Planting Season for a Harvest of Tax Savings
After what has been a rough winter in many parts of the country, spring is finally here. Spring is the time to plant in the garden, but may also be the time to consider ways to save on income taxes, long before year’s end. Here are a few suggestions for a bumper crop of savings:
Special Planning for Special Needs
Parents who have a son or daughter with disabilities may find it inadvisable to leave that child a large inheritance. Adverse consequences might include the disqualification from eligibility for various types of government assistance or the inability of the child to manage the inherited assets properly.
Professional advisers often suggest parents establish a special needs trust that will benefit the child but safeguard qualifications for government assistance. The trust typically would allow the trustee discretion to provide nonessential services and items to the child, such as piano lessons or recreational equipment. Special needs trusts must be carefully drafted to comply with state law.
In general, the trust must be specifically drafted to be supplemental, providing only “extras” for the son or daughter. Consult an estate planning attorney with expertise in special needs trusts to ensure proper wording. Parents should also write a “letter of intent” to the trustee explaining the child’s history, setting priorities for care and services and stating their own hopes and expectations for the child. In some cases it may be possible to direct that funds remaining in the trust at the child’s death pass to charity.
Who Should Be Your Executor?
Careful thought should be given to choosing your executor (personal representative at death). Your executor will be legally responsible for settling your estate and carrying out all the provisions of your will. It is not an easy task, even though an estate attorney provides legal assistance. Your executor will have to collect and preserve assets, wind up accounting procedures, file tax returns and worry about investments and cash needs.
You might nominate your spouse as your executor, or a competent and experienced friend or relative or the trust department of a bank. Or you may wish to name a spouse, friend or relative together with the trust department of a bank, to serve as co-executors.
Write to Your Family, Right from Your Heart
A will is basically a document in which you tell how you want assets distributed at death. There’s another document you should consider that tells why. It’s often called a letter of instruction, and it’s addressed directly to family members, not to the probate court.
In a letter of instruction you can explain why you distributed more assets to one child than another (e.g., medical hardships, financial need, to balance gifts made during your life). You can also direct certain items of personal property to a particular family member. For example, a grandmother might leave her knitting needles or crochet hooks to the granddaughter she taught to do needlework. Although these items may not be valuable in the monetary sense, they may carry special sentimental value.
Your letter of instruction is an opportunity to make the personal statements to your family that will help them understand the terms of your estate plan. In it you can also make special requests — that they continue supporting the charities that were important to you, in your memory.
A letter of instruction is not a substitute for a valid will. It is not enforceable in probate court because it is not witnessed as required by state law. Because it is not witnessed, it can be changed without the need to adhere to the legal technicalities of wills.