tenancy, whereby all property ownership and title is shared between you and your spouse, child or other party so that, upon the death of the first person, all the property passes directly to the surviving owner without probate. A second way is to establish a living trust, into which ownership of all assets is placed. Upon death, assets are distributed by the trustee to named beneficiaries without going through probate.
Not Keeping Beneficiary Designations Current
Accounts, such as IRAs, employer-sponsored retirement savings plans, or insurance policies offer you the opportunity to name beneficiaries. Typically you will name the beneficiaries when you first open the account. However, you need to periodically review your beneficiary designations to make sure that it still reflects your wishes. It is possible to have beneficiaries who are deceased, or whom you may no longer wish to leave assets to. It is important to remember that any account with a designated beneficiary will not be distributed according to the terms of your Will, but will be distributed pursuant to the beneficiary designations. To insure that the assets are paid to those you wish, keep your beneficiary designations current and coordinated with beneficiaries named in your Will or trust.
Not Having a Health Care Directive
Unless your wishes are spelled out in a health care directive – otherwise known as a living will or health care proxy – you risk having your health care decisions handled in a manner that is not in accordance with your wishes, which may create strife among your loved ones. Establishing a health care directive and naming a health care agent authorizes someone to make health care decisions for you and will help assure that your wishes are carried out.
Procrastinating
Perhaps the most common estate planning mistake is simply putting off your estate planning. You take a significant risk in not having an estate plan in place, regardless of your age or the value of your assets. If you die intestate, your state's succession guidelines determine your heirs who will receive your property. In many cases, following the state intestacy guidelines will result in a distribution that is not in accordance with your wishes. In the event that you have a dependent child, the state may end up selecting the guardian for your minor child. Begin your estate planning now, then regularly review and update your estate plan to ensure that it continues to reflect your wishes.
Planning ahead and working with qualified legal and financial professionals will help you avoid these and other estate planning mistakes.
TAX Talk
Credits AND Deductions
Below are some credits and deductions that may be helpful for the upcoming tax filings:
A tax credit reduces the amount of income tax you may have to pay:
Education Credit: An education credit helps with the cost of higher education by reducing the amount of tax owed on your tax return. If the credit reduces your tax to less than zero, you may get a refund. There are two education credits available: the American Opportunity Tax Credit and the Lifetime Learning Credit
Child and Dependent Care Credit: You may be able to claim the child and dependent care credit if you paid expenses for the care of a qualifying individual to enable you and your spouse filing a joint return to work or actively look for work. You may not take this credit if your filing status is married filing separately. The credit amount is a percentage of the amount of work-related expenses you paid to a care provider for the care of a qualifying individual. The percentage depends on your adjusted gross income. The total expenses that you may use to calculate the credit should not be more than $3,000 (one qualifying individual) or $6,000 (two or more qualifying individuals).
Child Tax Credit Child Tax Credit is an important tax credit that may be worth as much as $1,000 per qualifying child depending upon your income. The credit is limited if your modified adjusted gross income is above a certain amount
Adoption Credit Tax benefits for adoption include both a tax credit for qualified adoption expenses paid to adopt an eligible child and an exclusion for employer-provided adoption assistance. The credit is nonrefundable, which means it is limited to your tax liability for the year. The maximum amount (dollar limit) for 2014 is $13,190 per child.
Foreign Tax Credit If you paid or accrued foreign taxes to a foreign country on foreign source income and are subject to U.S. tax on the same income, you may be able to take either a credit or an itemized deduction for those taxes. Taken as a deduction, foreign income taxes reduce your U.S. taxable income. Taken as a credit, foreign income taxes reduce your U.S. tax liability. In most cases, it is to your advantage to take foreign income taxes as a tax credit.
Business Health Care Tax Credit The maximum credit maybe up to 50 percent of premiums paid for small business employers and 35 percent of premiums paid for small tax-exempt employers. To be eligible for the credit, a small employer must pay premiums on behalf of employees enrolled in a qualified health plan offered through a Small Business Health Options Program (SHOP) Marketplace or qualify for an exception to this requirement. The credit is available to eligible employers for two consecutive taxable years.
A deduction reduces the amount of your income that is subject to tax, thus generally reducing the amount of tax you may have to pay:
Individual Retirement Account (IRAs) An individual retirement arrangement (IRA) is a tax-favored personal savings arrangement, which allows you to set aside money for retirement. There are several different types of IRAs, including traditional IRAs and Roth IRAs. You can set up an IRA with a bank, insurance company, or other financial institution. You may be able to deduct some or all of your contributions to a traditional IRA. You may also be eligible for a tax credit equal to a percentage of your contribution. Amounts in your traditional IRA, including earnings, generally are not taxed until distributed to you. IRAs cannot be owned jointly. However, any amounts remaining in your IRA upon your death will be paid to your beneficiary or beneficiaries.
Student Loan Interest Deduction You may be able to deduct interest you pay on a qualified student loan. Generally, the amount you may deduct is the lesser of $2,500 or the amount of interest you actually paid and it is subject to a phase out, which means the amount of the deduction gradually decreases and phases out completely if and when your modified adjusted gross income (MAGI) amount reaches the annual limit.
Alimony Paid Amounts paid under divorce or separate maintenance decrees or written separation agreements entered into between you and your spouse or former spouse are considered alimony for federal tax purposes if certain conditions are met. Please note that Child support is never deductible
Other important Tax issues:
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FBAR/Foreign Income: Ensure that you have included all the ‘foreign source income’ like – dividends, interests, rental etc. If required you may have to file forms 8938, FBAR etc.
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Affordable Care Act: If you, your spouse and dependents had health insurance coverage all year, you will indicate this by simply checking a box on your tax return. No further action is required. For those who purchased coverage through the Marketplace, you may be eligible for the premium tax credit.
There are various limitations, thresholds, & procedures for many of the deduction and filings. Please consult your CPA/Tax attorney/or tax consultant for proper guidance with the above subject matter.
In accordance with IRS Circular 230, the above information is not intended or written to be used, and cannot be used as or considered a "covered opinion" or other written tax advice and should not be relied upon for the purpose of avoiding tax-related penalties under the Internal Revenue Code; promoting, marketing, or recommending to another party any transaction or tax-related matter(s) addressed herein; for IRS audit, tax dispute or other purposes.
Suresh Kumar, CPA, MBA is the Principal of Kumar Consulting, PA, a CPA & Consulting firm licensed in the states of FL, KS, and MO and can reached at 813-421-5068 or [email protected] or visit www.kumarconsultingcpa.com.
