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Estate Planning
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Do you really need a will?
Trusts
The trust is one of the most flexible tools devised by legal minds, and trusts can be created to serve a wide variety of needs and circumstances. You may find a trust the most helpful means of accomplishing your goals, especially for tax and estate planning and for asset protection. The different varieties of trusts have acquired an even wider variety of names – be sure that the form of trust recommended to you accomplishes your goals.
- The following chart shows federal estate tax credit amounts, the gift tax exemption amount and maximum gift tax rates, and the Generation Skipping Tax (GST) threshold and rates through 2011. Watch for further legislation by Congress in this area. Estate taxes apply to both probate and non-probate assets. Another basic tax fact in this area is that each of us can transfer an unlimited amount of assets to our surviving spouse free of estate and gift tax under the marital deduction, both during life and at death, so long as the spouse is a citizen of the United States. If your spouse is not a citizen of the United States, please see the discussion below concerning Qualified Domestic Trusts.
|
Year |
Lifetime Gift
Tax Threshold |
Estate Tax
Exemption Amount |
Highest Estate &
Gift Tax Rate |
Generation Skipping Tax Threshold |
|
2003 |
$1 million |
$1 million |
49% |
$1,060,000 indexed for inflation |
|
2004 |
$1 million |
$1.5 million |
48% |
48% |
|
2005 |
$1 million |
$1.5 million |
47% |
47% |
|
2006 |
$1 million |
$2 million |
46% |
46% |
|
2007 |
$1 million |
$2 million |
45% |
45% |
|
2008 |
$1 million |
$2 million |
45% |
45% |
|
2009 |
$1 million |
$3.5 million |
45% |
45% |
|
2010 |
$1 million |
$0!! |
Max gift tax rate =
Max income tax rate |
Max GST rate = max income tax rate |
|
2011 |
$1 million |
$1 million (again!) |
55% + 5% surtax |
$1,060,000 indexed for inflation |
- If you and your spouse have assets totaling more than the estate tax exemption amount, you may want to be sure your wills have marital family trust provisions. These provisions will make maximum use of exclusions available to both you and your spouse, by allocating assets between a marital share which can go directly to your spouse or into a trust for his or her benefit, and a non-marital share which funds a family trust and maximizes your exemption. These provisions should work in a manner that also minimizes state death taxes. If your spouse’s estate is small enough that trust administration might not be economical, his or her will might better use the disclaimer trust provisions discussed below.
- Disclaimer Trust provisions permit your surviving spouse to determine whether to put assets into trust by disclaiming a bequest in a will, based on tax and other considerations, following your death. The trust would provide for distribution of income to your spouse and other beneficiaries, and make trust assets available to them if necessary to help maintain their standard of living. It can also provide protection for minors and adult children whom you feel may not be ready for to accept responsibility for their entire inheritance. Your spouse can make the decision whether or not to fund the trust after taking into account a variety of factors at the time of your death, including the amount of the applicable estate tax exemption, the size of your estate, and your spouse’s own age and health. A disclaimer trust can exist as a free-standing estate planning document, or disclaimer trust provisions can be drafted into your will. One caution – your spouse cannot disclaim assets over which he or she exerts control after your death.
- By transferring income-producing assets into a revocable living trust, you can place management of those assets in the hands of a reliable trustee, provide for use of the assets by the trustee to furnish your own care in the event you become incapacitated, and, upon your death, provide for payment of taxes and debts and distribution of the assets according to your directions. It’s important to remember that the trust works only for the assets that are transferred into it, and you should have a clear understanding with your attorney about who will be responsible for transferring assets into the trust. The trust would provide that income from trust assets would be distributed as you direct during your life. It would be coordinated with your will to provide for payment of taxes, debts and expenses when you die, and then for distribution as you have directed in the document. In a pour-over will, you can cause assets in your name to be transferred to the trust upon your death. Assets within the trust avoid probate, a significant advantage if the assets include real estate in more than one state. Your trust estate can be administered in privacy in Minnesota, as opposed to the public filings required by the probate process. In the event you become incapacitated, your trustee can administer your property much more flexibly than would be possible under a guardianship in Minnesota. There are restrictions upon the holding of S corporation shares by a revocable trust. Trust income is taxable, and the trust will not be permitted to recognize a capital loss from depreciation of trust assets.
