Death and Taxes - Humanity’s greatest foes. For this reason, most attorneys are confronted with clients seeking to protect their investments after they pass or ensure a future for their loved ones from their protected assets. Estate Tax Planning serves as the solution to protecting one’s legacy. Through the planning process, you can create a plan that will ensure funds for future generation and implement strategies to prevent assets from being liquidated.
Whether you’re looking to protect your legacy for personal reasons or corporate reasons, here are a few items to consider as part of your estate tax plan.
Update Your Will/Plan for Succession
Creating a will may be the last thing on your mind, but in terms of protecting your assets and legacy, it might be a great idea to reconsider. A will or last testament is a document that explains how assets will be divided amongst beneficiaries and or family members in the event of the creator’s passing. A Will takes effect after the death of the creator, however, they can be updated at any time while the creator is still living.
As a result, family heirlooms or assets go towards their intended beneficiaries, further protecting your legacy. Similarly, through a will, you can also enforce certain bequests on your behalf.
Without a thorough will, your assets are likely to go through probate court. Within this system, money owed to creditors along with other monetary fines will be taken out, leaving your loved ones with much less than expected. As part of your estate tax plan, your attorney will encourage the creation of a will. Establishing a will is a fairly simple process and provides considerable protection in the event of your passing.
In the same manner, in a professional setting, creating a plan for succession will also help ensure the security of your legacy. As you move onto retirement, through a succession plan, your business or legacy will be placed into the hands of an individual of your choosing, for you will be there to witness it.
Amend Your Trusts
Another major aspect to consider in the process of estate tax planning should be the creation of trusts. Most people attribute the creation of trusts to be an act for the rich, however, regardless of your specific funds, the creation of a trust is an activity everyone should do or rather consider.
Setting up a trust can ensure your heirs are provided with assets after your passing. Creating a revocable trust will ensure that a preferred trustee is in control if your children are minors. The protection in trusts come from the selection of your preferred trustee and trusting they will act appropriately on your behalf. Unfortunately, trusts are likely to go through probate court, in which funds will be debated over and creditors can gain access if the court deems it appropriate.
Probate Court takes a long time and can become fairly expensive. A living trust will never go through probate court.
A Living Trust is also a document explaining how assets will be divided in the event of death but take effect during the person’s lifetime. They are more secure because they are harder to challenge in court. As a result, living trusts are more complicated because the responsibilities of the trustee must clearly be defined.
While a Revocable Trust is more flexible, it does not avoid estate taxes and does not protect from future creditors while the grantor lives. Furthermore, the living spouse may be entitled to the assets.
On the other hand, an Irrevocable Trust, the grantor cannot revoke the trust once it has been arranged. Nevertheless, the grantor can change the trustee at any point. Grantors have the ability to revise the document, name beneficiaries and leave your property to your children. Additionally, after five years, the assets cannot be used for medical care, ensuring the funds are properly inherited to their specified beneficiaries.
Life Insurance
Although life insurance proceeds are generally tax-free, they will be included in the gross taxable estate, especially if you own the policy. By transferring a proportion of your assets equal to the terms of your life insurance policy to an irrevocable life insurance trust, you can reduce the size of your taxable estate and create a much larger asset in your trust. Additionally, the money in this trust will be able to pass to your beneficiaries estate and income tax-free.
Gifting and Charitable Donations
Giving away money in gifts and charitable donations don’t exactly reflect the notion of protecting one’s legacy. However, gifting and donating reduces the value of your assets, thus reducing the likelihood of your estate getting taxed. The IRS allows for $14,000 to be gifted to recipients tax-free.
Furthermore, if the Fair Market Value of the assets is less than the governmental exemptions (mortgages, estate administration expenses, the passing over of property, qualified charities) then the estate will be passed on heirs and beneficiaries freely.
