Contents

• Estate Tax Overview


• Basics of Planning with Gifts


• 10 Common Mistakes of Estate Planning

About SC&H Financial Advisors, Inc.

Personal Financial Planning is not a one-time event—it is a critical, ongoing process that, if managed well, leads to financial freedom.

At SC&H, we develop complete and flexible plans that are designed to meet your ongoing needs. They are complete, because you need a fully integrated and comprehensive financial strategy that incorporates all of the most important wealth care issues. They are flexible, because milestones in your life such as a marriage, a career change, the birth of a child, a divorce, or a death in the family will require adjustments to your overall financial plan.

Our financial planning methodology is based on the Method 10™ model, an approach that addresses the ten key areas of wealth management that comprise a comprehensive financial plan. To learn more about these services, visit www.scandh.com/fa.

Welcome

The focus of this quarter’s issue of Financial Perspectives is Estate Planning. In today’s fast-paced world, we observe that many of our clients have not taken the time to develop an estate plan, which is of great importance in ensuring that your estate is handled fairly and as tax efficiently as possible after you are gone. Too often if people have an estate plan, they do not make the time to review it regularly to determine if it is still in line with their family’s goals.

We hope that as you read this newsletter, you find the information helpful and you realize that having an updated and detailed estate plan is truly a gift to your loved ones. As always, please call if we can be of assistance.

Regards,

Greg Horning
President, SC&H Financial Advisors, Inc.
(410) 403-1512
GHorning@SCandH.com

Estate Tax Overview

Estate planning involves the development of strategies that effectively distribute your assets to your heirs, utilizing ideas and vehicles to minimize the taxes incurred by your estate. However there always seems to be some confusion about how the estate tax works and who it affects.

The estate tax is a levy on assets that are transferred to your heirs after your death. The tax is based on the fair market value of your holdings (assets) at the time of your death, less certain exemptions, debts and other allowable administrative expenses. For estates required to file an estate tax return, property can be valued on an "Alternate Valuation Date" (six months after death), if this reduces the estate tax due. Contrary to what many believe, joint accounts and accounts payable or receivable on death are counted as part of the gross estate when calculating the estate tax. Joint titling merely helps to avoid the probate process.

In the Economic Growth and Tax Relief Reconciliation Act of 2001, President George Bush fulfilled his promise to reduce taxes by granting numerous tax cuts and credits. The estate tax was a primary target. Beginning with the 2002 tax year, the legislation called for a steady increase in the maximum estate tax exemption, and a corresponding decline of the highest effective tax rate. The legislation covers the period that ends in 2009.

Under current law, the estate tax is set to be completely repealed in 2010 for one year. In 2011, the provisions of the 2001 Act will end and the estate tax will revert back to the same rates and exemptions that were in effect in 2001.
In response to this tax law, many states have decoupled from the federal estate tax system, thus subjecting many taxpayers to state-level estate taxes, even if they are exempt from the federal estate tax.
Given this situation, estate tax planning is much more difficult due to the uncertainty of the current tax laws. With the ever-changing landscape of the estate tax system, it is prudent to take the time to meet with your financial advisor to evaluate your estate planning needs in order to preserve your hard-earned assets for your loved ones.

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Basics of Planning with Gifts

In the estate planning realm, gifting is an important wealth transfer technique. Gifting can be an excellent way to remove assets from your estate; especially those assets that you expect will significantly appreciate in the future.

The maximum gift tax rate is currently 45 percent. Each individual has an applicable lifetime gift exclusion amount of $1,000,000, meaning that you can gift up to $1,000,000 during your lifetime without incurring gift tax. The value of each gift is established at the date of transfer (fair market value) for gift tax purposes, but the gift retains the donor's cost basis for income tax purposes. If you gift an asset with growth potential, you will remove any future appreciation of that asset from your estate.

In addition to the $1,000,000 lifetime applicable exclusion for gifts, each individual can make annual gifts of $12,000 (the annual exclusion amount) to another person without incurring any gift tax or needing to file a gift tax return. Married couples can elect to split gifts made by one spouse, thereby transferring up to $24,000 to another person while utilizing each spouse's $12,000 annual exclusion. This exclusion is available per recipient. In short, you can make a $12,000 gift to as many recipients as you choose. An annual exclusion gift does not reduce the lifetime exemption unless you give a recipient an amount in excess of $12,000.