- A supplemental needs trust allows you to set aside assets for the benefit of a person who is disabled and is receiving or may in the future receive Minnesota Medical Assistance or other publicly funded benefits. The trustee has discretion to make payments for the beneficiary’s benefit. These trust payments supplement the beneficiary’s publicly funded benefits without causing him or her to become ineligible for them. The trust benefits cannot be used for benefits covered by the public funding program, but they can be used for such things as education, vacations, home repairs, personal items, transportation (including purchase of a specially modified vehicle), entertainment and medical or dental care, equipment or services not covered by the public funding program. If the supplemental needs trust is funded with the beneficiary’s own assets, assets remaining in the trust when the beneficiary dies may be subject to a reimbursement claim by the State for Medical Assistance benefits paid.
- If your spouse is not a citizen of the United States, he or she is not eligible for the marital deduction. However, the Internal Revenue Code permits a modified marital deduction pursuant to a Qualified Domestic Trust. In order to qualify, the trust has to meet certain requirements – at least one trustee must be a United States citizen or corporation; the trustee can make distributions of principal only if the trustee has the right to withhold taxes; the trust must meet regulatory requirements concerning collection of taxes; and an election for the trust must be made by the decedent’s personal representative. If you are a non-citizen surviving spouse it may be possible for you to create a Qualified Domestic Trust to receive an outright bequest, or to create a Qualified Domestic Trust IRA to receive a rollover you elect for your decedent spouse’s IRA benefits.
- You can make substantial bequests and minimize estate taxes by arranging for an Irrevocable Life Insurance Trust to purchase life insurance on your life so as to exclude proceeds of the insurance policy from your estate. This estate planning device can offer substantial gift tax leverage because the policy’s appreciation in value takes place after it is purchased by the trust. You can fund premiums by using the annual gift tax exclusion of $13,000 ($26,000 for two spouses) or the unified credit, subject to limited rights of withdrawal by trust beneficiaries. You must relinquish to the trust any “incidents of ownership”, such as the right to change trust beneficiaries, the right to control the control beneficial enjoyment of the policy, the right to withdraw cash, borrow against the cash value of the insurance policy or the right to surrender the policy, and perhaps the right to remove or replace trustees. Upon your death, the insurance proceeds are not subject to the federal estate tax, and can be applied to payment of estate taxes and other debts of your estate, and can be distributed to beneficiaries you have named in the trust. Caveats – if you are found to have possessed “incidents of ownership” in the policy within 3 years of your death, some or all of the policy proceeds may be included in your estate after all. Also, it is prudent not to be trustee of a trust owning an insurance policy under which you are the insured, as to do so can be considered an incident of ownership. Finally, beware of Generation Skipping Tax (“GST Tax”) consequences if the trust may make distribution to a beneficiary two or more generations below yours – this can happen inadvertently if, for example, your son’s death puts his child, your grandchild, in line for a distribution. The irrevocable life insurance trust can achieve significant tax savings, but it involves very complicated tax laws and should be created only with counsel from somebody well versed in the subject.
- Your retirement benefit may be the largest single asset in your estate. In many cases it is not beneficial to designate your revocable trust as the beneficiary of your IRA. In certain situations a trust can be helpful, however, such as when your spouse is the primary beneficiary but your minor children are contingent beneficiaries. A disclaimer trust can also be appropriate for an estate with a significant retirement benefit. You should obtain knowledgeable counsel in this area of planning, because the interplay of the various regulations is very complicated.
Charitable Giving
Retirement Benefits
Another Estate Tax Reduction Idea
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