A New Will for the New Year?

The New Year is a good time to make sure your estate plan is in order.  Most importantly, you should review and update your will, or have one prepared, if you haven't already.

One of the most common misconceptions about estate planning is that the primary planning concern is avoiding the federal estate tax. However, for 2014, the estate tax only applies to individual estates that exceed $5.34 million.  Why, then, is it still critical to have an up-to-date estate plan?

First, many states impose their own estate tax with lower income thresholds.  For example, CT imposes up to a 12% tax on estates over $2 million.  In NY, estates over $1 million face up to a 16% tax. Proper planning can minimize these taxes.

Second, transferring property through your will, or a will-substitute, can save your heirs taxes.  Property transferred upon death receives a step-up in basis for tax purposes, whereas inter vivos gifts receive a carryover in basis from the purchaser.  Thoughtful planning will maximize the value of your bequests.

Finally, even if you plan to distribute all of your assets through will-substitutes, like trusts, a will is still important to ensure the efficient and cost-effective administration of your estate. 

Our favorite personal budgeting tool

With various bank accounts, credit cards, and online payment plans, it’s increasingly difficult to keep track of where your money goes every month.  That’s why we were excited to discover Mint.com, a free budgeting tool that we’re using ourselves.  Mint hooks up to your bank accounts and credit cards to automatically categorize your expenses and income.  You can sign up for weekly or monthly updates on your spending.  You can also design weekly budget goals by expense category and receive notifications when you have reached your budget limit.  Mint also has a credit-checking service that, although not free, is a great resource for monitoring your credit score and resolving any credit score disputes. While we have not had any problems with Mint in the past, remember to monitor your accounts and change your passwords often to ensure you money’s safety.

You'll provide for your children when you pass. What about your pets?

When a loved one dies, family and friends have numerous details to take care of, all while grieving their loss. To ensure your pets are not neglected in this tumult, you should consider creating a testamentary pet trust. In such a trust, the pet owner, called the testator, sets aside assets for the lifelong maintenance of her surviving pets, including funds for food and veterinary care. The testator designates a “trust protector,” who receives a set fee from the trust and is responsible for distributing trust funds for maintenance of the pets. The trust is a legally enforceable document in almost every state, including Connecticut and New York; Probate Courts in these states can remove the trust protector if she fails to fulfill her obligations and can order restitution for any misused trust funds. When the last surviving pet dies, the trust automatically terminates; any remaining assets are distributed as directed by the trust document or by the testator’s will.

So, how do you create a pet trust? The first step is to identify the person, bank, or other institution who you want to be the trust protector. You should consult this person or institution to see if it is willing and able to take on the trust responsibilities, which will include monitoring the trust and basic accounting of trust assets. Second, you must prepare and execute the actual trust document. In this document, you must clearly identify the trust protector, the pets you want to benefit from the trust; the standard of care you desire for the pets; and where you want the remainder of the trust funds to go after the last surviving pet passes away. You can either consult an attorney to write the trust or prepare it yourself using a template. Finally, you must fund the trust. You can do so through your will by directing that certain assets go to the pet fund. By following these simple steps, you can ensure that all of your loved ones are adequately cared for, even in your absence.

College is expensive. How will you pay?

For the 2013-2014 academic year, a moderate budget at a private college averaged $44,750 and $22,826 for an in-state public college. These costs are expected to increase by 6% annually. At that rate, today’s fifth graders should be prepared to pay $305,000 for a private, and $110,000 for a public, college education. With these costs, it is critical to start planning and saving early if you hope to fund, or even meaningfully contribute to, your children’s college educations.

There are various vehicles available for education savings, many of which are tax-advantaged. To begin, “529 Plans” are state-run education savings plans. You can contribute up to $300,000 per beneficiary to most plans and select from a variety of investment options for the funds. Although contributions to the plan are non-deductible, investment earnings are never taxed, as long as they are used for qualified higher education expenses, such as tuition, fees, books, and room and board.

New York and Connecticut, among other states, offer state tax deductions for contributions to in-state 529 Plans. The funds can be applied to education in any state, but, if you live in one of these states, you can deduct up to $5,000 per year by as an individual and up to $10,000 per year as a married couple filing jointly. If you live in a state that does not offer a deduction for plan contributions, such as Massachusetts or California, you should shop around for the state program which best meets your investment wishes since you won’t be benefitting from the state deduction anyway. Morningstar provides a comparison of every state’s 529 Plan, including advantages and disadvantages of each plan.

Similar to the 529 Plan, the Coverdell Education Savings Account (ESA) accepts non-deductible contributions that grow tax-free. A significant advantage of the Coverdell, as compared to the 529 Plan, is that funds can be used for college, graduate school, or K-12 qualified expenses, including tuition and fees for private elementary school. Each individual can have up to $2,000 contributed per year on their behalf. Unlike the 529 Plan, there are income limits to who can contribute to a Coverdell. So it may take extra planning to take full advantage of the plan.
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