United States: Tax Tips

Why your college-age child needs an estate plan

Most college packing lists do not include an estate plan; however, a few basic documents can give you peace of mind as your son or daughter heads off to college. Without them, once your child turns 18, you will lose the right to access financial or medical information or make decisions on his or her behalf. Recommended documents include:

  • A HIPAA authorization and health care power of attorney, giving you access to medical information and the ability to make medical decisions if your child is unable to do so; and
  • A financial power of attorney, authorizing you to access your child's financial records and handle financial matters while he or she is away from home.

Generally, a will is not necessary unless your child owns a significant amount of property.

Behind on your retirement savings? Consider a cash balance plan

Business owners looking for ways to boost their retirement savings should consider a cash balance plan. One problem with 401(k) and other defined contribution plans is that nondiscrimination rules prevent business owners from favoring themselves over rank-and-file employees when it comes to contributions.

A cash balance plan, although it looks and feels much like a defined contribution plan, is actually a defined benefit plan. Thus, to comply with nondiscrimination rules, benefits paid to highly compensated employees (HCEs) and non-HCEs must be comparable. As long as projected benefits do not discriminate, contributions may be as high as necessary to fund those benefits. Often, that means dramatically higher contributions for owners approaching retirement than for younger employees.

Have you inadvertently disinherited your spouse?

Now that the federal gift and estate tax exemption has reached $11.40 million ($22.8 million for married couples), review your estate planning documents for provisions that can produce unintended results, and amend them if necessary. It is not unusual, especially in older plans, for a "formula-funding clause" which generally funds a credit shelter trust with the greatest amount of property that may pass to others free of federal estate tax, with the balance going to a marital trust or directly to one's surviving spouse. This approach may have worked well in the past, if the value of your estate exceeded the exemption amount. But if that is no longer the case, a formula-funding clause can cause all your property to go into the credit shelter trust, effectively disinheriting your spouse.

Be aware that the Tax Cuts and Jobs Act is set to expire after 2025, which at that point, the estate tax exemption will return to an inflation-adjusted $5 million for 2026. This will cause even the best planned estates to be revisited when that time comes.

Is it time to revisit your Qualified Personal Residence Trust?

If you transferred your home to a qualified personal residence trust (QPRT) years ago, the estate tax savings you envisioned may not be relevant today with the increase in the estate tax exemption. If estate taxes are no longer a concern, talk to your tax advisor about unwinding the QPRT. One possible option is to continue living in the home rent-free after the trust term. This would pull the home back into your estate, entitling it to a stepped-up basis and relieving your heirs from capital gains taxes on the home's appreciation.  However, by unwinding the QPRT, you will have wasted any payment of federal gift tax or use of the applicable exclusion amount associated with the original transaction.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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