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| Estate Planning |
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An updated, concise, well-drafted estate plan is one of the
greatest gifts you can give to your spouse, your children, and your
heirs. Have you ever though about what would happen to your family
should you die or become disabled? Dying without an estate plan can
throw your heirs into a legal quagmire that can cost thousands of
dollars in legal fees, taxes and other costs that could have been
avoided with proper planning. In addition, for families with
children, a properly drafted and current will with a guardianship
appointment is critical. Without a will, your children’s future will
be left to the decision of the courts.
Estate planning is much more than drafting a will. It includes
instructions about asset distribution upon death; healthcare
decisions, such as withdrawals of life support and the appointment
of someone to make that decision; guardianship issues; and the very
difficult choice of who will care for your children if you die.
Income and estate tax issues and a host of other matters are also
addressed. Many of these issues must be dealt with regardless of the
size of one’s estate; estate planning is definitely not limited to
the rich. A well-crafted plan can give you and your family peace of
mind for a lifetime.
The basic estate plan starts with a simple will plus advance
directives to cover healthcare issues. If you have children, the
basic plan is modified to include the guardianship provisions that
will appoint someone to care for your children if you die. With a
larger estate, a more complex plan can be designed to incorporate a
dynasty trust for your children, which will ensure that your assets
will not go unmanaged and unaccounted for to the guardian. The trust
can also be designed to ensure that your children will not receive
and outright distribution of assets at the age of majority when many
young people may have a difficult time managing assets in a complex
investment arena. Finally, for the middle income to the very
wealthy, estate taxes can cripple your heirs; thus, tax planning is
essential to the smooth and efficient transfer of wealth between the
generations. Without proper planning, more than half of your estate
can go to the government in taxes and expenses. |
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Estate Planning terms |
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Will: A will is the basic building block in estate planning. It can
be as simple as a basic statement of what you have and where you
want it to go, but it also can be a very complex document that is
drafted to deal with myriad estate tax issues, trust, and probate
issues. The will is also used to designate guardians for minors. It
is important to know that a will is a public document upon your
death, and costly probate proceedings are required to administer and
distribute your estate. |
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Trusts: The trust concept can confuse many people, as well as come
attorneys and accountants. At its very basic level, a revocable
trust or living trust is an alternative to a will. Like a will, a
living trust will distribute your estate according to your wishes,
but it is not subject to probate upon your death and is a completely
private document. In order for the trust to be effective in avoiding
probate, it must be funded. If you use a living trust, it is
essential to the success of your estate plan that your assets be
effectively transferred into your trust. |
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• Credit Shelter Trusts (also called bypass trusts): A credit
shelter trust is a powerful weapon in avoiding estate taxes. Upon
the death of the first spouse, the applicable credit amount
(currently $1,500,000) is placed into this trust and passes tax-free
to your children when the surviving spouse dies. With careful
investing, you can shelter substantial amounts of estate assets by
use of a credit shelter trust. |
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• QTIP (Qualified Terminable Interest Property) or Martial Trusts:
These trusts are beneficial when you have children from a previous
marriage or, in large estates, if there is a chance that the
surviving spouse might remarry. These trusts, when properly drafted,
ensure that the assets earned while you were alive go to your
children and guarantee that your children cannot be disinherited by
the surviving spouse (often unintentionally). |
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• Irrevocable Life Insurance Trusts (ILIT): These trusts are
designed to hold life insurance and, when properly drafted, allow
the proceeds of life insurance policies to pass to your children
free from estate tax. Today, with more people owning higher-value
insurance policies, ILITs are serving an important role in estate
planning. |
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• Children’s Trusts or 2503(c) Trusts: These trusts allow parents or
grandparents to transfer wealth to children and thus save estate
taxes without the fear that the children will misuse the finds and
when properly drafted can result in substantial income tax benefits.
Section 2503 of the Internal Revenue Code allows for such trusts,
and your state’s trust laws will govern the trusts. |
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• Advance Directives: Advance Directives, such as Living Wills and
Healthcare Powers of Attorney, are important planning tools to
relieve your family of the burden of making healthcare decisions for
you when you are incapacitated. |
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Most people underestimate the value of their estate. Assets in your
estate can add up quickly. For estate tax purposes, assets include
life insurance, IRA and 401(k) accounts and other retirement assets,
investments, bank accounts, personal property, business interests,
and real estate (including your home). In addition, one factor many
clients overlook is life insurance. A major benefit of life
insurance is that it is income tax free, but it is not estate tax
free.
