You're a physician. You dealwith mortality on a dailybasis. But planning for thefuture is critical no matter whatyour profession isâ€”and there are anumber of proactive steps you cantake now to protect surviving familyand to ensure that your will andyour wishes are carried out accordingto your plan.
Consider the following 6 taxstrategies with your estate planningadvisors as you develop and carryout your estate plan:
1. Review recent tax returnswith your accountant. Check forany carryovers (eg, capital losses,charitable contributions, and netoperating losses) that would terminateat your death. Carryovers maybe used by your surviving spouse ona joint return in the year of yourdeath, but any unused carryoversattributable to you do not carry overto the following year. So you mightconsider realizing more taxableincome this year to take advantageof the carryovers.
2. Plan gifts. Do you make giftsto reduce your estate taxes? If not,consider making the following nontaxablegifts (which will not beincluded in your taxable estate):
•Gifts qualifying for the annual$11,000 ($22,000 if you're marriedand choose gift splitting) per recipientgift tax exclusion. As a rule ofthumb, give cash or minimallyappreciated property. Retain highlyappreciated property, which receivesa stepped-up cost basis at thetime of your death.
• Medical and/or tuition expensespaid directly to the serviceproviders. Recipients do not have tobe a member of your family, andthere is no dollar limit on theamount you can pay.
• Gifts that are made up to theamount of your unused $1-milliongift tax exemption.
• Gifts to your spouse qualifyingfor the gift tax marital deduction. Ifeither you or your spouse don't havesufficient assets to take advantage ofthe entire $1-million estate taxexemption, the wealthier one couldtransfer property to the poorer one.The recipient can then bequeath itestate taxâ€“free to others (eg, childrenand grandchildren), so thatboth of you fully utilize two $1-millionexemptions. If one spouse hasmore taxable assets than the other,rearrange ownership to equalizeyour estate tax assessments. Considerconverting highly appreciated,jointly held property into singleownership by the spouse likely todie first. If after the conversion thatspouse lives more than 1 year, thesurviving spouse obtains a stepped-upbasis in the entire property.
• Gifts to charity qualifying forthe income and gift tax charitablededuction. These charitable giftsmay be made outright or in theform of trusts (eg, charitable lead orcharitable remainder trusts).
3. Make gifts beyond the $1-million gift tax exemption.Because there's no guarantee thatthe estate tax will be repealed after2010, consider making additionalgifts beyond the $1-million taxexemption. Three years from now,the gift tax paid will not be part ofyour taxable estate.
4. If your practice is a closelyheld business and you currentlyhold a majority stake, reduceyour interest in it. If you havemajority interest in a closely heldpractice, consider giving awayenough to reduce your retainedholding to a minority interest. Forestate tax purposes, this qualifiesthe remainder for a minority discount.The gift itself also may qualifyfor a minority discount.
But before you make these gifts,evaluate whether or not they willcause your estate to lose any of the followingestate tax benefit provisions:
• Dividend-free redemption of aclosely held stock to pay estatetaxes, if such stock's value is worthmore than 35% of the adjustedgross estate;
• Special use valuation of closelyheld farm/business real propertyconstituting at least 25% of thegross estate, if the farm/business'value is at least 50% of the grossestate; and
• Installment payment of estatetaxes attributable to a closely heldbusiness interest whose value ismore than 35% of the adjustedgross estate.
Talk to your financial advisorand accountant. Determine the valuesof your business interests, aswell as the entire potential estate,and review buy-sell and partnershipagreements. Giving or selling a portionof your interests in closely heldentities may not be desirable if itwill result in your estate not qualifyingfor any of these benefits.
5. If you hold stock options,review them. Determine whetherthey expire on your death or can bepassed on to your heirs. Check expirationdates to prevent unintendedlapses. Consider gifting nonstatutorystock options to family members.When they exercise these options,you (or your estate, if you aredeceased) recognize compensationincome. Payment of the income tax,however, may not be considered anadditional gift to the family member.
6. Review your retirementbenefit plans. Because they'resubject both to estate and incometax, retirement benefit plans areamong your most highly taxedassets. If your plan(s) hold substantialassets, consider taking orincreasing distributions. If you andyour family don't need the fundsand you're charitably inclined, considerdesignating a charity as theplan beneficiary.
In the end, while we naturallyplan for the happiest events of ourlives, discussing and planning for theinevitableâ€”death and taxesâ€”can bejust as valuable to those who surviveyou. Making your wishes known andhaving your estate planning documentsproperly drafted and readilyavailable can only give you and yourfamily peace of mind.
Marc A. Aaronson is a partnerin Eisner LLP's Tax ConsultingServices, located in New YorkCity. He welcomes questions orcomments at 212-370-1044 email@example.com.