Removing Assets from your Estate to Reduce the Estate Tax

Removing assets from your estate is a great way to reduce estate taxes before you die.

So, spend some and enjoy it!

Also, you probably know whom you want to have your assets after you die. If you can afford it, why not give them some assets now and save estate taxes? It can be very satisfying to see the results of your gifts– something you can’t do if you keep everything until you die. Appreciating assets are usually best to give, because the asset and future appreciation will be out of your estate.

Assets you give away keep your cost basis (what you paid), so the recipients may have to pay capital gains tax when they sell. But the top capital gains rate is only 15% (assets held at least 12 months). That’s a lot less than estate taxes (45-46%) if you keep the assets until you die.

Some of the most commonly-used strategies to remove assets from estates are explained below. Note that these are all irrevocable, so you can’t change your mind later.

  1. Tax-Free Gifts
  2. Irrevocable Life Insurance Trust (ILIT)
  3. Qualified Personal Residence Trust (QPRT)
  4. Grantor Retained Annuity Trust (GRAT) and Grantor Retained Unitrust (GRUT)
  5. Family Limited Partnership (FLP) and Limited Liability Company (LLC)
  6. Charitable Remainder Trust (CRT)
  7. Charitable Lead Trust (CLT)
  8. Buying Life Insurance

Detailed explanations of each of these strategies for removing assets from your estate will be explained in the upcoming blog entries.  For questions on reducing your estate tax, please contact our experienced Estate Planning Attorney in Woodland Hills.

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Published in: on May 10, 2011 at 4:51 pm  Leave a Comment  
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Understanding Estate Taxes: Net Value, Reduction/Elimination and Exemptions

Signing of tax exemptions for 2014 FIFA World ...

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How is the net value of my estate determined?

To determine the current net value, add your assets, then subtract your debts. Include your home, business interests, bank accounts, investments, personal property, IRAs, retirement plans and death benefits from your life insurance.

How can I reduce or eliminate my estate taxes?

In the simplest terms, there are three ways:

1. If you are married, use both estate tax exemptions

2. Remove assets from your estate before you die

3. Buy life insurance to replace assets given to charity and/or pay any remaining estate taxes

Using Both Exemptions

If your spouse is a U.S. citizen, you can leave him or her an unlimited amount when you die with no estate tax. But this can be a tax trap, because it wastes an exemption.

Let’s say, for example, that Bob and Sue together have a net estate of $4 million and they both die in 2006. Bob dies first. He leaves everything to Sue, so no estate taxes are due then. When Sue dies, her estate of $4 million uses her $2 million exemption. The tax bill on the remaining $2 million is $920,000! ($900,000 in 2007 and 2008.)

But if, instead, Bob and Sue plan ahead, they can use both their exemptions and pay no estate taxes. A tax planning provision in their living trust splits their $4 million estate into two trusts of $2 million each. When Bob dies, his trust uses his $2 million exemption. When Sue dies, her trust uses her $2 million exemption. This reduces their taxable estate to $0, so the full $4 million can go to their loved ones.

This planning can also be done in a will, but you would not avoid probate or enjoy the other benefits of a living trust.  Speak with an experienced Estate Planning Attorney in Los Angeles today to plan for your estate taxes.

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Published in: on April 25, 2011 at 8:33 pm  Comments (1)  
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Summary of The 2010 Tax Act

To summarize, the 2010 Tax Act makes significant estate and gift tax changes.  Almost every estate plan needs to be rewritten immediately.  The key points discussed above in the blog series include the following:

  • The estate tax exclusion amount increase to $5 million per person for 2010 through 2012.

  • The gift tax is reunified with the estate tax, and up to $5 million in lifetime gifts will be exempt (over and above the annual gift tax exclusion of $13,000 per donor for every donee each year).  Taxable gifts would be taxed at a top rate of 35 percent.  One would certainly have to make a very large gift to fall into the taxable range.

  • The maximum estate and gift tax rate is reduced from the 55 percent maximum rate under prior law to a maximum estate and gift tax rate of 35 percent for 2011 and 2012.

  • A “portability” provision is included, which allows surviving spouses to use any applicable exclusion amount that is not used by the first spouse to pass away.  This is not only true of very large estates, but also of those smaller estate plans that were drafted when the exemption was smaller and credit shelter trusts and outright bequests were drafted with maximum language.  The net result when such documents are interpreted under the new rules would be to pass entire estates into credit shelter trusts and not provide for other beneficiaries, perhaps not even for spouses.

  • The GST exemption amount is increased to $5 million for 2010 through 2012.

  • The Act sunsets at the end of 2012, thus making the foregoing changes temporary in nature.

As always, we recommend that clients review their estate plans periodically and/or whenever a significant life event occurs (e.g., birth of a child, death of a spouse, purchase of new home, etc.).

For clients with substantial amounts of wealth and with closely held businesses, we highly recommend that such clients consider using lifetime gifts to take advantage of the current $5 million lifetime gift tax applicable exclusion amount, which will expire absent further Congressional action at the end of 2012.

