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Estate Planning Strategies

estate planning

The main goal of estate planning is to protect and preserve your assets for your beneficiaries. Because of this, estate planning strategies typically include the use of various tax reduction and asset protection vehicles. This can include marital deductions, life insurance, annual gifting, trusts and charitable donations. Always keep in mind that estate planning is a highly individualized endeavor. The tax and financial instruments you end up using ultimately depends on your estate planning goals, as well as your present and future plans for your assets. Additionally, remember that your personal and professional circumstances change over your lifetime. For this reason, you should make it a habit to review your estate plans regularly.

Estate Tax Saving Strategy: Marital Deduction

The surviving spouse is entitled to receive the assets of a deceased spouse’s estate tax-free. Of course, this is assuming the estate’s worth does not exceed the federally-set ceiling at the time of death. The current marital deduction amount is $11.4 million as of this writing. Keep in mind, this amount changes because it’s adjusted yearly to account for inflation. If you die with an estate that’s worth less than this, the federal government gives your spouse a free pass. He or she will not have to pay any estate taxes.

Better still, marital deductions are portable. Let’s say a deceased spouse didn’t use all the estate tax exemptions to which he or she was entitled. Leaving behind a substantial estate, the surviving spouse now has to pay estate taxes. The law allows the surviving spouse to take advantage of the unused portion of the marital deduction of the deceased spouse. This can significantly lower the amount of estate taxes to be paid – or even eliminate them altogether. Naturally, this would depend on the size of the estate and the amount of exemptions not utilized by the deceased spouse.


Life Insurance

Estates often include different types of assets. Some assets, such as cash and bonds, are liquid; others, such as business interests or valuable collectibles, are not. If your heirs end up having to pay for estate taxes, they can use the liquid assets to do so. Remember to set up a payable-on-death account with your banks and a transfer-on-death proviso for your stocks and bonds. This way, your beneficiary can access the cash and the interest on the stocks and bonds immediately upon your death. There is no need to wait for probate since these arrangements place the named assets outside of the probate process.

It happens often enough, however, that many estates are cash-poor. There’s mostly illiquid assets in the estate that cannot be turned to cash easily to cover the estate tax. If you foresee this scenario, leaving behind a life insurance policy can help prevent it from happening. You may need to consider setting up an Irrevocable Life Insurance Trust (ILIT) to house the policy.

This would depend on your individual circumstances. If you die owning the policy, it becomes part of your estate. This defeats the purpose of giving your heirs access to the insurance money to cover estate taxes. Having an ILIT own the policy gives your heirs quicker access since it’s no longer part of your estate. If your estate qualifies for full exemption with the amount of the insurance factored in, you don’t have to set up an ILIT – unless you want to be extra safe.

Having life insurance does not only help your heirs cover estate taxes – should any become due. It also helps ensure they can continue to enjoy the life your income provided for them when you were alive.


Annual Gifting

Another way to reduce your tax exposure is to remove assets from your account through gifting. At the current time, the federal government sets an annual gifting ceiling of $15,000 per year per recipient. If the tax is applicable or not depends on a few issues. The first issue is the gift’s value. If the value of the gift is less than the gift tax exclusion, you need not be concerned about taxation. Second, There are exemptions that include both annual and lifetime amounts. The annual gift tax exclusion for the year 2019 is $15,000. The lifetime exclusion is $11.4 million as of this writing. Inside of this limit, the gift tax consequences will be nil. Thus, you will not consume any legally entitled estate tax exemptions.

You may have a certain amount of apprehension with the thought of giving your money away. This is especially understandable if your son or daughter has a history of making “ill-considered” decisions. You may be wary of giving them your hard-earned money to squander. In this case, you may want to consider setting up what is called a Crummey trust.

