Minimize the Tax Bite to Your Estate

Physician's Money DigestNovember 2006
Volume 13
Issue 11

Estate planning is an important subject to thinkabout, especially as you begin to accumulateassets or have family members you want toprovide for in the future. In order to be prepared forthe future, you must not only choose the beneficiarieswho will receive your assets, but also carefullyconsider the possible tax implications of those choices.If you fail to plan properly, you could end up withthe unwanted consequence of leaving the majority ofyour assets to the IRS.

Assets in savings vehicles like IRAs, qualifiedretirement plans, and annuities usually avoid probateand pass directly to the people you designate as yourbeneficiaries. The person you choose as the recipientof these accounts can make a big difference in theway taxes are applied to these assets.

Picking a Beneficiary

There are many possible options when it comes topicking who should benefit from your assets. Youcould choose a trust, name a charity, or designate anynumber of family members or friends. But, it isimportant to remember that a spouse has the mostflexibility in deciding how they will receive assets,usually allowing for a more tax-efficient transfer. Inaddition, a spouse can usually take advantage of theunlimited marital deduction, which means assetstransfer free of gift and estate taxes—regardless ofthe asset value.

If you don't want to name your spouse as the beneficiary,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, andcan also give you control over their distribution.Trusts do, however, carry a greater administrativeburden than simply naming an individual, and theyalso can have less favorable income tax consequences.

A third option—one that has very favorable taximplications—is naming a charity to receive certainassets from your estate. Anything passed on to acharity is free from both income and estate taxes.

Planning Ahead

In order to implement a proper estate plan, it'simportant to plan ahead carefully by considering variousfactors and circumstances that may be out ofyour 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 namingcontingent beneficiaries, in case the primary beneficiarydies before you do. This will prevent the assetsfrom simply being transferred to your estate, whichcan have the most costly income tax implications.

After completing your estate plan by naming primaryand contingent beneficiaries, it is important toregularly review your choices, especially as your situationchanges. Also, be sure to educate your beneficiariesabout your estate plan. They should beaware of the choices available, tax consequences, andany penalties that may apply.

With all the rules and regulations of estate taxation,it's important to consult with your tax advisor and tochoose your beneficiaries wisely. Otherwise, the IRScould receive a large majority of your assets as a resultof estate and income taxes, reducing the assets thattransfer to those whom you wish to benefit.

Joseph F. Lagowski is vice president, investments, and a financialconsultant with AG Edwards in Hillsborough, NJ. He welcomesquestions or comments at 800-288-0901, or visit This article was provided by AG Edwards & Sons, Inc,member SIPC.

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