Tax & Advanced Planning
Many topics fall under the category of Advanced Estate Planning. Usually Advanced Estate Planning is synonymous with reducing the Federal Estate Tax. An overview of some estate tax planning approaches is below:
Estate Taxes Minimization Tools
The Federal Estate Tax Exemption amount is the amount an estate can pass free of taxes. The current Federal Estate Tax Exemption amount is $5 million ($5.43 million, as indexed for inflation for individuals dying in 2015). Amounts above $5 million are taxed at a rate of 40%. The following is a list of some of the popular tools used to minimize estate taxes:
1. Irrevocable Life Insurance Trust (ILIT)
The death benefits on a life insurance policy that is owned by an irrevocable trust of which you had no control over would not be included in your estate for purposes of estate taxation. Oftentimes ILITs have been used to provide money to pay the estate tax bill. ILITs are also used to retain the insurance proceeds to be used to make distributions to surviving spouses and heirs.
2. Grantor Retained Annuity Trust (GRAT) and Grantor Retained Unitrust (GRUT)
In the situation of a GRAT or GRUT, assets are transferred to an irrevocable trust. The GRAT or GRUT names you as the beneficiary for any income the assets produce for a set period of time. At the termination of the period, the assets transfer to your beneficiaries. Because the beneficiaries will receive the gift at a later date, the value of the gift is decreased at the time of the transfer to the GRAT or GRUT, thus reducing your gift taxes you would be exposed to had you transferred the assets outright. If you die after the period of the GRAT or GRUT, the assets are not included in your estate, but if you die before the period, some of the assets may be included in your estate.
GRATs and GRUTs operate the same way, but if the income you receive is a set amount, the trust is called a GRAT, and if the income fluctuates, it’s called a GRUT.
3. Charitable Remainder Trust (CRT)
With a CRT, you transfer your assets to an irrevocable trust. The trust names you as an income beneficiary for your life, and upon your death the assets are distributed to a charity of your choice. The benefits of the CRT are three fold: 1) when the assets transfer they are removed from your taxable estate; 2) with the transfer in kind any capital gains are not realized. The charitable trust can sell the assets and convert to an income producing asset without paying capital gains tax; and 3) it benefits the charity of your choice.
4. Charitable Lead Trust (CLT)
A CLT is the opposite of a CRT. You transfer your asset to the CLT, removing it from your taxable estate, but instead of the CLT paying you the income, it pays a charity for a set number of years or until you die. When the trust terminates, the assets go to your beneficiaries.
5. Family Limited Liability Company (LLC)
A Family LLC is a business which holds your assets. You name yourself as manager of the LLC so you maintain control of the assets, but transfer some of your interests in the LLC to your children now. This reduces your taxable estate.
Brady Cobin Law Group PLLC Can Update Your Estate Plan
Your estate planning attorney can ensure that you have the right language in your documents to protect and preserve digital assets. At Brady Cobin Law Group, PLLC, we would be happy to review your estate plan or create a new plan to meet your needs for the immediate and distant future. Contact us today to get started.