Without any tax avoidance estate planning, the first spouse to die
will pass his/her estate to the surviving spouse, and using the
marital deduction, no tax will be due, no matter how large the
estate. This deduction is available to all U.S. citizens. However,
when the surviving spouse passes, estate taxes will be due on the
total remaining estate. The estate tax occurs when the value of an
individual’s taxable estate is greater than $1,500,000 (for 2005).
So if the estate was worth $ 2 million, $1,500,000 would be
inherited tax free, but approximately $230,000 in taxes would be due
on the other $500,000, because only one spouse used the estate tax
exemption. |
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For example:
John and Susan ($2.00M) > John dies ($0 tax using martial deduction)
>
Susan receives ($2.00M)
Susan ($2.00M) > Susan dies > uses her one-time $1,500,000
exemption, protecting the first $1,500,000 and exposing the
remaining $500,000 to approximately $240,000 in estate taxes, using
2005 tax rates.
Compare the example above with the tax saving results obtained
through the use of a proper estate plan below. |
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The A-B Plan |
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To preserve wealth in your estate by avoiding or limiting estate
taxes, which can be up to 55%, several tax-saving devices are
available. For a married couple, one of the most common devices is
through an A-B Plan. When the first spouse dies, the maximum estate
tax exemption amount (currently $1,500,000) is placed in the
deceased spouse’s B trust (also called a bypass trust or credit
shelter trust). No tax is due on the B trust because of the
exemption. The remaining assets are placed in the surviving spouse’s
A trust or given outright to the surviving spouse. The A trust and
any assets given outright to the surviving spouse will be subject to
estate tax if they exceed $1,500,000. The B trust can distribute
income to the surviving spouse and principle if needed for health,
education, maintenance, and support but the goal would be to spend
down the A trust.
Now let’s revisit John and Susan’s example:
John and Susan ($2.00M) > John dies > the maximum exclusion amount
is placed in John’s B trust, and the remaining amount is placed in
Susan’s A trust.
Susan dies> In the A trust, $500,000 passes tax free to the
beneficiaries because of her exemption, and amounts over this in the
A trust are taxed. The B trust has no tax due no matter what amount
is in it – even if it is more than the exemption amount – because
the value of the B trust is locked in at the time of John’s death.
For more complex estate, other tax avoidance techniques may include
the following:
1.) Tax-Free Gifts: each year you are able to give $11,000 to any
person free of gift taxes. (You can give $22,000 if the person is
married). This decreases the assets in your estate if you are above
the exemption amounts.
2.) Irrevocable Life Insurance Trusts (ILIT): remove the life
insurance payments from your estate total by making the Life
Insurance trust the owner of your life insurance policies. New
policies have no waiting period, and existing policies require that
you live three years from the date of the transfer to the Life
Insurance Trust.
3.) Qualified Personal Residence Trust (QPRT): This removes your
home from your estate, and the value of the gift is discounted
because your children will not receive it until some time in the
future, so you use less of the exemption amount. You transfer the
home to the Irrevocable Trust, keeping the right to use it for a
certain length of time; then after that time the residence transfers
to your heirs. Usually the grantor reserves the right to live in the
home for 10-15 years. If you die prior to the term, the home is
included in the estate. If you live longer than the term, rent is
usually paid to the heirs.
4.) Grantor Retained Annuity Trust (GRAT) and Grantor Retained
Unitrust (GRUT): The GRAT and GRUT are similar to the QPRT except
you transfer income-producing assets to the trust for a number of
years. When the trust term ends, the asset passes to the
beneficiaries based on the discounted value.
5.) Charitable Remainder Trusts: The asset is given to the
Irrevocable Trust; however, the income is paid to you for your life.
The advantage of the trust is that highly appreciated assets can be
sold without capital gains taxes and invested in high income
producing assets. When you die, the asset is given to the charity
and your estate is reduced by the value of the asset. Life insurance
can be used to replace the value of the asset through use of an
Irrevocable Life Insurance Trust.
6.) Charitable Lead Trust: these are the same as the Charitable
Remainder Trust, except the income is paid to the charity and the
asset is transferred to your estate at your death. This is for those
who do not need the current income but wish to pass the asset to
their children and want to reduce estate taxes by removing it form
their taxable estate and save income tax on the current income.
7.) Family Limited partnerships: The business assets are transferred
to the children now to reduce the sze of the estate. As the general
partner, the grantor remains in full control of the assets, but
again discounts the value of the business for estate tax savings.
Each year, Americans pay millions of dollars in unnecessary state
and federal income and estate taxes, as well as needless probate
fees. By planning your estate in advance, you can reduce if not
eliminate this cost of dying as well as know that your estate will
be administered the way you want it to be. Our attorneys have
extensive experience in estate planning and can help you develop a
well-ordered estate plan. For a free evaluation of your estate,
contact our offices to arrange a consultation. |
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