THERE are two important aspects that should be taken into consideration in your estate planning:
1. Asset reduction which reduces your estate and the amount of estate taxes that must be paid upon death; and
2. Asset protection which safeguards your assets from creditors and lawsuits.
Gross estates over the following amounts are taxed at the following rates for the following years:
2006 – 08 – $2.0 million – 46 & 45% maximum,
2009 – $3.5 million – 45% maximum.
2010 – $0 – no estate tax!
2011 – $5 & $5.12 M – 35% maximum
2013 – $5.25 million – 40% maximum (permanent)
2014 – $5.34 million – 40% maximum (permanent)
2015 – $5.43 million – 40% maximum (permanent)
2016 – $5.45 million – 40% maximum (permanent)
Estate plans should have a combination of the following instruments:
1. Pour-Over Will directs any assets not held in the trust will be placed in a trust by virtue of a will upon death. It takes care of the assets that you fail to remember to transfer to the living trust as well as assets purchased after executing your living trust.
2. Durable Power of Attorney comes into effect if either spouse becomes incompetent or incapacitated. It names a conservator and avoids court procedures. Durable POAs end at death.
3. Revocable Family Trust avoids probate of your assets upon death. And upon death of either spouse, it will provide a step-up basis (and reduced taxes) for any property held and directs the distribution of assets to beneficiaries. By use of a marital deduction, it will also defer estate taxes until the second spouse dies.
4. Limited Liability Company (LLC) is a new hybrid business association that merges the advantages of a corporation with the flexibility of a partnership. Some liability protection is given for each member (not like general partnerships whose partners are exposed personally to liabilities of all other partners). Liabilities are limited to equity invested by each member. For real estate, the LLC has become the entity of choice.
5. Family Limited Partnership (FLP) protects your assets from creditors by having them owned by a limited partnership. It allows asset reduction by gifting partnership ownership to children, grandchildren, and other beneficiaries. The gifting makes use of the annual exemption that avoids gift taxes, thus reducing estate tax.
6. Irrevocable Life Insurance Trust (ILIT) trims down your assets as it takes life insurance earnings out of your estate and utilizes it to fund a trust for your beneficiaries and to control fund distribution. It is an exceptional device to preserve insurance money to pay medical expenses, tuition fees of your beneficiaries, children, and grandchildren. At your death, this trust also serves as the main source of funds to pay any estate tax, administration expenses, debts, etc..
7. Qualified Personal Residence Trust (QPRT) trims down your assets as it takes your home out of your estate and at the end of the term of the trust, transfers it to your beneficiaries usually family members . Also, it affords asset protection as the home is transferred to an irrevocable trust. You no longer own it. In the meantime, during the term of the trust, you still have the right to live and use the residence. (TIP: This trust can also avail of the $250,000/500,000 exclusion of gain, if treated as a grantor trust, from the sale of principal residence provided all other IRC section 121 requirements are met). And yes, you can continue to enjoy your property tax deductions and mortgage interest.
These estate plan vehicles save significant amounts of estate tax dollars while helping protect your assets from unwanted creditors conveyance claims and frivolous lawsuits. Please seek legal counsel for your asset protection and estate planning.
In accordance with IRS Circular 230, this communication is not to be considered a “covered opinion” or other written tax advice and should not be relied upon for IRS audit, tax dispute, or any other purpose.
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Sy Al-os Accountancy Corporation provides accounting and tax services to individuals, corporations, LLCs and business entities. The Firm has a niche in defending taxpayers audited by the IRS and other governmental agencies.