As more becomes known about this Act, we will be available to discuss it further.  If we can be of assistance to you in the area of income tax or estate/gift tax planning, or, if you have any questions or wish to discuss your estate plan in light of the Act, please do not hesitate to contact us.

Please call our office at (818) 501-5800 at your earliest convenience, and we will gladly schedule time to meet with you and review your estate planning documents.  In some cases, no changes will be required.  In others, we will recommend changes.  We cannot know, in advance, whether your documents will require changes to best take advantage of the current state of the estate tax law until we have a chance to review your documents with you.

Nonetheless, we strongly believe that it is important that your estate planning documents produce the result you want.

Start reading from the beginning of this blog series on the 2010 Tax Act:

Important Estate Tax Aspects of the 2010 Tax Act (the “Act”)
Published in: on February 18, 2011 at 7:49 pm  Comments (1)  
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What’s NOT in The 2010 Tax Act

There are two key provisions that many commentators feared would be in the 2010 Tax Act, but which were not included in it.

Specifically, there have been several proposals to place limits on Grantor Retained Annuity Trusts (“GRATs”), which allow individuals to transfer wealth out of their estates with as little as a zero estate or gift tax cost that would have made GRATs less valuable from an estate planning perspective.  There have also been several proposals to limit valuation discounts in connection with certain estate planning techniques such as family limited partnerships. There were no such provisions included in the Act.  Therefore, these techniques continue to be available to move wealth to lower generations.

Temporary Relief Does Not Extend to Non-US Citizens Who Are Not Residents for Estate Tax Purposes

The Act reinstates federal estate taxes on United States-situs property of non-US citizens who are not residents.  The increase of the applicable exclusion amount to $5 million per person does not apply to non-US citizens who are not residents. US situs property exceeding $60,000 in value is currently subject to US estate taxes beginning at graduated marginal rates starting at 18 percent.  Accordingly, particular vigilance needs to be exercised in structuring the acquisition of US assets such as real property, so as to avoid imposition of US estate taxes at pre-2010 levels.

Contact our Estate Planning Lawyer in Los Angeles today to review your estate plan.

Continue to final post in blog series:

Summary of The 2010 Tax Act
Published in: on February 18, 2011 at 7:34 pm  Comments (1)  
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Additional Observations on the Gift Tax, State Estate Taxes and the Portability Provision

Increased Gift Tax Applicable Exclusion Amount

From 2001-2010, the applicable exclusion amount for gift tax purposes has been $1 million.  The 2010 Tax Act increases this to $5 million, or $10 million per married couple.  This change provides an unprecedented opportunity to move substantial amounts of wealth out of individuals’ estates.  There are several techniques that individuals can use to leverage this $5 million applicable exclusion amount and move considerably more wealth out of their estates.

To illustrate, individuals can now make gifts of $5 million to asset protection trusts, move all growth in such wealth out of their estates, provide a significant amount of asset protection for such assets, and the transferor may continue to be a discretionary beneficiary of such trusts, without any gift tax being assessed.

In addition, the increased gift tax applicable exclusion amount increases the amount of assets that individuals can transfer via an installment sale to a dynasty/grantor trust.  Under this estate planning technique, individuals can now make an initial gift of as much as $5 million ($10 million per married couple) to a dynasty trust, and then transfer as much as $45 million ($90 million for a married couple) to such dynasty trust in exchange for an installment note.  This technique works especially well for family businesses that are expected to grow significantly in value over time.

Given the fact that the Act will sunset without further Congressional action in 2012, we are advising clients that it would be prudent to implement estate planning techniques utilizing lifetime gifts before the December 31, 2012 sunset date.  Significantly, the Act preserves a favorable tax environment for making gifts by preserving the 35 percent gift tax rate for two more years.  Now that the threat of a gift tax increase to 55 percent beginning in 2011 has been averted, some individuals may be interested in postponing planned gifts in anticipation of the rate hike.

State Estate Taxes

Another blast from the past is back: the state death tax credit.  Many states have separate estate tax regimes with lower applicable exclusion amounts than the federal applicable exclusion amount.  When the credit was abolished, most states eliminated these symbiotic taxes.  It remains to be seen; however, which states will re-implement their own death taxes.  All states had benefited from these taxes by collecting revenues that would otherwise go to the federal government.  Yet, under the new estate tax rules, it appears that very few estates would be taxable.  It may be critical that the estate plans of individuals living in or owning property located in such states address such estate tax exposure.

Portability

One of the more notable provisions contained within the Act is the “portability” provision, which provides in general terms that if one spouse does not fully utilize his/her entire $5 million applicable exclusion amount, the unused portion can be used by the surviving spouse’s estate.  The significance of this is dramatic in terms of estate planning.  The entire concept of equalizing estates of husband and wife to the tax advantage of each spouse’s unified credit has been made unnecessary for tax purposes.  This provision is intended to avoid the need for credit shelter trusts in estate planning documents. Unfortunately, both spouses must die before 2013 in order to benefit from the portability provision.

