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I’ve Heard of Estate Planning But What Is It?

Category: Articles

By David Albert, CPA, CFP® 

According to Wikipedia.com, estate planning is the process of anticipating and arranging for the disposal of an estate during a person’s life.  But what does that mean to the average person?  To put it in very simple terms, it is a way to accomplish the following objectives: 

• Transfer your property smoothly to your heirs
• Provide for loved ones who need help and guidance
• Minimize estate taxes
• Plan for the day when you are not capable of managing your affairs
• Keep the details of your estate private

Now that we know what estate planning does, what are the components of a good estate plan? 

Wills, powers of attorney and living will/advance medical directive.  These are the basic estate planning documents that each person should have.  The will can contain provisions to minimize estate taxes.  Due to recent changes in the tax law, much larger amounts of assets can pass to the next generation without estate tax. 

Trusts. There are several types of trusts that can help you meet estate planning goals that may not be met by leaving your assets outright to your heirs.

If have concerns about your heirs’ ability to manage your assets after you are gone, leaving them to a trust allows you to name a trustee to manage them for the benefit of your heirs.

The bottom line is that when you want to exert control over how your assets are managed or distributed, trusts are typically the way to go.  This can be done through your will or in a separate trust.

Irrevocable trusts.
 Several types of irrevocable trusts offer the potential for reduced estate or gift taxes.

With a qualified personal residence trust (QPRT), you transfer ownership of your home to the trust for a period of years, during which time you may continue to live in the home. At the end of the period, ownership of the home is transferred to the trust’s beneficiaries, who are typically your children. When your home enters the trust, it is removed from your estate and is subject to gift tax.  You must general outlive the term of the trust for the asset to be excluded from your estate.

Before creating an irrevocable trust, it is important to keep in mind that this type of trust cannot easily be changed or revoked.

Family limited partnerships.
 A family limited partnership (FLP) may also help you minimize estate and gift taxes.

An FLP must have a valid business purpose and not simply be used to minimize estate and gift taxes. Your estate planning advisor can tell you more.

Irrevocable life insurance trusts. The proceeds from life insurance policies are frequently used to pay estate taxes so that assets in the estate do not have to be sold to pay the taxes. However, if you own the policy on your life, the proceeds will be part of your estate and subject to estate taxes—the very thing you are trying to avoid.

If your estate will be subject to estate taxes, it is generally a good idea to have an irrevocable life insurance trust own the policy on your life so that the proceeds are not part of your estate.

Strategic giving. If you expect that your estate will be subject to estate taxes, you may want to give some of it away during your lifetime.

You can give up to $14,000 (the annual gift tax exclusion for 2015) to as many people as you choose this year without your gift being subject to the federal gift tax or reducing the amount that can later be exempted from estate taxes. If you are married, you can double that amount if your spouse agrees to split the gifts with you.  The direct payment of medical and educational expenses are also generally excluded from gift tax.

Donations that you make to qualified organizations, such as charities, religious organizations, and nonprofit schools, reduce your estate and are generally income tax-deductible. Charitable remainder trusts and similar arrangements allow you to make a gift to charity, claim a charitable deduction for part of your gift, reduce your taxable estate, and generate a stream of income for yourself or someone else.

Which tools are right for you?

This question is not easily answered as each individual’s situation is unique.  You need to work with your tax, financial and legal advisors to come up with the plan that makes most sense for you. They will help you select the appropriate tools and craft an estate plan that is right for you.

David Albert, CPA, CFP®, Esq, is a shareholder in Rubino & Company’s tax practice.  He also is in charge of the wealth management practice of the firm and is a practicing attorney.  He has over thirty years of experience working with a wide range of clients assisting them with complex tax, estate planning, and financial advisory issues.    

 

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