With the uncertainty of where estate and gift tax exemptions and rates will be after January 1, 2013, it is important to consider planning with the current $5 million exemption available today. While there are many estate planning strategies, this blog post will discuss living trusts.
The purpose of estate planning is to be sure that after you die, your assets go to your intended beneficiaries. Therefore, people often associate estate planning with old age and decide to put it off. However, the best time to plan your estate is now, while you can -- before you need an estate plan. Remember, advance planning is the key to any successful endeavor.
It’s difficult to pinpoint any particular age for starting to plan your estate. But, if you begin now, you may be able to preserve your assets for your spouse and other heirs in a safe and tax-efficient way. A simple will can efficiently transfer your assets; however, you’ll have no guarantee that a reliable, unbiased investment manager will succeed you. A flexible legal arrangement called a trust may help to ensure that your family’s financial future is protected if you die or become incapacitated.
In your trust agreement, you legally transfer some or all of your assets to a trustee’s care. You can make the transfer effective immediately, upon your disability or death, or at some future time. It is important to choose a trustee with strong investment skills and experience to handle substantial assets. Poor investment decisions could mean a lower standard of living for your spouse or a reduced inheritance for your beneficiaries. When you choose a professional asset manager as your trustee, you’ll feel secure knowing that your family’s finances will be carefully managed, whatever the ages, health, or financial experience of your heirs.
Reduce Uncle Sam’s Share
Keep in mind that the amount that can be sheltered from federal estate tax is $5 million in 2011. This means that you can avoid owing estate taxes on any amount that you leave to your heirs under this threshold. Transfers to a spouse generally are not subject to estate tax. However, the estate-tax rules may make it difficult to escape paying taxes when those same assets eventually pass to your children or other heirs. By planning ahead and setting up a trust now -- before you actually need it -- your children may be able to avoid paying hefty taxes on the assets they inherit from your spouse. Of course, professional guidance is essential before acting.
Another way to reduce your potential estate tax is to remove assets from your future estate by giving them away. The tax law exempts small gifts with a gift-tax annual exclusion. This tax break can be your major opportunity for making tax-free transfers over your lifetime. In 2011, you can make gifts of up to $13,000 to each of as many individuals as you want without gift-tax consequences. If your spouse joins with you, the tax-free amount doubles to $26,000, per person, per year. Also, up to $5 million total in otherwise taxable gifts can be made without incurring gift tax.
You can turn a sizable gift into a tax-advantaged source of income by setting up a charitable remainder trust. Simply set up the trust during your lifetime, or in your will, and fund it with your charitable contribution. The charity will receive the trust’s assets when the trust’s term ends. But, before that, income from the trust can be paid to anyone you choose -- including yourself -- as the trust’s beneficiary. Thus, a charitable remainder trust allows you to support a good cause and pay yourself or your beneficiaries as well.
Protect Your Family
None of us likes to think about our own mortality or the chance of becoming incapacitated. And that’s exactly why so many families are caught off guard and unprepared when incapacity or death strike. You can protect your family and help ensure their financial future with a properly designed trust. If you want to know more about the importance of setting up a trust before you need it, please contact us.
It is important to understand that there are many estate planning strategies. While living trusts may be beneficial for some, for others it may not. Each estate planning project should be tailored to your specific circumstances, your goals and objectives.
Look for future blog articles where we will discuss additional estate planning strategies such as Grantor Retained Annuity Trusts (GRATs), charitable trusts, generation skipping planning, etc.
Contact Jayne Schaeffer with any questions or email [email protected] for future blog article suggestions.
Jayne R. Schaeffer, CPA/PFS