MAKING CENTS: Many opportunities missed, especially in estate planning

More costly than a mistake in your tax filing may be missing out on opportunities for savings you didn’t know existed. One may be with the holding period of your investments. Investments held for one year or longer qualify for a lower capital gains rate than short term gains held less than a year. Before you sell any investment, check the date of acquisition.

Consider harvesting any gains or losses in your portfolio to offset each other. The code allows you to deduct losses dollar for dollar against gains. When your losses exceed your gains, you’ll only be allowed a $3,000 deduction.

An exception to offsetting gains with losses may be appropriate for low income taxpayers. Perhaps this is the year that you’ve retired, and you find yourself in a lower tax bracket. Joint taxpayers with taxable incomes less than $72,500 will pay no capital gains on their sales of appreciated investments.

Before you sell an investment to donate to your favorite charity, consider gifting the investment to the charity. In the case of gifting appreciated securities, you will get a

deduction for the full fair market value of the investment even though your cost may be far less than the fair market value. In this case, you’ll avoid claiming any capital gains and get a full deduction for the amount that you want to gift to the charity.

Improperly calculating the basis of inherited investments also causes problems. The inheritor of investments can step up their tax basis to the fair market value at the date of death. For an elderly decedent who held their investment for a long time, this difference may be very significant.

Similarly, if an elder person is considering a gift of real estate or appreciated property of any kind, it may make sense for this asset to pass through the estate rather than via gift simply for the step up in basis.

The last thought is about Roth IRAs. Many people are conditioned to take nothing from the IRA until the last possible moment at age 70½. A conversion to a Roth IRA now will help to reduce required minimum distributions later. Of course, you’ll pay tax now on the amount converted but this may a good thing. If you find yourself in a lower tax bracket this year, consider making a partial Roth conversion to use up whatever may be remaining in that lower tax bracket.

MAKING CENTS: Review estate plans now, rest in peace later

Talking about the follies of wealthy or famous people is so popular that even the lousy estate plans they leave make headline news. Think about all the celebs, like James Gandolfini, who have left a mess for their children and other loved ones.

Very few, on the other hand, are motivated by these stories to get their own estate plans in order.

The truth is that the overwhelming majority of those reading this right now have an estate just as messy as the celebs.

I won’t get too nerdy on you and throw around code sections or advanced estate planning topics, but rather the basics that everyone needs to button down and keep current.

The first issue is to ask whether you even have a will, trust, durable power of attorney and a health-care power of attorney. All but the trust is needed for even the simplest of estates. A trust becomes more important if there are any matters that may need further guidance or attention after your passing, such as managing money for minor children until they are capable of receiving it. Another reason for trusts may be your desire for privacy and avoiding your state’s probate process.

Sometimes a will or trust that is very old is as dangerous as not having one at all. Provisions may be outdated or superfluous, and badly in need of updating. For example, are you sure that your former spouse is not named in any of the documents? Is it set up to minimize both federal and state death taxes? Are people named as executors or trustees no longer significant in your life or not even living?

Beyond your documents, you should look at how you own property. For example, if you own an inherited rental property jointly with rights of survivorship with your brother, and you pass away; guess what happens? Your brother gets the entire property regardless what your will says.

Similar problems can occur with improper beneficiary designations of your retirement accounts, annuities or life insurance policies. It is very easy to change beneficiaries, but you must take action.

The good news about having a lousy estate plan is that you’ll never know what a mess you created. The bad news is that your heirs will have this experience as one of their last memories of you. Estate plans need to be reviewed every five years or more often. Unfortunately, this is one element of your financial plan that you don’t know when you’ll need, so time is of the essence.

MAKING CENTS: Estate plans do more than avoid tax hit

Many people equate estate planning to death tax savings or avoidance, and because most people have less than $5.25 million in assets, they assume that estate planning isn’t for them. Nothing could be further than the truth.

An estate plan is a plan that takes care of you, your family and your assets, both money and stuff when you are either incapacitated or dead. It centers on legal documents, the core of which may not be your will. A will for example, doesn’t help if you are severely disabled or incapable of making your own financial decisions. For incapacity, a durable power of attorney or owning your assets in a trust where a co- or successor-trustee is appointed at the time you sign the trust may serve you better than a will.

For most people, the core of their estate plan should be a living trust. This means that you would own most of your assets in your trust now, with you in control as trustee and beneficiary. Beyond the living trust, a pour over will which would then direct anything that you forgot to title in the trust over to the trust after your passing. The pour over will works, but it will also cause your estate to go through the probate process.

Two other necessary documents include a durable power of attorney and a living will or health care proxy. The durable power of attorney allows your appointee to act on your behalf for everything financial. A live and potentially risky document; only give this power to someone in whom you have immense faith and trust. Everyone over age 18 should have a separate document for selecting an agent to direct health care decisions in the event you are unable to decide for yourself.

Even if your estate is less than $5.25 million, other taxes can clip the value of your inheritance. Depending on where you live, a state death tax may be involved. Any estates larger than $1 million in Massachusetts will pay approximately 10 percent in state tax on the amounts over $1 million.

There may also be income taxes due from a retirement account, such as a 401K or IRA, and from the inheritance of any annuities.

Other significant reasons for an estate plan are: provisions to prevent a 22-year-old beneficiary from blowing it all, provisions for divorce-proofing assets for future generations and protecting assets from health care, creditors or other unforeseen problems.

John P. Napolitano is CEO of U.S. Wealth Management in Braintree, Mass., and 2012 president of the Financial Planning Association of Massachusetts. He may be reached at jnap@uswealthcompanies.com or on Facebook as JohnPNapolitano and US Wealth

John Napolitano is a registered principal with and securities offered through LPL Financial. Member FINRA/SIPC. He can be reached at 781-849-9200.

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