Estate Planning
Our Estate Planning Practice
Estate planning allows you, while you are still living, to ensure that your property will go to the people you want, in the way you want, and when you want. It permits you to save as much as possible on taxes, court costs and attorneys’ fees; and it affords the comfort that your loved ones can mourn your loss without being simultaneously burdened with unnecessary red tape and financial confusion.
All estate plans should include, at a minimum, three important estate planning documents: a durable health care power of attorney, a durable power of attorney and a will. The first is for handling your health care during your life, in case you are ever unable to do so yourself. The second is for managing your property during your life, in case you are ever unable to do so yourself. The third is for the management and distribution of your property after death. In addition, more and more, people are also using revocable living trusts to avoid probate and to manage their estates both during their lives and after they’re gone. When estate taxes are an issue a combination of irrevocable trusts can be added to the estate plan in order to eliminate estate taxes as much as possible. A living will is also recommended. For a better understanding of the recommended estate planning documents please review the page of this website that specifically address the document.
A General Explanation of the Current Estate and Gift Tax
Regardless of which estate planning documents that you decide on all individuals of means need to understand the estate tax and the gift tax and how they may apply to their estates. The gift tax is a tax on all gifts made, whether outright or in trust, that take effect during a person’s lifetime (inter vivos gifts). The estate tax is a tax on all gifts/transfers, whether outright or in trust, that take effect at the grantor’s death (testamentary gifts). Unless there is an exception, tax must be paid on all inter vivos gifts and testamentary gifts.
When you die, whatever assets you own at the time of your death are considered to be part of your gross estate. These assets include personal property, such as cars and computers; liquid assets such as savings accounts and mutual funds; real estate, and life insurance. Life insurance proceeds, while not taxed as income to the recipient, are indeed calculated in the value of the decedent’s gross estate. Your taxable estate is equal to the gross estate minus funeral and burial expenses paid out of the estate, debts owed at the time of death, the value of property given to a spouse, the value of property given to a qualifying charity, and state death taxes.
Tax must be paid upon the transfer of the taxable estate, unless some exception applies. Under Federal tax law, one spouse can give an unlimited amount of property to a U.S. citizen spouse during lifetime or after the grantor’s death*. In tax talk, this ability to give to a spouse without estate tax consequences is called the Unlimited Marital Deduction. Thus, estate tax can be completely avoided simply by giving the entire estate to a surviving U.S. citizen spouse. However, upon the death of the unmarried second spouse, the unlimited marital deduction is no longer available. Intervivos and Testamentary gifts to other loved ones are shielded from tax only by the unified credit.
The unified credit is just what the name implies, a credit against the gift or estate tax that would otherwise have to be paid. In the year 2020, this credit is sufficient to cover the tax that would otherwise be levied on $1,580,000.00. In effect, the first $11.5 million of the estate is shielded from Federal estate tax. If the estate exceeds $11.5 million dollars, it will be required to pay Federal estate tax on the excess, up to a maximum rate of forty percent!
Strategies for Minimizing Estate and Gift Taxes
How do you minimize the estate tax if your estate is or expected to be over the unified credit in effect in the year of your death? One option is to give property away during your lifetime, thereby reducing the value of your estate until it is under the tax exclusion amount. However, the tax code places severe limits on non taxable gifts. Gifts outside of these limitations will be subject to a gift tax, and a tax will be imposed once the tax exceeds the unified credit.
The current annual gift tax exclusion that a Grantor can give to any one individual is currently $15,000. A married couple can combine their annual exclusions and gift $30,000, gift tax free, to any one individual. In addition to the annual exclusion, larger amounts to pay educational or medical expenses, paid directly to the qualified provider, are non taxable events. Annual exclusion gifts can only be made in trust if the trust includes specific limitations on the trust and gives the beneficiaries specific rights known as crummy powers. In some instances gifts to 529 college savings plans are exempt from the gift tax.
Probably the most powerful estate tax avoidance mechanism for a married person is the credit shelter trust. Remembering the basics of the unlimited marital deduction and the unified credit, consider the following two examples:
Example 1: No tax planning Let’s say that Husband (H) has a taxable estate of $10M. Wife (W) has assets in her own right worth $10M . H dies in 2019 with a simple will giving all his property to W. W takes tax free under the unlimited marital deduction. W dies the following year with a will giving all of her property equally to her two children, A and B. Upon her death, W’s taxable estate is $20M. The unified credit ensures that W’s estate need not pay tax on the first $1.58M. However, an estate tax will be levied on the other $8.42M not protected by the unified credit.
Example 2: Credit Shelter Trust Assume the same facts as above; however, this time H has seen an estate planning attorney and had executed a will containing a credit shelter trust. It is called a “testamentary” trust because it is created by language in a will. Basically, H’s will says that of his estate goes outright to W, no strings attached. The other $9M goes into a trust for the benefit of the children. The trust instructions give W access to the trust income and limited access to the trust principal during her lifetime. When W dies, all remaining trust assets go to the children. So, here’s what happens, tax wise, if H dies in 2019 after having executed a testamentary credit shelter trust. The $lM given to W outright is not subjected to estate tax. It is protected by the unlimited marital deduction. The other $9M put in the trust is not considered to be a gift to W; rather, it is a gift to the children and therefore not protected by the unlimited marital deduction. However, it is shielded from tax up to the amount covered by the unified credit-$11.5M. Unlike in the previous scenario, H’s unified credit has been put to good use. Upon the death of the second spouse, the $9M trust proceeds go to the children tax free, protected by H’s unified tax credit. But W’s estate has an additional $10M. [Remember, in this scenario, W took outright from H and had another of her separate property owned prior to H’s death.] W, using her unified credit, can give this additional $11.5M tax free to the children as well. Thus, $11M is passed tax free to the children, making good use of both Hand W’s unified credit. Tax on $8.42M has been completely eliminated!
H & W would no doubt find the elimination of all Federal estate tax attractive; but there is a catch, in order to get the benefit of the unified credit W’s access to the assets in the credit shelter trust has to be limited. The Internal Revenue Code allows W to have some control and access to the trust funds. However, if W is given too much control and access, then the trust appears to the taxman like a gift to W rather than to the children, and treats it as such. The tax reduction benefits of the credit shelter trust are lost.
For unmarried people and married people with estates larger then both of their unified credits there are several other options available to reduce or eliminate the estate tax including, but not limited to, life insurance trusts, charitable giving and family limited partnerships.