Editor’s note: This is the second in a series of articles designed to help you “demystify” the estate planning process for your clients.

The first article discussed how the federal gift and estate tax exemption, unlimited marital deduction and annual tax-free gifts can be of benefit to your clients. To read, click here: /news/estate-and-gift-tax-saving-opportunities-24771.html?section=40

 

Financial advisors often find themselves in the position of educating their clients about the need for comprehensive estate planning as well as the many estate-planning opportunities that may be available to them. In this second article, we will discuss additional opportunities that may well be of great benefit to your clients.

Life Insurance

While life insurance proceeds are generally exempt from any income tax, federal estate tax will be incurred if the insured possessed any ownership interest in the policy on his or her life at the time of death. However, if life insurance policies are transferred to an irrevocable life insurance trust or another third party at least three years prior to death, the proceeds of the life insurance policies can completely avoid federal estate tax. 

The reason is that at death, the insured no longer has “incidences of ownership” in the underlying policy and, therefore, the proceeds cannot be included in his or her taxable estate under the Internal Revenue Code. Since the estate tax rate is currently at 40 percent, the tax savings potential of this strategy is quite impressive. Single life policies, either individually owned or employer provided, as well as joint and survivor life insurance policies and split-dollar purchase arrangements can be utilized under this tax-saving method through the use of a properly drafted irrevocable life insurance trust.

Charitable Gifts

Any gift to a qualified charity is fully exempt from gift and estate taxation. Trusts or not-for-profit corporate arrangements can be used and offer advantages over and above a simple charitable deduction. For example, a wholly charitable trust or a private foundation could provide a way for ongoing family participation in significant charitable endeavors even after the death of the individual who established the charitable arrangement. 

Similar objectives can be achieved by establishing a donor-advised fund under the auspices of a community foundation. This methodology can provide an appropriate memorial or legacy for the family and a source of pride for younger generations who can become involved in the management of the charitable endeavor with proper planning.

In addition, special split-interest trusts in which the family and charities have separate interests as beneficiaries can offer unique advantages. For example, under a charitable lead trust, income is paid to charity for a term of years after which the balance of the trust property is distributed to family members or other beneficiaries. A charitable remainder trust is another type of split-interest trust, in which the grantor retains the right to income for his or her lifetime, with assets ultimately passing to a charity or charities of the grantor’s choice. Both techniques allow for charitable deductions for income tax purposes under specific circumstances.

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