Estate Planning: Transferring Wealth and Tax Planning

If you are a Florida resident with substantial assets, The Karp Law Firm can help you minimize (and sometimes eliminate) estate taxes and transfer the maximum amount of tax-free money to your beneficiaries. Read on for information about some of these estate planning strategies: 

Note The federal estate tax expired effective Jan. 1, 2010. However, it is widely anticipated that Congress will reinstate it, possibly making it retroactively effective to the first of the year. In 2011 current law provides for the federal estate tax to return with an exclusion of $1million and a tax rate of 55%. Many of the strategies below assume a federal estate tax at 2009 levels. These strategies will again be relevant if and when Congress reinstates the estate tax.

Gift to Transfer Tax-Free Money and Reduce Your Taxable Estate

A program of gift-giving can help reduce the size of your taxable estate, provide financial assistance to your family, and, since you make these gifts while you're alive, allow you the pleasure of knowing you are assisting your loved ones.

As of January 1, 2009, an individual can give away up to $13,000 per year, per recipient, to as many recipients as desired, without incurring any gift tax or affecting the unified lifetime gift tax exemption, which is currently $1,000,000.  For example, a single person with two children can transfer $13,000 to each child per year for a total of $26,000, and retain his $1,000,000 exemption. A married couple with two children can transfer $52,000 per year ($13,000 per child per parent) and each spouse will still retain a $1,000,000 exemption. 

There are no restrictions on who you may make gifts to. In addition to your family members, you may make gifts to any individual up to $13,000 per year without affecting your gift tax exemption. These gifts are not tax-deductible for you, or income taxable to the recipient.

A person may give away in excess of $13,000 per year to any recipient if the gift is made directly to a medical provider or educational institution for that recipient's benefit. For example, you may pay your granchild's annual college tuition of $30,000 without in any way impacting your unified credit, provided you write the check directly to the school, in addition to giving $12,000 to your grandchild in the same year. None of these gifts would affect your lifetime gift tax exemption.

Credit Shelter Trust can Double Tax-Free Assets a Married Couple Can Pass to Heirs

A Credit Shelter trust (also known as the A-B Trust or Bypass Trust) may be beneficial if you are married and your combined marital assets exceed the current estate tax exclusion (the amount you can pass on to your heirs free of estate taxes). The exclusion as of January 1, 2009 is $3.5 million per individual. In addition to keeping your estate out of probate, this type of trust allows both your and your spouse's estate tax exclusions to be used, thus effectively doubling what can be passed on to heirs estate tax-free.

A Credit Shelter Trust is structured so that when the first spouse dies, the couple's assets are divided into two trusts: the deceased spouse's trust which contains the current exclusion amount; and the survivor's trust. As an example, let's assume a 2009 estate tax exclusion of $3.5 million per person and a couple with $7 million in assets. Upon the death of the first spouse, assets flow into two trusts: the Credit Shelter Trust containing the deceased's assets up to $3.5 million, and the survivor's trust. The surviving spouse has full use of the income from the Credit Shelter Trust during his or her lifetime, as well as the right to draw on the principal for health, education, maintenance and support. Upon the survivor's death, assets from both trusts pass on to the beneficiaries. Thus, each spouse has made full use of his/her estate tax exclusion and can pass on twice the amount of tax-free money to heirs. Without the Credit Shelter Trust, the surviving spouse would have had a $7 million estate at the time of his or her death, but only one exclusion would have been available. Thus, $3.5 million of the $7 million would have been subject to estate taxes. 

Life Insurance Trust Can Provide Heirs Cash to Pay Estate Taxes

For estates on which estate taxes will be owed, the issue of what assets should be used to pay the taxes can be problematic.  Frequently a family business is involved which cannot be sold or mortgaged without causing great harm to the business and family members who work in it and rely upon it for their and their family's future. If qualified plan money [ IRA, 401(k), 403(b) ] is a large portion of a decedent's estate, liquidating these funds to pay estate taxes can create negative income tax complications and cause a major dissipation of those retirement funds.

An Irrevocable Life Insurance Trust is one solution to this quandary. The insurance can either be on the life of a single individual, or upon the second to die of a married couple (the point at which the estate tax customarily has to be paid). The trust is set up with a trustee(s) other than the insured.  The trustee is generally an adult child, or a third party like a bank or an attorney. Properly done, gifts are made by the insured to the trustee, for the benefit of the ultimate beneficiaries (usually children or grandchildren). Those gifts are used to purchase and continue to pay for life insurance on the life of the insured. Upon the death of the insured or insureds, the life insurance proceeds are paid to the trustee, for the benefit of the beneficiaries, free of both income tax and estate tax.  Those funds are then used to pay any estate taxes due, thus avoiding the need to sell the family business, real estate, or the qualified plan. 

