Estate Tax Minimizing Strategies

When planning your estate or legacy strategy, it is essential to consider how putting some or all of your assets in a trust will affect both you and your beneficiaries. Trusts can be helpful in charitable giving, mitigating estate taxes, and protecting your estate from creditors, probate, and a multitude of other adverse situations

Keeping Things In Balance

Estate tax-minimizing strategies generally come with tradeoffs that you should be aware of. These tradeoffs can come in the form of, implementation costs, relinquishment of financial benefits, the loss of control of your assets to a certain degree.

Implementing any estate planning strategy usually comes with a cost. For instance, you may need to hire an attorney to draw up legal documents, or you may need to hire an appraiser to determine the current fair market value of a property. Second, most estate tax planning strategies require you to give up some or all of the financial benefits from your property. For example, putting life insurance in an irrevocable trust to avoid estate taxes on the proceeds also precludes you from drawing on the policy’s cash value. Most of the tax-minimizing strategies we’ll look at require you to give up some degree of control over your property. For example, deeding your home to your children today will avoid estate taxes on the home’s future appreciation, but, as the new owners, your children would have the legal right to evict you. 

The bottom line is that you must balance your objectives against the cost, making sure that the potential benefits of a strategy outweigh the costs. Now, let’s look at some strategies that make the best use of the transfer tax exemptions, exclusions, and deductions.

Decreasing the Estate Tax Burden

Equalizing each spouse's estate

This strategy is best for spouses who have unequal estates. The spouse with the larger taxable estate can transfer assets to a spouse with smaller taxable estate and the transfer is not subject to transfer tax because of the marital deduction.

Optimizing the marital deduction

This strategy requires the first spouse who dies to leave an amount equal to the estate the tax exclusion to children (the amount will not be taxed because of the estate tax exclusion). The balance of the estate is then left to the spouse and will not be taxed because of the marital deduction. And finally, the estate tax is deferred until the surviving spouse passes.

Qualified terminable interest property (QTIP) trust

Assets passing to QTIP trust qualify for the marital deduction and the surviving spouse receives all income from the trust for life, with access to the principal according to the terms of the trust. The remaining trust assets are then included in surviving spouse’s taxable estate. At the surviving spouse’s death, the remaining assets pass to the trust beneficiaries.

Bypass (credit shelter) trust

This type of trust allows both spouses to fully utilize estate tax exclusions while giving the surviving spouse restricted access to more assets. Assets passing to the bypass (credit shelter) trust utilize the first spouse’s exclusion. Upon the death of the surviving spouse, the remaining trust assets pass to beneficiaries according to the terms of the trust. 

Dynasty trust

A dynasty trust preserves wealth for multiple generations of descendants, The trust survives twenty-one years after the death of the last beneficiary alive when the trust was created. This means it could last for over 100 years. Trust assets remain sheltered from transfer taxes (but not income taxes) while in the trust. 

Grantor retained annuity trust (GRAT)

Using this type of trust trust removes the property from your estate while allowing you to retain interest. The GRAT receives property an in return you (and your spouse) are paid an annuity for specific amount of time at which time the property transfers to your beneficiaries. However, the transfer is subject to gift tax but at a discounted value. The property is not included in the taxable estate as long as you outlive the term of years  

Qualified personal residence trust (QPRT)

This is a trust that is funded with a personal residence. With this type of trust, you retain the right to live in the home for a specified number of years. So long as you outlive the specified number of years the home is not included in the taxable estate but at that time you must begin paying market-based rent if you continue living in the home.

Understanding Your Estate: Critical Elements of an Estate Planning Strategy

Establishing an estate planning strategy is crucial, yet many wait too long to put their wishes in writing. Use this helpful guide to review your estate strategy and start conversations with your loved ones, financial professionals, and legal team.

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