Estate Planning Tools
The material found on this site is for general information only. Concepts included on this site dealing with federal estate tax issues may not be the most acceptable or best option for your situation. You should consult your qualified tax professional for advice on your particular situation.
There are a number of techniques and estate planning tools that may be utilized to reduce or eliminate federal estate tax. Some of these include the unlimited marital deduction, gifting, and trusts. The use of life insurance may also be considered to provide the cash needed at death to pay federal estate taxes.
Unlimited Marital Deduction
Property passing to a surviving spouse is eligible for the federal unlimited marital deduction (assuming the spouse is a U.S. citizen). Therefore, if a married person passes the entire estate to the surviving spouse, no federal estate tax would be due. However, at the second death the assets owned by the surviving spouse (assuming the spouse does not remarry), will be taxed in his/her estate for federal estate tax purposes. The tax code passed on 1/2/2013 allows any unused exemption amount at the death of the first spouse to be added to the exemption amount of the surviving spouse (often referred to as "portability" of the exemption.
Wealth transfer objectives should be discussed with legal and financial advisors. Potential estate tax is one consideration in the total planning process.
Unified Credit (Applicable Credit Amount)
The unified credit for 2016 (applicable credit amount) is $2,141,800. This credit allows an individual to pass $5,490,000 of property to heirs other than the spouse, free of federal estate tax. This property can pass either while alive, (through gifts) or at death.
By implementing a gifting program, an estate owner can dramatically reduce the size of the taxable estate. If an estate owner doesn't need an asset to live on, it may make sense to give the asset away, since the recipient may likely be the person who would receive the asset at death. The advantage of gifting property while living is that the appreciation in the value and income from the gifted asset is removed from the estate. However, the estate owner who gifts property must realize that once the property is gifted, the estate owner loses all benefits and control of the property. Further, the income tax consequences (basis issues) must be also considered when gifting is contemplated.
The annual gift exclusion for 2017 is $14,000. This amount is indexed for inflation. If a husband and wife join together to make a gift, $28,000 (split-gift) can be given to an unlimited number of people every year, with no gift tax consequences (although, a federal gift tax return must be filed in gift-splitting cases).
Gift recipients can be anyone. For example, parents could conceivably give away $28,000 to each child; grandparents could gift property to each child and grandchild. You can see the potential for large federal estate tax savings if a significant amount of property is gifted.
A trust is used in estate planning to manage or dispose of property, either during the grantor's lifetime or after death. A trust can hold virtually any kind of property — real or personal — tangible or intangible, and can be as flexible as it needs to be to meet the estate owner's objectives.
- Distributions from a trust can be arranged in any manner the grantor desires — in amount, frequency or for whatever purpose defined by the grantor.
- Trust beneficiaries can generally be anyone or any institution named by the grantor.
- The trust can be designed so that it can be changed whenever the grantor deems necessary or it can be set up so it may not be changed or revoked.
- The trust can be established while the grantor is living or at death.
Trusts are created for a variety of reasons:
- Asset management — the grantor or beneficiaries of the trust may lack the expertise to manage a large portfolio of assets.
- To benefit the grantor — the grantor can receive income from the trust and control its assets.
- To benefit or protect others — trusts can be set up for the care of minor children or incompetent persons.
- To divide property ownership among persons.
- Federal estate or income tax purposes — trusts can contain provisions to reduce federal estate or income taxes.
- For charitable purposes.
- For special needs planning.
Trustees can generally be anyone the grantor wishes, including the grantor himself. It is not uncommon to have co-trustees. One trustee could be the grantor, or a family member, whose role is to be sure that the grantor's personal objectives are met. The other trustee could be a bank or other financial institution that would make the investment decisions on behalf of the trust beneficiaries.
Three Common Trusts Include:
Neither State Farm® nor its agents provide tax or legal advice.
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