Editor’s note: This is the first in a series of articles designed to help you demystify the estate-planning process for your clients.
You’ve no doubt observed that your clients may take one of several approaches to estate planning, most of which leave them wishing they had sought professional advice earlier.
The first can best be described as “avoidance behavior,” in which they consciously or by default do nothing in planning for the inevitable, leaving their family to resolve matters during an already emotional and difficult time.
Another approach, only slightly more proactive, is doing it themselves or using online forms that may lead to mistakes or omissions that cannot be corrected once they become incapacitated or have died. This can lead to unnecessary legal fees, taxes and/or litigation, unfortunately defeating their original intentions.
Finally, failing to periodically update their existing estate-planning documents can create unnecessary complications. Federal and state tax laws change on a regular basis, and certain other life events (for example, moving to another state, getting married or divorced, having children) can make changes in their estate-planning documents imperative.
Most estate-planning attorneys spend a considerable amount of time creating and updating their form documents, which are then customized for each client based on the client’s specific needs and situation in life. This helps assure both you and your clients that their estate-planning wishes are current and valid.
The primary goal of estate planning is to ensure that assets are distributed in accordance with the client’s intentions. However, as we know, the tax laws can sometimes get in the way of realizing these intentions. The federal estate tax rate is currently 40 percent, and the estate tax is generally due nine months after death. However, there are significant opportunities to reduce or even eliminate this tax by way of exemptions, exclusions and deductions readily available under the Internal Revenue Code.
In this article, we’ll discuss several of these opportunities, continuing with others in the second article.
Federal Gift And Estate Tax Exemption
For 2016, the federal gift and estate tax exemption is $5.45 million. This exemption is adjusted for inflation on an annual basis. Above this exemption, the federal gift and estate tax rate is a flat 40 percent.
For a married couple, the total amount of assets equal to twice the exemption amount can ultimately pass to their children or other beneficiaries without incurring any gift or federal estate tax. Under properly drafted estate-planning documents, this tax exemption can be preserved at the first spouse’s death while maintaining all of the assets for the benefit of the surviving spouse.
One strategy to accomplish this goal is at the first spouse’s death, with assets up to the amount of his or her exemption placed in a family trust for the benefit of the surviving spouse. Although the surviving spouse will be able to receive income and principal from the family trust, the surviving spouse does not own the assets in the family trust for federal estate-tax purposes. Consequently, the assets in the family trust will not be included in the surviving spouse’s taxable estate, which allows those assets and their appreciation in value to pass free of estate tax to the couple’s children or other beneficiaries.