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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 the Credit Shelter. When the first spouse dies, the maximum estate
tax exemption amount (currently $3,500,000) is placed in the
deceased spouse’s Credit Shelter (also called a bypass trust or credit
shelter trust). No tax is due on the Credit Shelter because of the
exemption. The remaining assets are placed in the surviving spouse’s
QTIP or given outright to the surviving spouse. The QTIP and
any assets given outright to the surviving spouse will be subject to
estate tax if they exceed $1,500,000. The Credit Shelter 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 QTIP.
Now let’s revisit John and Susan’s example:
John and Susan ($4.00M) > John dies > the maximum exclusion amount
is placed in John’s B trust, and the remaining amount is placed in
Susan’s QTIP.
Susan dies> In the QTIP, $500,000 passes tax free to the
beneficiaries because of her exemption, and amounts over this in the
QTIP 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 Credit Shelter 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 $13,000 to any
person free of gift taxes. (You can give $26,000 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 size 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. |
