Estate Planning Education Courses

Large Estate

You're probably convinced by now that estate planning is an important process for you and your family. The type of estate planning solution that's right for you depends on the size of your estate.

If you are married and have an estate worth more than the unified tax credit, then you'll not only want to avoid probate, with all of its expenses, you'll also want a plan that helps you reduce or avoid estate taxes. An estate planning strategy using the A-B trust may be just what you need.

With an A-B trust, you can ensure that you and your spouse take advantage of both of your estate tax exemptions, thus sheltering both unified tax credits from estate taxes. Here's how it works.

At the death of the first spouse, the assets of the couple are divided into two separate trusts. One is the "A" Trust, or survivor's trust (think "A" for "above the ground"). The second is the "B" Trust, or the family trust (think "B" for "below the ground").

The survivor has access to all the assets in the "A" trust. But did we just cut the survivor's standard of living in half by putting the rest of the couple's assets in the "B" trust? No, because the survivor has rights to access the income and principle in the "B" trust as needed for a wide range of needs, including maintenance, health, education, and support.

Because the assets in the "B" trust aren't in the survivor's estate, they pass on to the beneficiaries without probate and estate tax free up to the unified tax credit in the year the survivor dies. The same thing happens to the assets remaining in the "A" trust: they pass on to the couple's beneficiaries free of probate and exempt from estate taxes on assets up to the unified tax credit.

ADVANCED SOLUTIONS

What if you're married with wealth greater than 2 times the unified tax credit? Then, you may need additional planning options to protect all your assets from taxes and probate expenses. Four additional strategies may be able to serve you well:

• Gifting
• Life Insurance Trust
• Charitable Trust
• Family Limited Partnership

Let's discuss each one briefly and review how they might work for you.

GIFTING

If you give it away, it won't be subject to estate taxes when you die, nor will it be subject to probate. One way to reduce the size of your estate is to begin giving your wealth away now. The government helps you do that by allowing each person to give to another up to $12,000 each year, gift-tax and estate tax free. You can make $12,000 gifts to as many people as you'd like. Together with your spouse, the two of you can give a single individual up to $24,000 each year, gift- and estate-tax free.

Depending on how much wealth and how many loved ones you have, and how soon you start making annual gifts, you could give away a substantial amount of your wealth before you die.

The downside, of course, is that when you give away wealth in this way, you also give up control. Will your loved ones use your gifts wisely? Could the money end up in the hands of creditors or an ex-spouse? With outright gifting, there's little you can do to control how that wealth is spent once you give it away.

THE INSURANCE TRUST

As we mentioned earlier, life insurance adds to the value of your estate for estate tax purposes. So, without careful planning, it can actually increase the financial burden on your family, not ease it. An effective solution is the insurance trust, which actually owns your life insurance for you, removing it from your estate. Each year, you make your annual premiums using your annual gift tax exclusion for each of the policy's beneficiaries. When you die, the trust controls how the beneficiaries receive and under what circumstances may use the proceeds, as you've directed in the trust documents.

THE CHARITABLE TRUST

Another excellent planning strategy for many is the Charitable Trust. It allows you to donate an asset to a trust, generate an immediate charitable deduction, reduce the size of your estate (and thus, lower your estate taxes), avoid any capital gains taxes on the appreciated asset, and even generate a new or improved source of income from the trust while you live. At your death, your chosen nonprofit organization receives what's left of the trust assets.

THE FAMILY LIMITED PARTNERSHIP

The Charitable Trust is a great strategy for removing an asset out of your estate. But what if you want to keep control of an asset, even as you move its ownership into the estates of your loved ones? The Family Limited Partnership offers a solution.

With a Family Limited Partnership, you create a partnership that owns your assets. You own interests in the partnerships. Each year, using your gift tax exemption, you can give away interests in the partnership to your loved ones, thus moving ownership of your property from your estate into theirs. Because partnership interests are often discounted, you can move more of your wealth out of your estate faster without incurring gift taxes. You can even retain control over how the assets are managed if you name yourself and your spouse general partners, with your loved ones designated as limited partners. As general partners, you and your spouse can even earn income for managing the partnership assets.

WHICH STRATEGY IS RIGHT FOR YOU?

In the limited space of this program, we can't provide any more detail than these brief sketches of how each of these advanced strategies work and how they might benefit you. And we have just touched on the highlights of each, leaving out substantial details about their occasionally complicated inner workings. But we'll be happy to discuss them in more detail and evaluate their effectiveness in meeting your estate planning needs during an individual consultation with you in our offices.