There are many different tools in the estate planning toolkit. Trusts of various kinds can be utilized to satisfy a number of diverse objectives. This is why it is very important to connect with an estate planning attorney when you are thinking about your legacy. Legal devices may be available to you that you are not aware of, and a lack of knowledge can sometimes be costly.
Estate Tax Efficiency
If you have been very successful from a financial perspective, you have to be aware of the looming specter of the federal estate tax. This death levy carries a 40 percent maximum rate that can significantly erode the wealth that you are passing on to the next generation. The good news is that there is a relatively hefty credit or exclusion. This is the amount can be transferred before the estate tax would kick in. At the time of this writing in 2018, the federal estate tax exclusion is $11.18 million.
The exclusion is allotted to each individual taxpayer, so a married couple would have a total exclusion of $22.36 million. It is also important to understand the fact that the estate tax exclusion is portable between spouses. If you were to predecease your spouse, they would have their own exclusion, and they could also use your exclusion.
When you hear about this tax, if your assets are in taxable territory, you may consider giving gifts while you are living to avoid it. This was possible after the original enactment of the estate tax in 1916. However, a gift tax was put into place in 1924.
It was repealed a couple of years later, but it was reinstalled in 1932, and it has been a fact of life ever since. At the present time, the estate tax is unified with the gift tax. As a result, the exclusion is a unified exclusion that applies to lifetime gifts along with the estate that you will be passing along to your loved ones.
If you are faced with the death tax, there are a number of different types of irrevocable trusts that you can use to facilitate tax efficient asset transfers. When you convey assets into a trust that cannot be revoked, you are surrendering incidents of ownership, so the resources are no longer part of your estate for tax purposes. However, the actual transfers to others are subject to some level of taxation.
One type of trust that can be useful for people who are faced with estate tax exposure is the qualified personal residence trust. The way that it works is that you convey your home into the trust, and you name a beneficiary who will assume ownership of the property after the term of the trust expires. You continue to live in the home as long as you choose to do so; this interim is referred to as the retained income period.
Let’s say that you decide to live in the home rent-free for 10 years. After that, the beneficiary will assume ownership of the property. This transfer would constitute a taxable gift in the eyes of the IRS. However, no objective buyer would pay full value for a home that they could not possess for 10 years. This is taken into account by the Internal Revenue Service when they determine the taxable value of the gift. As a result, the gift tax would be applied on a value that is far less than the actual market value of the property.
This is one type of trust that would provide estate tax efficiency, there are others. Grantor retained annuity trusts, generation-skipping trusts, and charitable lead trusts are some of the additional vehicles that can be utilized by high net worth individuals to preserve resources.
Estate Planning After Remarriage
If you are a parent that is divorced, and you are getting remarried, you are logically going to have estate planning concerns. There is a device called a qualified terminable interest property trust that can be the solution. To provide a simple explanation, you convey assets into the trust, and your spouse is the first beneficiary. After your passing, your surviving spouse could receive distributions of the earnings from the trust and utilize trust-held property. However, he or she would have no ability to change the terms of the trust.
You name final beneficiaries that would assume ownership of the remainder after the death of your surviving spouse (presumably your children). When you utilize a QTIP trust, you are taking care of your spouse throughout his or her life as you protect the interests of your children.
Attend an Upcoming Seminar!
Our trust administration attorneys are holding a series of seminars over the coming weeks. You can learn a lot if you attend one of these sessions, and there is no charge at all. To see the schedule and obtain registration information, visit the estate planning seminar page on this website.
Mark S. Eghrari, Estate Planning Attorney
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