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Sophisticated
Estate Planning
There are a multitude of scenarios that require sophisticated estate
planning. Perhaps you want to use your assets to improve your own
or someone else's quality of life, or enjoy the benefits of charitable
giving, or secure the future of a disabled or minor child, or even
perhaps ensure the continued success of the family business. No matter
what your needs, we can make the process less daunting and more productive.
Is my estate subject
to estate tax?
That depends on a number of factors. The first factor is the value
of the assets that you own or may own including any real estate,
cash, securities, business interests, anticipated inheritances
and/or lawsuit recoveries, gifts made to persons other than your
spouse which exceed the annual gift exclusion amount of $11,000
per person, etc.
The second factor relates to who you leave your
assets to. Generally, spouses can leave all of their assets outright
to each other through the use of the unlimited marital deduction.
However, by doing this, the second spouse may end up with a taxable
estate. Currently, you can pass $1,000,000 of assets to persons
other than your spouse without incurring federal and New York estate
tax. This is called the unified credit. The federal credit is increasing
as follows:
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2004.........$1,500,000
2006.........$2,000,000
2009.........$3,500,000
2010.........Repealed
2011.........$1,000,000 |
It should be noted that New York's credit is scheduled
to stay at $1,000,000 which means there could be New York Estate
tax for you in 2004 depending on the size of your estate. It should
also be noted that although the estate tax will be repealed in the
year 2010, there is a sunset provision in the law which brings the
estate tax credit back to $1,000,000 in the year 2011. Because of
the uncertainty of the law, estate planning to reduce your taxable
estate is still highly encouraged.
How can I reduce my taxable
estate?
Your taxable estate can be reduced
through a number of gifting techniques. Currently, you and your
spouse can each pass $1,000,000 of assets to persons other than
each other, without incurring federal and New York gift tax.
In addition, during your lifetime, you and your
spouse can each give away $11,000 per person each year to as many
people you want to without filing a gift tax return. Where minors
are involved, this amount can be paid to a trust for a minor which
meets certain conditions. You can also make payments to providers
of medical services and higher education providers for tuition (not
room and board) and such payments do not consume your annual exclusion
or the unified credit.
Can I make gifts without losing
control or use of the asset?
Many people prefer not to make outright
gifts because they lose control of the asset. There are other techniques
that can be used to reduce estate taxes while allowing you to maintain
control:
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Family Limited
Partnership
If you own certain real estate, business or have other financial
interests, a Family Limited Partnership can be created where
you are the controlling general partner and allows you to
gift limited partnership interests to your chosen beneficiaries.
Such interests can be discounted for lack of marketability
and lack of control since they would be extremely hard to
sell on the open market. This removes the asset from your
estate at a discounted value and also removes any
appreciation on the asset.
Qualified Personal Residence Trust
Another technique to use is a Qualified Personal Residence
Trust whereby a home you use as a residence is transferred
to a trust for your chosen beneficiaries. You have the right
to live in the home for a certain term of years and because
of that right, the value of the transfer is discounted. After
the term of years, your beneficiaries own the house. Again,
the asset is removed from your estate at a discounted value
plus any future appreciation. In addition, if you pay rent
to the beneficiaries after the term, this is another method
to remove assets from your estate without incurring any gift
tax.
Grantor Retained Annuity Trust
Another technique is a Grantor Retained Annuity Trust where
you transfer certain income producing assets to a trust and
you retain an annuity for a term of years at a certain interest
rate. The existence of the annuity reduces the value of the
transfer for gift tax purposes.
This vehicle also removes appreciation on the assets from
the estate.
Grantor Defective Trust
Another technique is to sell income producing assets to a
Grantor Defective Trust in exchange for a Promissory Note.
Income earned on the assets is paid to the Grantor Defective
Trust which, in turn, makes payments to you on the Note. Because
this transaction is considered a
sale and not a gift, this is a way to remove the value of
an asset and its subsequent appreciation from your estate
without using up any of your unified credit.
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Are life insurance proceeds
or policies that I own includible in my estate?
Generally, life insurance policy proceeds are includible in your
estate. However, if you create an irrevocable life insurance trust,
transfer ownership of the policy to the trust and live for 3 years,
the
policy and any appreciation are removed from your estate. An irrevocable
life insurance trust is also a good tool to finance payment of estate
taxes where your estate does not contain enough liquid assets. Upon
your death, the trustee of an irrevocable life insurance trust can
liquidate the policy and use the proceeds to buy non liquid assets
from your estate so that the estate will have cash to pay the taxes.
What is a Bypass or Credit Shelter
Trust?
The creation of a bypass trust allows one spouse to set aside
funds for the surviving spouse with permission to invade the principal
and interest as needed. Upon the death of the second spouse, the
trust proceeds pass to designated beneficiaries as part of the first
spouse's estate. In effect, the surviving spouse gets the use of
the money while taking advantage of the deceased spouse's unified
credit, thereby saving on estate taxes.
What is a Charitable Remainder
Trust and how can it help me reduce or eliminate estate taxes and
capital gains?
A Charitable Remainder Trust is a trust created by you. During your
lifetime, you receive a yearly annuity payment from the trust. Upon
your death, the assets remaining in the trust pass to a qualified
charity of your choice. Sometimes, clients set up their own private
foundations which end up receiving the proceeds of this type of
trust.
This method of charitable giving creates current
benefits without current costs. You will be able to give a significant
future gift to a charity while obtaining increased annual income,
current income tax
deductions and future estate tax savings, thereby satisfying a multitude
of needs. The trust works by generating an income tax deduction
and lifetime annual income by allowing the donor to purchase life
insurance with lifetime annual income and a tax savings. This enables
the family to receive life insurance from the irrevocable life insurance
trust tax free upon the donor's death at which time the charity
receives the remainder from the charitable remainder trust.
How can I provide for my second
spouse while protecting my children from my first marriage?
The QTIP (qualified terminable interest property trust) allows an
individual to provide a surviving spouse with income from the trust
for the remainder of the spouse's lifetime. The individual also
can
provide the surviving spouse with limited access to the principal
of the trust for his or her support. However, upon the death of
the surviving spouse, the assets remaining in the trust pass to
the beneficiaries names in the first decedent's will, most often,
the children. An individual can provide support for a spouse during
the spouse's lifetime but retain control of the estate after the
spouse's death. The method also defers the estate tax until the
death of the surviving spouse. Upon the death of the surviving
spouse, the entire value of the QTIP trust will be subject to estate
tax.
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