Estate Planning Saves Money
Estate planning is more important than ever ... ACT NOW!
*Changes to the Federal and State Estate Tax laws were recently enacted. However, because the new law is effective for only Two (2) years, I want to emphasize that the scenario I describe in this article remains a very realistic guideline for the long term. It assumes a $1.0 Million Exemption level rather than the current $5.0 Million Exemption level enacted by the new law applying to years 2011 and 2012 only. Of course, this article will be updated to reflect new legislation as it occurs......so stay tuned.
The Factual Scenario:
Take a common husband and wife scenario where the combined wealth
they've accumulated over their married life is $1.5 Million.
The property is held in joint tenancy and made up of real estate
(the family home), mutual funds, Certificates of Deposit and life
insurance. Even married couples with modest real and personal
property can easily have an estate exposed to Federal Estate Tax. Life insurance
benefits commonly push the value of the estate over $1.0
Million. Most don't realize the simple fact that the relatively
inexpensive life insurance policy can expose the death benefits to a
tax of 50% of the amount over $1.0 Million in total assets. (We
explain more in the following discussion).
Death of the First Spouse:
On the death of the first spouse (lets say the husband), all joint
tenancy property goes to the surviving spouse. No probate is
required and the property is completely free of Federal Estate Tax
as the law exempts 100% of all property going to
the surviving spouse.
In addition, Federal estate tax law provides an exemption called the "lifetime exemption". Currently, the lifetime exemption covers property equal in value to $5.0 Million. It was originally set at $1.0 Million for years 2011 and beyond by previous legislation. However, the current exemption level ($5.0 Million) is only for the next two years. So new Federal legislation will be required to set the tax levels for years 2013 and beyond. It is uncertain and unpredictable just where the tax rate will be set and I cannot assume that the the Federal government will not return to the previous $1.0 Million level ... and neither should you. My advice is to plan for the low amount and pray for the higher. The tax rate for the each dollar above the exemption amount is near 50% .
Why do I mention the lifetime exemption amount with regards to the scenario I just described? Simply because in that situation the lifetime exemption of the first spouse to die was not used. In fact, it was completely wasted. Also, in my analysis, I assume that deaths will occur in 2013 or following and the lifetime exemption amount will be $1.0 Million. It is a prudent assumption as the larger exemption amounts will be available for only the next 2 years. Consider this for yourself and if you have a reasonable expectation that you will live beyond January 1, 2013 then you had better assume your estate will be applying a lower exemption amount (post 2012).
Death of the Second Spouse:
So, why is the lifetime exemption amount important? Well, for one reason, even though
all is well and good with the tax free transfer to the
surviving spouse, lets say that the surviving spouse (the wife) dies a few years
later, in 2014. On her death, her estate is valued at
the same $1.5 Million. However she can no longer use the marital
exemption (she died single). Her only exemption is her lifetime
exemption which protects only (assumed) $1.0 Million from the tax.
The scheduled tax rate is 50%.
Therefore, in this scenario, her estate will have roughly $500,000.00 of assets exposed to the tax and her estate will pay federal estate tax in the amount of approximately:
$250,000.00
OUCH!
That's real money taken from your
children!
There is good news, however....This can
and should be avoided.
Same Scenario With Estate Planning Techniques Applied: A Revocable Living Trust with Marital Deduction Provisions.
In this scenario, both spouses have the same property as before. Instead of placing it into joint tenancy, before either die, they establish a Revocable Trust having provisions designed to maximize both the marital deduction and the lifetime exemption amounts.
The property (house, mutual funds and CD's) are placed into the trust. The trust is designated as the beneficiary of the life insurance policy and receives the death benefits.
On the death of the first spouse (husband gets it again) the revocable trust is divided into two separate trusts, one for the deceased husband and one for the surviving wife. The assets going into the husbands trust (the deceased spouse) will be roughly half of the assets or up to $1.0 Million (the lifetime exemption amount). The assets in the husband's trust will pass free from estate tax because they are completely covered by his lifetime exemption amount of $1.0 Million. His estate pays NO tax.
The wife receives the income and benefit of the husbands trust property and enjoys it the same as if she truly owned it. However, for estate tax purposes, those assets are not considered hers and are not subject to the estate tax on her death. Therefore when she dies in 2014, her estate is valued at roughly $750,000.00, well under the $1.0 Million lifetime exemption amount and her estate pays NOFederal Estate Tax as well.
On the death of the second spouse, both trusts then merge and distribute the net remaining assets ($1.5 Million) to the couple's children and heirs.
Therefore, as a result in this scenario, for the transfer of $1.5 Million in assets to their children, this couple paid :
NO FEDERAL ESTATE TAX.
By using this estate planning technique they ...
saved
$250,000.00
...
And so can YOU!
You can make REAL MONEY available to your children. Money that would have been lost had you
DONE NOTHING!
Also, if the estate grows larger the maximum
protection is even greater and would cover up to:
$2.0 Million in assets protecting your family against a maximum tax of
$500,000.00.
Your investment in estate planning just made you a hundred-fold
return!
J
Therefore,
by any standard of measure, Estate Planning is a necessity for those
having significant assets. Estate Planning is a very good
investment. The cost of Estate Planning is minimal compared to
the cost of probate, appointing a conservator and the federal estate tax.
One important thing to remember: The above described technique applies only to married couples. It is important for the trust to be set up during their marriage.... and before the first spouse dies. The ability to double the lifetime exemption will not be available once a spouse has passed on.
Other techniques are available for a single person to limit or reduce their Federal Estate Tax liability. Each person is unique and requires an assessment of their situation.
It is important to remember that by owning common and readily available life insurance, married couples and single persons can easily create a taxable estate even though they're not considered "rich". From my experience, many people are unaware that their estate could be subject to the hefty Federal Estate tax. It's worth your time and effort to review your situation now.
Call me today!
Jerold R. Gilbert is a Denver Estate Planning Attorney. A Colorado Wills and Trust Lawyer.
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Jerold R. Gilbert, Esq.
720-202-6958
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"Estate Planning Is Wise Planning."
Contact Information
Jerold R. Gilbert, Esq.
9474 Tammy Lane
Parker, CO 80134
720-202-6958 office