You’ve worked hard your whole life to provide for your family and make your loved ones more secure. Without advanced estate planning strategies, much of the significant assets you have accumulated may end up with the IRS and state taxing authorities.
Our firm regularly assists affluent families with such sophisticated planning strategies as Family Limited Partnerships or Limited Liability Companies, Special House Trusts, Irrevocable Life Insurance Trusts and a wide range of charitable gifting techniques to reduce Federal Estate Taxes, Gift Taxes, and Generation Skipping Transfer Taxes.
Will my estate be subject to death taxes?
What is my taxable estate?
What is the unlimited marital deduction?
What is a Credit Shelter or A/B Trust and how does it work?
What is a Qualified Personal Residence Trust (QPRT) and how does it work?
What is an Irrevocable Life Insurance Trust and how does it work?
What is a Family Limited Partnership and how does it work?
Will my estate be subject to the estate/death tax?
There are two types of estate/death taxes that may affect your goals: 1) federal estate tax and 2) state estate tax. The federal estate tax is computed as a percentage of your net estate. Your net taxable estate is comprised of all assets you own or control minus certain deductions. Some deduction examples are: administrative expenses (funeral and burial costs, charitable donations). The federal estate tax currently taxes estates with net assets of $5,490,000 (source 2017 irs.gov).
Your estate may also be subject to state estate and inheritance taxes. Further, you may have a taxable estate in the future as your assets appreciate in value. Additionally, laws change frequently. To ensure your goals will still be achieved with your current plan have your estate plan regularly with a knowledgeable estate planning attorney. For peace of mind contact G&M Legal Services at 623-236-2476.
What is my taxable estate?
Taxable estate is the total value of assets including interests in real estate, business, joint and retirement accounts, and life insurance policies not passed to your U.S. Citizen spouse minus liabilities and deductions. The taxes imposed on the taxable portion of the estate are then paid out of the estate itself before distribution to your beneficiaries.
What is the unlimited marital deduction?
A married spouse can give an unlimited amount of assets either by gift or bequest, to his or her spouse without the imposition of any federal gift or estate taxes. So, the unlimited marital deduction allows married couples to delay the payment of estate taxes at the passing of the first spouse because, at the death of the surviving spouse, all assets in the estate over the applicable exclusion amount ($5,490,000 as of 2017 source irs.gov) will be included in the survivor’s taxable estate. Please note the unlimited marital deduction is only available to surviving spouses who are United States citizens.
What is a Credit Shelter or Bypass Trust or A/B Trust?
A Credit Shelter Trust, aka Bypass Trust or A/B Trust is used to eliminate or reduce federal estate taxes. It is typically used for married couples with estates that exceed federal estate tax exemption. The purpose of a Credit Shelter Trust is to preserve both spousal exemptions for maximum transfer of assets. Upon the first spouse’s the death, the Credit Shelter Trust creates a separate, irrevocable trust using the deceased spouse’s assets. The surviving spouse is the main beneficiary of the irrevocable trust, with the children as the successor beneficiaries. The Irrevocable trust is funded to the extent of the first spouse’s exemption. The assets in the irrevocable trust are not subject to estate taxes. The trust takes full advantage of the first spouse’s estate tax credit. Special language in the trust provides limited control of the trust assets to the surviving spouse which prevents the assets in that trust from becoming subject to federal estate taxation, even if the value of the trust goes on to exceed the exemption amount by the time the surviving spouse dies.
What is a Qualified Personal Residence Trust (QPRT)?
A Qualified Personal Residence Trust or a QPRT (pronounced “cue-pert”) allows you to give away your house or vacation home at a great discount, freeze its value for estate tax purposes, and still continue to live in it.
How does a Qualified Personal Residence Trust (QPRT) work?
Your house is transferred to the QPRT. You retain a right to live in the house for a specific number of years. Your family is usually the beneficiary of the QPRT. If you live to the end of the specified period, the house (as well as any appreciation in its value since the transfer) passes to your beneficiaries free of any additional estate or gift taxes. After the end of the specified period, you may continue to live in the home but you must pay rent to your family or designated beneficiary in order to avoid inclusion of the residence in your estate. This is maybe an added benefit as it serves to further reduce the value of your taxable estate, though the rent income does have income tax consequences for your family. If you die before the end of the period, the full value of the house will be included in your estate for estate tax purposes, though in most cases you are no worse off than you would have been had you not established a QPRT. An added benefit of the QPRT is that it also serves as an excellent asset/creditor protection vehicle since you no longer technically own the property once the trust is established and your residence is transferred to the QPRT.
How can life insurance proceeds affect my estate plan?
A misconception about life insurance proceeds is that they are not subject to Federal Estate Taxes. While the proceeds are received by your loved ones free of any income taxes, they can count as part of your taxable estate and therefore your loved ones may lose a significant amount of its value to estate taxes without proper planning. Click here to learn more or how to avoid these possible pitfalls.
What is an Irrevocable Life Insurance Trust?
An Irrevocable Life Insurance Trust (or ILIT) is created specifically for the purpose of owning your life insurance policy. A properly established and administered trust holds the policy outside of your estate and keeps the proceeds from being taxable to your estate. The proceeds from the insurance policy can then be used to provide your estate with the liquidity to pay estate taxes, pay off debts, pay final expenses and provide income to a surviving spouse or children.
The ILIT will be the policy owner and beneficiary. Once we establish your trust, you use your annual gift tax exclusion to make cash gifts to your trust. Your beneficiaries forgo the present gift (in lieu of the future proceeds) and the trustee uses the remaining gift to pay the premium on the life insurance policy.
There are many options available when setting up an ILIT. For example, ILITs can be structured to provide income to a surviving spouse with the remainder going to your children from a previous marriage. You can also provide for the distribution of a limited amount of the insurance proceeds over a period of time to a financially irresponsible child.
What is a Family Limited Partnership?
A Family Limited Partnership (FLP) is a form of a limited partnership among members of a family. The main advantages of forming and funding an FLP involve estate and gift tax savings and asset protection. An FLP also allows you to retain control over the transferred assets while enjoying these advantages.
Once the FLP is established and your assets are transferred to it, you can make gifts of limited partnership interests to your children or other beneficiaries. This accomplishes several different estate planning objectives simultaneously.
The FLP has a number of benefits: transferring limited partnership interests to family members reduces the taxable estate of the older family members while they retain control over the decisions and distributions of the investment. Since the limited partners cannot control investments or distributions, they can be eligible for valuation discounts at the time of transfer which reduces the value of their holdings for gift and estate tax purposes. Lastly, a properly structured FLP can have creditor protection characteristics since the general partners are not obligated to distribute earnings of the partnership.
Our firm is dedicated to helping clients make educated, informed decisions about their assets, and will work with you and your team of financial advisors and CPAs to implement a highly effective estate plan with minimal effort. Call us today at 623-236-2476.