Use a Heritage Trust to Keep Your Assets in Your Family

Today's high divorce and remarriage rates make keeping assets "in the family" an  increasing concern. If your child divorces, chances are you want your child and your own grandchildren -- not your former in-law and that in-law's children -- to inherit your assets. A properly drafted Heritage Trust can help ensure that your assets pass to your blood relatives, as well as potentially protect those assets from their creditors in the event your heirs encounter financial hardship. 

You set up a Heritage Trust naming your child as beneficiary and trustee of the trust when you pass on. At that time, assets from your trust are retitled into the Heritage Trust. Your child then has complete access to both the principal and income. When your child dies, any unused portion of his inheritance goes to his children. (If his children are too young to manage the monies, the funds may be held in trust for them, and a trustee, usually another one of your adult children, can use the assets for the grandchildren's health, education, maintenance and support.) If your child dies without children of his own, any unused funds are divided among your blood relatives, generally surviving children or grandchildren.

Another advantage of the Heritage Trust is that assets passing through it, unlike those passing through a traditional will or trust, are automatically segregated from your child's marital assets. This spares your child the potentially awkward situation of informing his spouse that he wishes to keep his inheritance separate from his marital funds.

Heritage Trust Graphic

Spousal Option Trust Can Keep Your Estate Plan Flexible as Tax Laws Change

The Credit Shelter Trust allows couples with taxable estates to pass the maximum amount of tax-free money to heirs. However, it requires some extra work after the first spouse dies. The survivor needs to maintain assets in two pots: the Credit Shelter Trust and the Survivor's Trust. That involves tracking, managing, and filing income tax returns for each trust.

The problem is, under the Tax Reconciliation Act, the definition of "taxable" is constantly changing. This law as of January 1, 2009, provides for an estate tax exemption of $3.5 million per individual. But in 2010, the estate tax is eliminated entirely. But then, if Congress fails to act, the Act expires, the estate tax exemption returns to its pre-2001 level, and effective 2011, anything over $1 million will be taxed. If the first spouse happens to die when the provisions of the Act render the couple's estate non-taxable, the Credit Shelter Trust will still require the survivor to set up two trusts -- at that point, a lot of bother for no benefit.

The Spousal Option Trust (also known as the Disclaimer Trust) addresses this problem of chaning estate tax exemptions by giving the survivor the option, not the obligation, of setting up two trusts upon the death of the first spouse. If at the first death a Credit Shelter Trust is unnecessary from a tax standpoint, it need not be established. The decedent's assets would then go directly into the survivor's trust.

Spousal Option Trust Graphic

Stretch Out Your IRA with an IRA Trust

If your IRA has more assets in it than you are likely to need during your lifetime, you may wish to pass it on to your children (or other heirs) so they may "stretch out" the withdrawals.  If properly drafted and set up, an IRA Trust  will allow your children or grandchildren to make withdrawals over a longer period of time than you or your spouse are legally entitled to, thus dramatically increasing the lifetime payout to them.  This type of trust can transfer wealth to children, grandchildren and even more remote descendants. When used with a Roth IRA, distributions to an IRA Trust will also be income tax-free.

Regardless of who the beneficiaries are, the income and principal appreciation of your IRA account accumulates tax-deferred during your lifetime.  Consequently, even a rather modest amount earmarked for an IRA Trust could have a significantly increased value at your death (depending, obviously, on investment performance and how many more years you live).  However, the greatest potential for a traditional or Roth IRA’s  growth in value stems from the longer distribution period applicable to a grandchild or great-grandchild. 

The trustee of an IRA Trust is directed to withdraw the minimum required distribution amount from the traditional or Roth IRA account over the life expectancy of the Trust’s beneficiary.  The undistributed balance of the IRA account continues to grow tax-free, thus increasing the amount of future payouts. You can still control the distributions to your child or grandchild. You can choose the Trustee of the trust, the terms on which the trustee will take distributions from your IRA account, and when and to what extent funds can be distributed from the Trust to your primary beneficiary. 

Charitable Remainder Trust: Give to Charity and Reap Estate Tax Benefits

The Charitable Remainder Trust can be a useful tax-savings tool if you have significantly appreciated assets, such as stocks and real estate. A Charitable Remainder Trust may allow you to avoid paying capital gains taxes on these assets, as well as remove them from your estate and therefore reduce estate taxes. When you place highly appreciated assets in a Charitable Remainder Trust whose ultimate beneficiary is a charity of your choice, you receive an immediate income tax deduction equal based on the fair market value of the assets. Your designated charity (trustee) then sells the asset and invests the monies in income-producing investments, and you receive income for life from the trust. When you die, your designated charity receives the principal of the trust. Although the trust is irrevocable, you still have the power to change or add charitable beneficiaries at any time.