Top Estate Planning Strategies

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Paul Sundin, CPA

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A Trust Centered Estate Plan may not be enough to plan against all avoidable estate taxes for individuals and couples with larger estates. Various other types of Trusts can be used, so that family members pay as little tax as possible when the assets are passed onto them. In doing Estate Plans for taxation purposes, we consider estate taxes, gift taxes, generation-skipping taxes, property taxes, income taxes, and capital gain taxes. There are several strategies available to us, any combination of which we design to meet each individual’s needs. Additionally, all strategies described in this section can offer creditor protection.

Irrevocable Life Insurance Trusts are the most common estate tax planning technique. Most people have heard that life insurance is tax-free; however, they are only income tax-free. Many people do not know that life insurance is subject to estate taxes. This means that beneficiaries may only receive about half of the insurance, with the other half payable to the IRS. This can be easily avoided by placing all life insurance into an Irrevocable Life Insurance Trust. A properly drafted Insurance Trust can ensure that all proceeds will pass to the children free of tax. By placing ownership in these specialized Trusts, proceeds will not be considered part of your estate, so the money your loved ones receive will be distributed to them tax-free.

An Insurance Trust can be established for life insurance the client may already own. Survivorship life insurance may be purchased by a specific type of life insurance Trust to pay the anticipated estate tax liability. This structure provides clients’ families with tax-free assets to pay estate taxes, so assets such as the family residence do not need to be sold. These policies generally have lower premiums because they insure the lives of both husband and wife. They do not pay out until the second death, which is when the funds are necessary to pay the taxes.

Qualified Personal Residence Trusts serve to lower the final estate taxes due. These Trusts are used for clients to make a lifetime gift of the home to their children. The home is placed into this specialized trust for a certain number of years. During the term of the trust, the clients retain the right to live in the home. However, at the end of the term of years, the home reverts to the children (usually in the form of a Children’s Trust, so the kids do not actually receive the property until they receive the rest of their inheritance).

By delaying the gift for a certain term of years, the value of the gift (and therefore the amount of the $1,000,000 exemption that is used) is greatly discounted. For example, if mom and dad were to simply gift a $2,000,000 home to their children today, their entire combined exemption would be used. However, if they gifted the home through a Qualified Personal Residence Trust with a 20-year term (based upon an age of 60 years), only $400,000 of their combined exemptions would be used. In addition, by placing the home in the Qualified Personal Residence Trust now, all future appreciation is attributable to the children. So even if the home has tripled in value when the children are settling the parent’s estate, there will be no taxes due for the home.

Grantor Retained Annuity Trusts are substantially similar to the Qualified Personal Residence Trust, but they can be used for any asset. In addition, by making this type of delayed gift to the next generation, the asset will not be considered part of the clients’ estate when calculating the final estate tax liability.

Dynasty Trusts can be used to make gifts to clients’ family members. These Trusts retain assets for the benefit of whomever the client designates, such as children and grandchildren, to be distributed whenever the clients decide. They also have the added advantage of lowering the size of an estate, creating an estate, and gift tax-free gift.

Charitable Trusts can benefit those who already make regular charitable contributions and those who do not usually give to charity but reduce their estate tax liability. Charitable Lead Trusts can allow an asset to pass to an individual’s beneficiaries estate tax-free and offer an income tax deduction. Charitable Remainder Trusts reduce estate tax liability, help escape capital gains tax, and offer an income tax deduction.

Family Limited Partnerships are California businesses established to own family assets such as an investment portfolio and real estate. They can be established to transfer portions of family wealth to succeeding generations to help avoid estate taxes and help family members get involved in managing family assets.

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Estate CPA

Gilbert, AZ