Cynthia Leach

Accountant & Financial Planner

Often, so much attention is focused on the estate tax that other tax and nontax considerations are slighted. For example, many estates comprise retirement plan assets in 401(k), IRA, and profit-sharing plans. The income tax aspects are often as important or more important than the estate tax consequences of holding these assets. Thus, these assets require special attention.

Nontax considerations also can be very important. Suppose, for example, that the bulk of your estate is tied up in a closely held business. Have you made adequate plans for the succession of management of your business? If you are a partner or co-owner of the business, have you agreed on a legally binding method of disposing of your interest, buying the other partner's interest, or continuing part-ownership of the business? If you have a buy-sell agreement, is the specified price or the formula contained in the agreement fair and equitable to all concerned?

You should pay particular attention to the following:

• Collectibles (for valuation issues)
• Closely held business interests (including valuation, management succession, ownership, and tax issues)
• Life insurance and annuities (including beneficiary designations and ownership issues)
• IRAs, 401(k) plans, and other tax-deferred arrangements (including beneficiary designation and other income tax issues)
• Installment sales and receivables (for income tax issues)
  
  

Understanding what you own and how it passes is essential in the development of a comprehensive estate plan. Life insurance and retirement benefits are both contractual arrangements under which you name a beneficiary to receive benefits in the event of your premature death. Proper estate planning requires the coordination of the beneficiary designations with the asset disposition plan of your will and other planning documents. For example, if you have written a will that establishes one or more trusts to hold your assets for the benefit of your family after your death, but your life insurance and retirement benefits are left directly to one individual, your overall estate plan is inconsistent and may be ineffective.

What is an irrevocable life insurance trust, and how can it save estate taxes?

The proceeds of life insurance policies owned by an individual are generally included in the individual's estate and are subject to estate tax. Significant es-tate tax savings can be obtained by assigning the ownership of the policies to an irrevocable life insurance trust. The trust owns the policies and receives the policy proceeds at the death of the insured. The trust is often created for the benefit of the insured's spouse, children, or other heirs. Since the policies are owned by the trust and not the insured, they are removed from the estate for estate tax purposes. An irrevocable life insurance trust can be a very valuable estate planning tool. However, these trusts do involve complex estate tax rules. You should consult with your attorney or other estate planning advisers before creating such a trust.