However, credit shelter trusts continue to provide significant additional benefits beyond just the use of each spouse’s applicable exclusion amounts. These include the following:

     

  • Ensuring that assets contained in the credit shelter trust pass to children of the couple and not to any new spouse of the surviving spouse.

  • Ensuring that appreciation on the assets contained within the credit shelter trust, which may exceed the applicable exclusion amount at the surviving spouse’s death, are not subject to estate tax at that time.

  • Protection of assets in the credit shelter trust from creditors of the surviving spouse, including any marital claims of future spouses.

    •  

Given the fact that the portability provision will sunset in 2012, as well as for the reasons stated above, we are advising clients to continue to use estate plans that incorporate credit shelter trusts.

Continue reading blog series:

What’s NOT in The 2010 Tax Act
Published in: on February 17, 2011 at 8:10 pm  Leave a Comment  
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General Observations Regarding The 2010 Tax Act

Generally, the estate and gift tax provisions of the 2010 Tax Act are very favorable to taxpayers because of the substantial increase in the applicable exclusion amount, to $5 million, and the lower maximum estate and gift tax rate of 35 percent. The Act also addresses several technical estate, gift and GST tax issues in a manner that is favorable to taxpayers (e.g., the impact of the lapse of the estate tax, including the application of basis rules, on decedents passing away during 2010).

The GST exemption in 2011 and 2012 will be $5 million – equal to the exclusion used for estate tax purposes.  The GST tax rate for transfers made after 2010 is equal to the highest estate and gift tax rate in effect for such year – 35 percent for 2011 and 2012.  In 2010, the GST tax will apply, but the tax rate for transfers made in 2010 will be zero percent.  The GST exemption will be $5 million.

The Act also extends the following GST modifications enacted as part of EGTRRA:

  • The GST tax exemption will be allocated automatically to transfers to GST trusts made during life that are “indirect skips.”  An individual making direct or certain indirect skips may elect out of the allocation rules.  An “indirect skip” is a transfer that has an intermediary step before reaching the “skip person.”  The “skip person” is one that is two or more generations below that of the person making the transfer.

  • Under certain conditions, the GST tax exemption can be allocated retroactively.

  • Those inadvertently failing to make timely elections to allocate the GST exemption will have the opportunity to seek relief from Treasury.

  • A “qualified severance” of a trust into two or more trusts, under the governing instrument or local law, will be respected for GST purposes.

  • The value of property to be used for determining the inclusion ratio is the property’s finally determined gift tax value or estate tax value.

  • Substantial compliance with the statutory and regulatory requirements for allocating the GST exemption will suffice to establish that the GST exemption is allocated to a particular transfer or trust.

Temporary Fix

The Act is a temporary fix, which sunsets on December 31, 2012, immediately after the next election cycle.  It is impossible to predict whether it will be extended in either its current or some modified form, especially given the fact that it is a hot button issue with both major political parties.  If Congress fails to act, the Act will lapse and the estate tax will revert to what it would have been under prior law (i.e., $1 million applicable exclusion amount and 55 percent maximum estate and gift tax rate).

Contact our Tax Planning Attorney in Los Angeles today to review your estate plan.

Continue reading blog series:

Additional Observations on the Gift Tax, State Estate Taxes and the Portability Provision
Published in: on February 17, 2011 at 7:58 pm  Comments (1)  
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Important Estate Tax Aspects of the 2010 Tax Act (the “Act”)

Was that the sound of another volcanic eruption from Eyjafjallajokull in Iceland?  Was it a lingering echo of vuvuzelas from the World Cup of 2010 in South Africa?  Or was it an enthusiastic cheer from the Bronx at the news that no estate tax would apply to the estate of billionaire George Steinbrenner?  No, that “thud” was the sound of Congress closing the book on its experiment with estate tax repeal.  The estate tax is back.

On December 17, 2010 President Obama signed the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the “Act”). The Act substantially modifies federal taxation of income, gifts and estates, which impacts estate planning for many of our clients, and presents significant estate planning opportunities.  The Act temporarily reinstates and modifies the estate and generation-skipping transfer (GST) taxes retroactive to the beginning of 2010, and modifies the gift tax beginning in 2011.  Importantly, while the new estate tax regime will be effective in 2010, estates of decedents dying in 2010 can elect out of the Act’s regime and use former 2010 estate tax law – a zero rate and modified carryover basis rules.

This blog series summarizes the Act’s key changes and provides you with our observations about the Act’s impact from an estate planning perspective.   Please note that there are several important changes made by the Act that this blog series does not summarize.

Continue reading blog series:

Why (almost) Every Estate Plan in the U.S. Needs to be Rewritten Immediately
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Published in: on February 17, 2011 at 1:14 am  Comments (1)  
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