Smart Tax Strategies For Your Estate Plan

Estate Planning Word Cloud Concept on a Chalkboard with great terms such as durable, will, financials, lawyer, executor, probate and more.

When it comes to taxes, a little planning goes a long way. Here are some of the best strategies available today for minimizing gift and estate taxes:

Maintain Family Assets

A family limited partnership (FLP) allows you to manage and control family assets in a way that provides the tax-effective transfer of wealth to others. Typically, the majority of limited partnership interests are gifted to family members. Limited partners have no control over the partnership’s operation, and typically cannot sell or borrow against their partnership interests, due to the lack of liquidity and marketability. Therefore, valuation discounts apply for gift tax purposes, and additional discounts may apply to the assets themselves, depending on their liquidity.

Transfer Wealth During Your Lifetime

Lifetime gifts are generally superior to testamentary gifts for minimizing transfer taxes, since they reduce the size of your taxable estate. You’re permitted to give up to $14,000 ($28,000 for spouses splitting gifts) to any number of recipients in a single year without incurring gift tax. The unified tax credit of $5.45 million includes both the lifetime gift tax exemption and the estate tax exemption, so an increase in one reduces the other. Since the gift must be irrevocable, it’s crucial that you leave yourself sufficient funds to live on, and the recipient must be responsible enough to manage the money wisely. You can preserve your lifetime exemption by making unlimited payments directly to qualified medical and educational providers on behalf of your loved ones, and they won’t owe any gift or income tax on the funds.

Control The Time Period

To be eligible for the annual $14,000 exclusion, it should be a present interest – meaning the beneficiary should have the capability to use or spend the proceeds immediately. The Crummey power trust allows transfers to the trust to qualify as a present interest, since the beneficiary has a limited period of time to withdraw the annual gift. As long as the trust provides a time window during which the beneficiary can withdraw the gift before it becomes subject to the terms of the trust, it creates a present interest and qualifies for the grantor’s annual gift tax exclusion.

Transfer Wealth From Illiquid Assets

Life insurance is frequently included in the estate planning package, to provide liquidity in the case of closely held or relatively illiquid assets, such as a family business, farm, or real estate. While life insurance proceeds are generally tax-free to the beneficiary, they are included in the decedent’s gross estate as long as the decedent owned the policy at any point during the three years leading up to his death. The best way to avoid this issue is with an irrevocable life insurance trust. As long as the trust owns the policy, the proceeds remain outside the estate, and will be exempt from both income and estate taxes. The trust should purchase the policy, since the transfer of an existing policy within three years of death brings the proceeds back into the estate.

Provide For Your Children From A Previous Marriage

The most flexible marital trust – the qualified terminable interest property (QTIP) trust – allows the executor to determine how much of the estate qualifies for the unlimited marital deduction. While the surviving spouse’s needs and expenses are provided for during his lifetime, the final distribution of trust assets to the first spouse’s children is also protected. This makes it a particularly attractive option for people with children from a prior marriage, or if there is any concern over what might happen if a surviving spouse remarries.

Lower Your Gift Taxes

A grantor retained annuity trust (GRAT) permits the grantor to transfer assets to a trust for a few years. During this term, the grantor will receive an annuity from the trust, before the remaining assets are transferred to the beneficiary. The payment amount that must be disbursed by the GRAT to the grantor is calculated using an interest rate determined by the IRS, known as the hurdle rate. Annuity payments received by the grantor reduce the gift’s value for gift tax purposes, which is determined at the time of transfer into the trust. As long as the assets in the trust outperform the hurdle rate, this can be a very effective transfer strategy.

Investment professionals can help you identify the tools and strategies necessary to reduce your gift and estate taxes. Werbin Rubin knows how to use these tools to your advantage, and we’re committed to helping you achieve your financial goals, with comprehensive solutions designed to meet your needs.

Tags: estate planning services san jose, estate tax planning san jose, capital gains tax, best financial planner in palo alto, certified financial planner in san jose, financial planners in san jose

Advisor Services through Werba Rubin Advisory Services, LLC.Securities through Loring Ward Securities Inc., Member FINRA/SIPC #10-086 (04/10))
© 2016 Werba Rubin Advisory Services, LLC
No Comments

Sorry, the comment form is closed at this time.