Estate Planning For Women

Estate planning affects women more profoundly, so they should take charge of this process, or at least be equal participants. Among Americans 65 and older, 42% of women, but just 14% of men, are widowed. Women’s longer life expectancy, combined with  their tendency to marry older mates and their lower lifetime earnings means they are far more likely to see their living standards compromised in retirement if proper estate planning is not done. And since it is women who are most often widowed, they usually have the last word about which of a couple’s assets ultimately go to family, charity or the taxman.

Starting in 2011, a surviving spouse can add any unused estate tax exclusion of the just deceased spouse to her own $5 million exclusion–this is called portability. So a widow can pass on as much as $10 million, untaxed, through either lifetime gifts or her will. But portability is not automatic. To get it, the executor of the estate of the first spouse to die must file an estate tax return, even if no tax is due. Surviving spouses should see to it that the form is filed even if they have nowhere near $5 million of their own, because who knows what the future holds?

Nine months is also the deadline if you plan to disclaim (turn down) any portion of what you inherited from a spouse so that it can go directly to your children or other family members or into a trust for their benefit. The new tax law makes it more likely that spouses will leave everything to each other outright. Other couples may want to give the survivor the right to disclaim at least some money and have it go into a family trust or bypass trust, as it is also called. This allows the survivor to make an informed decision based on her own financial resources and federal and state estate laws at that time. If you want to use this postmortem tax planning strategy, you need to keep an eye on the calendar.

Starting in 2011, the tax-free amounts you can give to no-spousal heirs during life and at death are combined into a single $5 million exclusion. So, for example, if you have used $1 million of the exclusion to make lifetime gifts, the unused exclusion when you die will be $4 million, rather than $5 million.

Married couples get a new, special break: They can share each partner’s $5 million exclusion during life (this process is called gift-splitting) and give more to the kids now, tax-free. But of course this also reduces how much of the tax-free amount will be available when they die, either for their own use or to be carried over by the survivor.

Should you give away assets now to save taxes?

Now that the estate tax exclusion has gone to $5 million per person ($10 million/couple), this issue concerns very few people. Still, a popular new refrain from estate tax experts is that you should rush to give to family members before the tax-free amount is scheduled to drop to a measly $1 million in 2012–even though that change isn’t likely to take effect. Of course many of the transactions they recommend for making gifts now generate high legal fees for them.

Keep in mind, too, that most methods of saving estate taxes require you to totally give up ownership and control over assets, whether you are giving them to people directly or putting them in a trust. A threshold question for anyone contemplating this strategy: Can I afford it? Be sure you are leaving yourself enough, and to be on the safe side, you should assume you will live to an advanced age.

You can give anyone $13,000 a year (a couple can give $26,000) without eating into your $5 million exclusion. If you want to give away more than that, you can either count your gift against the $5 million exclusion amount or, if you have used up the tax-free amount, pay gift tax of 35%. Remember that each dollar of the exclusion used during life shaves a dollar off what is available for your estate to use after your death.

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