Advanced Estate Planning

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The topic of estate planning is expansive.  We covered some basics last month, and will cover some of the more complex considerations this month.  Please note that I am not an attorney and cannot provide legal advice.  It is critical to involve an attorney in your estate planning, and I recommend going to one that specializes in estate planning.

Estate Taxes.  Clients often create an estate plan to minimize estate taxes (death taxes).  Estate taxes do not apply on a Federal level until your estate exceeds $15 million.  However, estates over $2 million can be taxed in Massachusetts ($1,838,056 in Rhode Island).  Your estate includes any bank/investment accounts, real estate and death benefit of any life insurance policies.  There are a number of advanced strategies to reduce or eliminate estate taxes, including credit shelter trusts, gifting and charitable strategies.

Trusts.  Trusts come in many shapes and sizes.  If you are married, certain trust provisions can allow you to double the amount that can be passed on to your beneficiaries free from estate taxes.  These provisions are referred to as credit shelter, disclaimer or AB provisions.  Outside of tax planning, there are several other benefits to trusts.  Trusts can either be Revocable, meaning they can be changed at any time, or Irrevocable, which cannot be altered once it is created. 

Revocable Trusts.  The vast majority of trusts are revocable, because of their flexibility.  One of the primary benefits of a trust is that it avoids probate.  If your asset does not have a named beneficiary (such as real estate or many bank accounts), it must be probated at your death, which involves filing paperwork with the court.  It is important to understand, having a will does NOT avoid probate.  If assets are owned by the trust, or the trust is named as the beneficiary, it will avoid probate.  Another big benefit of trust is in the area of management and distribution of assets if you do not want your beneficiaries to receive the money immediately at your death or if you want to protect it from divorce or creditors.  For example, you may not want your children to receive an inheritance until they are 25 or 30 years old. 

Irrevocable Trusts.  Irrevocable Trusts are much less common than they used to be.  They are primary used to shelter assets for high net worth clients or exclude assets from Medicaid planning.  Medicaid rules have become stricter over time, so assets generally need to be transferred at least 5 years in advance of needing long-term care.  Clients also relinquish control with irrevocable trusts.

Gifting.  Gifting is a popular strategy if you feel you have sufficient assets and want to see loved ones or charities benefit from the money while you are living.  This may also allow you to reduce the size of your estate to avoid estate/death taxes.  You can very easily gift up to $19,000 per year to anyone ($38,000 if you are married and your spouse consents to gift splitting).  You can also gift significantly more than this (without paying taxes) if you file a Gift Tax return.   

Charities.  It is outside of the scope of this article, but there are more advanced strategies to consider if you are charitably inclined.  As an example, you can create a Donor Advised Fund to receive a large tax deduction and have money distributed to charities of your choice over time.  Charitable Remainder Unitrusts and Charitable Lead Trusts allow you to potentially create income and receive a charitable deduction.  If you are over the age of 70 ½, you can donate money directly from your IRA on a tax-free basis.

Lars Lambrecht, Rehoboth resident and Certified Financial Planner, is available to answer questions or meet for a consultation.  617-947-6428