We decided to ask an estate planning specialist for some tips on estate planning and we got some great advice. All of these may not apply to you, but hopefully you can pull at least a few good ideas from their advice.
1. Implement a business succession plan. If you are the co-owner of a business, implement a buy-sell agreement with your business partners to ensure that the family of a deceased partner receives a fair price for the business interest while ensuring the continuation of the business itself. If you have a family business, explore techniques to leave the business to those in the family who will operate it, while treating fairly the remaining survivors.
2. Leverage today’s low interest rates to substantially reduce your taxable estate. Today’s historically low interest rates provide a unique opportunity to shift minority positions in your business to the next generation over time through the use of a Grantor Retained Annuity Trust (GRAT) or an Intentionally Defective Irrevocable Trust (IDIT). You can lock in a low interest rate for your retained portion, removing greater portions of the profitable, appreciating business value from your taxable estate.
3. Consider a single member limited liability company (LLC) to hold business, investment or recreational property. Individuals, corporations, partnerships and other LLCs are increasingly placing such property as rental real estate, operating divisions and intellectual property in separate single member LLCs to protect personal and other business assets. For federal tax purposes, the single member LLC is considered a “disregarded entity,” so there is no separate income tax return for this entity, making it a cost-efficient and convenient asset protection tool.
4. Structure life insurance ownership to eliminate the estate tax on its death benefits. While life insurance death benefits are generally not subject to income tax, they are subject to estate tax when the deceased insured owns the policy. If the life insurance is purchased by an irrevocable trust, your survivors can receive such benefits free of both income and estate taxes. If you have an existing policy insuring your life, you may transfer it to an irrevocable trust and achieve the same result as long as you survive more than three years from the date of transfer.
5. Give to charity in a tax-efficient manner. There are a number of ways to structure charitable giving, both during life and upon death, to maximize available deductions for income tax and transfer tax. Charitable Remainder Trusts (CRTs) and Charitable Lead Trusts (CLTs) are popular techniques. Private foundations allow you to leave a legacy of charitable giving while showing your survivors the importance of giving back to the community.
6. Name a trust as the beneficiary of your qualified plan or IRA. By naming a trust, designed to comply with certain IRS regulations, as the beneficiary of your retirement plan accounts, the trust beneficiaries generally can stretch out distributions over a beneficiary’s lifetime. Your survivors can thus obtain the advantages of tax-deferred growth while securing the benefits of holding assets in trust.
7. Create a Generation-Skipping or Dynasty Trust. The estate tax tends to erode wealth at each succeeding generation. By placing highly appreciating assets in a trust designed to provide for the security of your children while avoiding the estate tax in one or more generations, you can leave a legacy of trustee-managed wealth for your family that will last long into the future.
8. Execute and fund a revocable trust as the foundation of your estate plan. After your death, the revocable trust can protect the trust assets from a beneficiary’s creditors, divorce judgments and other lawsuits and provide prudent management of assets for young children and grandchildren. It can address “blended” family situations, allowing you to address the needs of your spouse and those of children from a prior marriage, reduce estate taxes for married couples on their combined estates and avoid probate court involvement in the settlement of the estate. Remember, property that passes by will is always probated.
9. Don’t forget to plan for incapacity. Have a Durable Power of Attorney and a Patient Advocate Designation in place in case you are incapacitated through injury, sickness or old age. If you don’t plan ahead in this respect, the Probate Court will need to appoint someone to manage your affairs and make health-care decisions for you, resulting in critical delay, additional expense and inconvenience for family members during an often stressful time.
10. Don’t procrastinate. Many of the techniques designed to reduce estate taxes work to your advantage over time. In fact, the IRS often scrutinizes estate-reduction techniques when done shortly before death. Interest rates will inevitably rise over time, thereby reducing the effectiveness of certain estate planning tools.
