13. Estate Planning Process Flashcards
Estate Planning process
1) Gather significant data
2) Establish and prioritize objectives
3) Identify factors that limit/affect selection of techniques
4) Identify weaknesses before selecting technique
5) Select 1+ techniques
6) Implement technique
7) Monitor plan for revisions and modifications
Client Issues
The rate of inflation: It is a factor in reducing the actual value of future earnings.
The estate liquidity: A properly executed estate plan should not result in the forced liquidation of the estate assets in order to discharge the liabilities and/or taxes associated with death.
Choose items that can be considered ‘significant estate planning data’
Presence of a valid will.
Client’s wishes for property distribution upon death.
Identity and relationship of heirs to the client’s property.
The manner in which the title to the property is held.
Current FMV of the client’s assets.
The client’s debts and liabilities.
Information on the health and life expectancy of the client and family.
Factors that Determine Selection of Technique
Value of the gross estate, FMV of the client’s assets
Amount of estate or gift tax liability (before subtracting applicable deductions and credits)
Health and life expectancy of the client
Financial needs of the client during the lifetime
Types of property owned by the client
Title of property owned by the client, that is, individual, jointly with rights of survivorship, in trust
Competency of the client’s beneficiaries
The client’s marginal income tax bracket
State law of the client’s domicile
Value of Gross Estate
If > exemption equivalent ($12,920,000), make sure to utilize marital and charitable deductions, creation of trusts and use unified credit to minimize tax liability
Estate or Gift/Transfer Tax Liability
Techniques to cost-effectively reduce this liability, thereby increasing the value of assets passing to heirs
Health and Life Expectancy
If a client is in excellent health with a long life expectancy, various techniques may be appropriate to achieve the client’s objectives.
life insurance policy owned within an irrevocable trust may be considered as a strategy to deal with the liquidity needs of the estate.
Tax and Non-Tax Consequences of Estate Plans
Financial goals that involve tax planning include:
-Minimizing gift and estate taxes when transferring property to others
-Shifting income to family members in lower tax brackets
-Obtaining a stepped-up basis in property to avoid future capital gains taxes
Non-tax personal estate planning goals often include:
-Caring for spouses and children
-Planning for incapacity
-Reducing estate administration costs
-Protecting property
-Controlling the transfer of property interests to others
Consequences of Minimizing estate taxes
While irrevocable trusts can remove assets from grantor’s estate, grantor cannot benefit from property, change terms of trust or revoke it if circumstances change
While by-pass trusts avoid taxation in the decedent’s estate (since assets and appreciation are not included in surviving spouse’s estate at death), less funds may be available for direct transfers to the surviving spouse.
If using decedent’s full unified credit and marital deduction by transferring assets into a by-pass trust and power of appointment trust for the surviving spouse, there needs to be sufficient resources to fully fund exemption equivalent
If leaving exemption equivalent amoutn to children with remainder to spouse, more money can be bequeathed to children and less to surviving spouse than intended if exemption increases (spouses can transfer unused portion of unified credit to surviving spouse)
ILITs can remove death benefit from owner’s gift estate by transferring policies more than 3 years from death/if trust purchases new policy on insured’s life. Premiums must be transferred into trust every year that are subject to potential gift taxes. Crummey powers reduce/eliminate gift taxes by creating present interest gifts of premium payments transferred into trust, which allows grantor and spouse to take annual exclusions for each trust beneficiary to offset taxable gifts
O/Techniques for reducing estate taxes
- unlimited marital deduction eliminates any gift or estate taxes on property transfers to spouses; however decedent’s estate may be “overqualified” if the decedent did not fully use their applicable credit to offset a potential estate tax liability. property inherited by the surviving spouse is taxed at its FMV, which includes appreciation, at that spouse’s death.
-charitable deduction is subtracted from the decedent’s adjusted gross estate to reduce the taxable estate; however may leave less to heirs. LI may be purchased for wealth replacement to ensure heirs receive equitable value
-unified credit is used to offset a person’s gift and estate tax liabilities and can shelter up to $12,920,000 in lifetime gifts and estate taxes. There are no negative tax or non-tax consequences to using the unified credit, which is not optional to use, and each person should incorporate its use into their estate plan.
-Special use valuation is applied to the real property valuation of farms and closely-held businesses to reduce the value included in the owner’s gross estate. a recapture tax is imposed if the heir disposes of the real property, or if it ceases to be used as “qualified use property” within ten years of the decedent’s death.
-alternate valuation date is used if there is a net decrease in the value of the decedent’s gross estate and estate tax liability six months after death. A consequence of choosing an alternate valuation date is that it cannot be used if estate taxes are eliminated through the marital deduction. The surviving spouse could disclaim a portion of the decedent’s estate to utilize the alternate valuation date, which also avoids over-qualifying the estate for the marital deduction.
Methods to minimize gift taxes
Use leveraging
Use qualified transfers
Use discounts
Use the GSTT exemption
Leveraging
- Gifting LI policies with high death benefit relative to low gift tax value (removed from insured’s gross estate if >3 yrs before death)
-Transferring LP shares in family LP (GPs, who are the parents, gift LP shares to children/o/family members that are discounted for minority interests and lack of marketability. FMV of present interest gifts are reduced by annual exclusions and discounts so that property is transferred at a greatly reduced transfer tax cost. Properly structured FLPs can shift taxable income to junior partners in lower tax brackets and can remove limited partnership interests and any future appreciation from the general partner’s gross estate.
GRAT/GRUT pass appreciated remainder interests in trusts to family members for discounted gift tax value and also removes from grantor’s estate. Homeowners can transfer primary and vacation homes into QPRTs, removing value from gross estate and passing appreciation to family members at a low gift tax value.
5yrs of contributions to 529 plans to leverage annual exclusion and remove gift from contributor’s estate
Qualified transfers
Direct payments to:
-educational institutions for tuition and fees, or,
-medical facilities to cover hospital, doctor, and medical expenses.
Generation-Skipping Transfer Exemptions
The GSTT exemption equivalent amount follows the estate tax exclusion of $12,920,000 (2023). an estate plan that creates a testamentary trust to benefit grandchildren funded with the decedent’s maximum generation-skipping exemption may find that there is much less in their estate to pass on to their children if the exemption amount increases over time.
Client Income Tax Bracket
If high, outright gift of income-producing property, or in the case of a closely held business interest, a family partnership, might be appropriate.
