The
Year 2000 is fast coming to a close, and this is to
remind you that it may be advisable to take certain
estate planning steps before December 31st.
The following are some estate planning techniques and
related ideas to be considered.
1. Estate Tax "Exemption".
This remains at $675,000 for the year 2001. Following
is a schedule which indicates what the exemption
amount will be (under current law) for the next few
years:
2000-2001………………$675,000
2002-2003………………$700,000
2004……..………………$850,000
2005……………………..$950,000
2006 and
thereafter....…..$1,000,000
The estate tax begins at 37%
(on assets over $675,000)
and reaches 55% (on
taxable estates of $3,000,000).
2. Unified Gift and Estate Tax System.
It is not possible to eliminate estate taxes simply
by gifting away your assets because the Gift Tax
rates are essentially the same as the Estate Tax
rates. However, there are numerous estate planning
techniques which can be used to reduce Estate Taxes.
Utilization of "valuation-discounting" is
currently a very significant factor to be used in
estate tax planning.
3. Annual Exclusion. You may
make gifts of $10,000 per donee per calendar year,
without paying any gift taxes and without using any
part of your lifetime estate exemption. If you are
married, the $10,000 exemption is effectively doubled
to $20,000. If you make a gift by check, it is
important that the check clear your account by
December 31st. Certain gifts to Trusts will not
qualify for the annual exclusion.
4. Non-Tax Estate Planning.
This is also extremely significant. It is important
that your Will and estate plan be implemented, so
that your assets will pass to your intended
beneficiaries, in the amounts and percentages, and
under the appropriate terms, as intended. It is
important that you provide protection for your
children by using Trusts as may be appropriate; and
it is important that you name the Executor and
Trustee and Guardian of your choice.
5. Utilizing Both Spouses’ Exemptions.
If you are married, and if you were to leave all of
your assets to your spouse, the net effect is that
your $675,000 exemption would be wasted. Rather than
leaving all of the assets to your surviving spouse,
you can bequeath part of your assets to a Trust for
your surviving spouse. Your surviving spouse can have
the use and benefit of the Trust assets. This Trust
is also known as a Credit Shelter Trust, and is also
sometimes called a Marital Trust. The net effect is
that your heirs would receive the amount of
$1,350,000 on a tax-free basis, rather than receiving
only $675,000 on a tax-free basis. This would result
in an estate tax reduction of about
$270,000-$370,000. This technique is highly advisable
for any couple with assets over $675,000.
6. Living Trusts. There has
been much publicity about Living Trusts, touting
ostensibly great advantages. Frequently, these
advantages are over-stated, but, generally, the
Living Trust is a useful estate planning tool. It is
advisable to include a Living Trust as part of your
estate plan, whether or not you actually currently
fund the Living Trust. It is especially advisable to
use a Revocable Living Trust for any out-of-state
assets which you may own.
7. Power of Attorney. It is
advisable that you sign a Power of Attorney, granting
to your spouse or some other trusted person, the
power to handle your affairs in the event that you
were to become incapacitated. If needed, this would
prevent an otherwise expensive and time-consuming
guardianship. The Power of Attorney can be worded to
take effect only in the event that you were to become
incapacitated.
8. Titling of Assets. It is
extremely important that your assets be titled in a
manner which is coordinated with your overall estate
plan. It is common to hold assets in joint names, but
holding too many assets in joint ownership could have
the effect of defeating the intended estate plan and
causing unnecessarily high estate taxes for your
heirs. It is important to review this matter of
titling, periodically, as your estate grows.
9. Gifts for Tuition and Medical Expenses.
In addition to the $10,000 Annual Exclusion, and the
$675,000 Exemption, and the Martial Deduction, you
may also make tax-free gifts by way of paying tuition
and medical expenses for your family members. For
example, if you were to pay a $25,000 tuition payment
for your grandchild, that would be gift-tax free, and
would not use up any part of your annual $10,000
exclusion. It is important to note that any such
tuition and medical payments must be made directly to
the provider.
10. Family Limited Partnership (FLP).
This remains to be a very viable technique to
consolidate assets, and also to serve as a means of
making gifts to your family members in a leveraged
manner. Generally, leverage is obtained, because by
gifting a non-voting interest the value can be
discounted for gift tax purposes. For example, for a
partnership which has $1,000,000 in total value, a
20% interest might be deemed to have a value of only
$120,000 for gift tax purposes, by virtue of
allowable discounts in valuation. Also, it is
possible to give away a majority of the equity for
purposes of reducing your taxable estate, and still
retain control so long as you hold only the voting
shares, which may represent as little as 1% of the
total equity. Sometimes, a Limited Liability Company
(LLC) is used in place of a FLP.