This is how a Crummey trust works. You fund the trust in the name of a beneficiary as part of your annual gifting. The beneficiary is allowed to withdraw funds from the trust, but only within a specific time frame. This qualifies the amount you transferred to the trust as a ‘gift.’ If the funds are not withdrawn within the specified period, the money remains in the trust. As long as the amount does not exceed the current gifting limit, there are no tax repercussions. This allows you to accomplish two goals: keep the money in the trust and qualify for the annual gifting exemption.

Of course, the obvious risk is that your beneficiary may still withdraw the funds against your wishes. You will have to convince your beneficiary that the money will serve them better in the future, when you are no longer around to provide for them, rather than the present, when you still are.

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Trust Funds for Minors

Setting up a trust fund for your minor children is another good way to reduce the amount of your estate. The money stays in the trust until the child reaches 21, the age of majority. Until then, he or she will have no access to trust assets. This type of trust qualifies for the annual gifting exclusion, so you can fund the trust up to the maximum allowable amount. This, of course, is in addition to whatever assets you used to set up the trust in the first place.

Keep in mind that “gifts” do not always have to be in the form of cash. Giving an asset with a high probability of future appreciation can actually work out better in the end. You can gift stocks and bonds to a trust as well as cash. This holds true whether you’re funding a trust fund for a minor or setting up a Crummey trust as above.

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Charitable Contributions

Leaving part of your estate to charity is an excellent way to leave behind a lasting legacy. It can also be quite effective in reducing your estate taxes. You can create a charitable remainder trust (CRT) that will provide for both your family and your favorite cause. This makes sense when your children are still young, or you have a dependent with special needs. You want to make sure they benefit from your estate first, while they are incapable of taking care of themselves. The remainder of your estate goes to charity after certain conditions have been met. This could be when your minor child reaches the age of majority or when a special-needs dependent passes. At the time of your death, the value of your estate is reduced because of the partial donation you made to charity through the CRT.

Alternately, you may also want to do this the other way around. That is, provide for your charity first, then have the remainder of your estate go to your beneficiaries afterwards. In this case, you have to create a charitable lead trust (CLT) instead of a CRT. You will still be entitled to a partial charitable deduction for your estate. If you wish to reduce both your income and estate taxes, consider setting up a lifetime charitable trust. Depending on your individual tax situation, your charitable gift can result in substantial tax deductions over your lifetime.

Forced Heirship

Some jurisdictions, such as many in South America, Europe and the US state of Louisiana have what we call forced heirship. This means that you must give a certain portion of your estate to certain heirs. So, if a child is a drug addict and should not receive assets that would fuel the habit, one cannon disinherit that child. If a child has disowned you, well, too bad. The law makes you give that child a percentage of your assets.

The solution is the set up a trust in a jurisdiction that does not enforce forced heirship. Many South Americans, for example turn to New Zealand trusts to circumvent this imposition.

estate planning information

Estate Planning Strategy Conclusion

As more and more baby boomers reach retirement age, estate planning has come to the forefront of their bucket list. It’s not so much something they’ve wanted to do all their lives, as something that simply has to be done. And they’re right. Don’t let state laws, or even the whims of your surviving spouse, dictate how your estate will be distributed. Estate planning ensures that the assets you worked hard for all your life will be distributed according to your wishes.

Estate planning is currently a booming field. There is no shortage of effective estate planning strategies you can take advantage of to reach your goals. The most commonly used strategies involve marital deductions, life insurance, trusts, annual gifting and charitable donations. Understandably, much of estate planning focus on tax reduction. But asset protection is also crucial in estate planning. Thus, trusts – both revocable living trusts and irrevocable trusts – are often part of a sound estate plan.

For estate planning to be truly effective, it must be customized for your current needs as well as future plans. You should also make it a point to review your estate plan as your life circumstances change. Additionally, old estate laws can be repealed, while new ones enacted. It’s good to stay on top of these developments yourself, or hire a trusted professional to advise you on the matter. Planning your estate now is the best way to make sure your beneficiaries profit from the assets you left behind for them.

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