Eliminating federal estate taxes for large estates
For the past few years, one of the more intriguing e-mail newsletters that has arrived at my computer is published by an outfit that focuses on high-asset estate planning. It offers advice on how assets can be structured to avoid estate taxes, especially federal estate taxes. You can also find estate planning lawyers from here, who can help you with taxes and other details.
The organization is known as InKnowVision LLC.
I have to admit that in the back of my mind I wondered how these organizations and also high-end estate planning generally would fare now that federal estate taxes, at least for the next two years and possibly permanently, would apply only to clients with over $5 million in assets at time of death for single potential taxpayers and $10 million for married couples.
To take full advantage of the $10 million unified credit, on the death of the first spouse the surviving spouse should file a Federal Estate Tax return.
At any rate, InKnow Vision did not disappoint and I recently received by e-mail attachment a 64-page summary authored by a Massachusetts attorney titled “Family Wealth Goal Achiever — Initial.”
The draft was for discussion purposes only and was not intended to provide specific results for a specific family. Each family brings its own goals and attitudes to the table when it comes to planning.
It did, however, provide background for a prototypical family with a husband aged 83 and wife aged 76 who have two adult children with differing lifestyles, three grandchildren, and $22 million in assets.
The news, regardless of one’s convictions on the matter, is that, with some planning, estates even over $10 million still can pass to the next generation with no federal estate taxes.
I found the examination fascinating in the way that I suppose a chessmaster would feel in viewing new moves to achieve checkmate in the shortest period of time. Most strategies involved mechanisms with which I was already familiar.
Some were a bit more involved but here is how this might be done.
Step one: Develop goals and objectives. This step, by the way, is necessary for every estate regardless of size and regardless whether taxes are an issue. If, for instance, the will makers are unwilling to accept structuring of assets even if this would save money in the long run, they might not be agreeable to establishing trusts or other strategies. Also there are personal goals such as providing adequate liquidity for daily living and also emergencies, extending immediate benefits to children and grandchildren without waiting for death, charitable giving during lifetime and at death, financial security of the surviving spouse, and handling long-term care needs.
Step two: State the plan assumptions. Certain assumptions are made from the outset.
This, again, is true for all estates, not just for those requiring high-end planning.
For instance, it might be assumed that the will makers continue to reside in a state that has the same estate, inheritance or income taxes as their current state, that tax-qualified funds (IRAs and other retirement funds, for example) are paid out over time and not immediately or that they may be paid to charity.
Certain assumptions might be made regarding the lifetime annual expenses and income needs with a rate of inflation assumed. Calculations are made regarding administrative costs during life and after death.
Step three: Discuss the strategies. Techniques discussed in the paper are described here in general terms and are not based on the specific wording of the document.
• With a grantor retained annuity trust, one spouse would transfer some of his investments into the trust with a defined term which would provide quarterly payments to him and eventual payment to his heirs.
• Since the family in the example owned a vacation home that they wanted to keep within the family indefinitely, a vacation house maintenance trust was recommended, to be funded by life insurance. The technique, more commonly used in past years when estate taxes were more of an issue for smaller estates, is referred to as an irrevocable life insurance trust (ILIT).
• With a qualified personal residence trust (QPRT), the couple could shelter more of the value of real estate since it would be valued with an adjustment for lack of liquidity and limited transferability.
• Large IRAs could be left to charity after the death of the second spouse. This would reduce or completely eliminate overall estate tax on the death of the second spouse. If IRAs continue to the children, payments should be stretched over time instead of taken in a lump sum to minimize taxes.
About the Author Janet Colliton
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.