11. Qualified Personal Residence Trust
(QPRT). This is also a very favorable
technique, which allows you to give away your house
at a discounted value. You can retain the right to
the full use and benefit of the house for a certain
number of years, and provide that your children would
receive the house when that term of years has
expired. The potentially high estate tax on your
house can be very significantly reduced.
12. Grantor Retained Annuity Trust (GRAT)
and Intentionally Defective Grantor Trust (IDGT).
These are techniques by which you can retain for
yourself the current value of certain assets which
you currently own, and transfer to your family only
the future appreciation with respect to those assets.
For example, you could transfer $500,000 into a GRAT
or an IDGT, and provide that you would receive back
the $500,000 plus a yield of 7% over a period of,
say, 5 years. If the property were to grow at a rate
higher than the 7%, the excess will accumulate in the
Trust, and will in effect be transferred free of any
gift taxes to your children.
13. Charitable Remainder Trust (CRT).
This is a means to place assets into a Trust, and
retain the right to income from the Trust for a
number of years, and obtain a current charitable
deduction for income tax purposes. The remainder
passes to the charity(ies) of your choice, which can
be subsequently changed, when the stated number of
years expires.
14. Irrevocable Life Insurance Trust (ILIT).
As a general rule, the face amount of life insurance
is taxed as part of your estate. For example, without
proper planning, the estate tax on a $1,000,000 life
insurance policy could be $550,000. It is generally
advisable to use an ILIT, in order to remove the
insurance from being taxed as part of your estate.
15. IRA and Pension Planning.
It is important to note that retirement plan assets
are subject to both estate tax and income tax. For
example, the estate tax might be 50%, and the
remaining amount would then be taxed as ordinary
income (at, say, a 33% rate) to the beneficiary. It
is very important that detailed attention be given to
both the estate tax planning and income tax planning
for your retirement accounts.
16. Required Minimum Distributions From Your
IRA. It is extremely important that
you make the best election for the payout of your
IRA. The payout election becomes irrevocable on April
1 of the year after that in which you reach age 70½.
If you do not affirmatively make an election, there
will be an election by default.
17. Roth IRA. This is
a type of IRA which compounds on a totally tax-free
(not merely tax-deferred) basis. It is possible to
convert your traditional IRA into a Roth IRA; and
this can result in very significant long-term
benefits to your family members. You can convert your
existing IRA into a Roth IRA, but only in a year when
your annual income is less than $100,000.
18. IRA for Your Child. One
advantageous method of making gifts to your children,
would be to fund an IRA for your child (either a
traditional or Roth IRA).
19. Generation-Skipping Transfer (GST) Tax.
If you leave assets to your children, it is likely
that your grandchildren will ultimately pay estate
taxes on your children’s estate. You can leave
assets to trusts for your children and grandchildren,
and thereby by-pass the estate tax at the
generational level of your children, but this
constitutes a GST which is potentially subject to a
55% tax (in addition to the normal estate tax of
55%). However, every individual has a $1,030,000 GST
exemption. It is important to properly utilize this
GST exemption, by having the appropriate provisions
in your Will.
20. Reverse Mortgage. One
method of providing cash flow to elderly parents
might be for the children to make monthly payments to
the parents, in the form of a "reverse mortgage
loan". As each monthly payment is made, the
child’s loan is secured by a mortgage on the
home. A parent might want to make large gifts to
children; the parent would lose the income from the
gifted property, but the reverse mortgage arrangement
could provide replacement cash flow to the parent to
meet his/her daily needs, while continually reducing
the net equity owned by the parent by virtue of the
mortgage held by the child.
Some Interesting Tax Facts:
If you had gross income of about $270,000 or
more, in 1998 you ranked in the top 1%. The top 5%
had income of $114,000 or more.
The top 1% of taxpayers pay about 35% of all
Federal Personal Income Taxes, and the top 5% pay
about 54% of the total Personal Income Taxes.
The lower 50% of taxpayers pay about 4% of the
total Federal Personal Income Taxes