Gifts can be used to fund a child's college education. Parents, grandparents and other individuals can contribute up to $60,000 to a qualified college savings program (a Section 529 plan) and treat the contribution as having been made ratably over five years, thereby utilizing their $12,000 annual exclusion from gift tax.

In addition to annual exclusion gifts discussed above, donors can also pay unlimited medical and educational expenses for another person without any gift tax consequences. There is no gift tax imposed on payments made directly to a medical provider for qualified medical expenses, including medical insurance premiums paid for another, or for tuition payments made directly to an educational institution.

As planners, we look for opportunities to employ strategies which can leverage the power of gifting, including gifts of minority interests and assets, which are subject to restrictions on further transfer. Because of the restrictions that apply to these assets, valuation discounts may apply, allowing for the transfer of larger interests, without the surrender of control of the related entity.

One last key note: Any use of your $1,000,000 lifetime applicable exclusion amount for gift tax purposes will be deducted from your applicable exclusion amount for federal estate tax purposes, which is $2,000,000 for 2008.

These are just a few of the many provisions which allow taxpayers to reduce the value of their estate through gifting techniques. Consult your team of tax professionals to see what methods are the most advantageous for your individual situation.

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10 Common Mistakes of Estate Planning

Creating a successful estate plan requires consideration, diligence and knowledge.  A successful estate plan will efficiently distribute your assets to your loved ones with the least amount of effort, time and money.  A single mistake could subject your estate to significant taxes, or allow your assets to be distributed to a person who is not your intended beneficiary.  The best way to avoid estate planning mistakes is to be aware of them. 

Here are some of the most common errors related to estate plans:

1. Failing to prepare or update a will.  A will is a legal written document that dictates where your assets will go after your death.  If you do not have a will, the state has the power to determine how assets will be distributed.  It is also important to update your will for changes in family situation such as birth, adoption, marriage, divorce, and death.


2. Choosing the wrong executor.  When naming your executor, you must consider who will be responsible, fair, and focused on their responsibility to all interested parties.    


3. Failing to update your beneficiary designation.  It is crucial to review beneficiaries for retirement accounts, insurance policies, and payable-on-death accounts periodically to make sure that the primary and contingent designations are current.  These beneficiary designations override the provisions of a will.  As with wills, changes in family situations require these designations to be reviewed.  In addition, if minors are named as beneficiaries, it is important to name a trustee to manage the account until the child reaches majority age.   


4. Titling assets in joint ownership.  Although joint ownership can avoid probate, it will not reduce estate taxes.  Also, joint ownership overrides provisions of the will, so assets may end up with a party other than those intended.


5. Failing to fund the revocable living trust.  Trusts can distribute assets upon death, but only if they are properly funded.  For many trusts, assets must be transferred into the trust prior to death.  It is important to note that living trusts do not avoid estate tax, and that they may not be quick to close. It can still take up to a year to properly prepare and file the estate tax return, the decedent's final individual tax return, and the trust income tax return. 


6. Titling of the life insurance policy.  If you are the owner, the proceeds will be included in your estate and be subjected to estate taxes.   An irrevocable life insurance trust is an option that could prevent this result. 


7. Failing to keep liquid assets.  It is important to consider available sources of cash to pay estate taxes, inheritance taxes, funeral expenses and administration expenses. 


8. Leaving everything to your spouse.  The unlimited marital deduction only postpones estate taxes until the second spouse passes away.   Creating the appropriate trusts can take advantage of the unified credit and reduce the value of assets in the surviving spouse's estate. 


9. Failing to keep records of assets.  Keeping a file of all of your assets can help your executor locate, manage, and distribute all of your assets.  If your executor is unaware of an asset, it may never be distributed as you wish.  Also make certain that you have your will and trust documents accessible.  If no one knows these documents exist, your final wishes may not be carried out.


10. Failing to choose professional assistance.  Utilize the services of a professional who regularly practices in the estate administration field.  This can help you make decisions that can reduce the assets subject to taxes, save time and money in planning, and provide aid to the executor and heirs in the future.  A specialist in this field can also make other helpful suggestions, such as preparing a living will that will help to complete your estate plan.

With the growth of personal wealth and the uncertainty of the future of the estate tax, it is important to make sure your estate plan is current and to stay alert for future changes to estate tax provisions.

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