This time of year, attention inevitably turns to tax issues. Whether you are expecting a big tax refund or just hoping to minimize your payment to the IRS, tax matters capture everyone’s attention at the beginning of a new year.
What many people may not realize is that some strategies which may be used to minimize tax liability may also be effective estate planning strategies. For example, strategic gifting may reduce your income and therefore potentially reduce your tax liability. Strategic gifting can also be an effective estate planning tool to transfer assets to your desired beneficiaries. Investing in an IRA or 401(k) can also minimize your income tax liability; however, if you do not designate a beneficiary on your IRA or 401(k), you may end up with probate issues following your death.
If you have young children, you may relish the deduction that those children provide on your tax returns. But have you thought about who would care for your children if you were not here? Estate planning is essential for young families, even if they have limited assets so that they can ensure that their families are cared for in the manner they wish.
And what if you were incapacitated? Who would be responsible for managing your finances and preparing your tax returns? A financial power of attorney is necessary to permit someone to deal with the IRS and any other financial institution on your behalf. Without a financial power of attorney, your loved ones may have to petition the court to appoint a conservator, who could be a member of your family, or which could be an independent conservator with no relation to you or your family, who would charge for their services. This process can generally be avoided with an estate plan which encompasses care during your lifetime as well as distribution of your assets after your death.