Regardless of your age or your wealth, it is very important to prepare a will, therefore, it is important to have a will even if you do not have a large estate. Please see our explanation of the benefits of having a will in our Estate Planning area.
Your estate includes real estate, retirement accounts and life insurance. If you have an estate that is more than $2 million, you should go to an attorney or law firm, such as ours, who specializes in estate tax planning. There are several different ways to reduce your estate taxes. Below are a few examples:
- Planning for the Unified Credit. A common way to reduce estate taxes if you are married is to use a By-Pass Trust will. For example, if you and your spouse have an estate of $4 million and you have a simple “I love you” will, after the first spouse’s death, there would be no estate tax because spouses are exempt, however, when the second spouse dies the second spouse’s estate which is now $4 million, will be taxed on everything over the $2 million exemption amount, which in this example is $2 million, which is approximately $780,000. With a By-Pass Trust Will, the first $2 million will go into a trust for your spouse, where he or she receives all the income, plus 5 percent of the principal each year, or more if he or she can show a need, and the spouse can be the trustee of the trust. The remaining amount of your estate will go to your spouse free of trust under the spousal exemption. When the second spouse dies, the amount in the By-Pass trust will go to your children tax free under the first spouses $2 million exemption allowance, and then the remaining $2 million of the $4 million estate will go to your children tax free under the seond spouse’s $2 million exemption allowance. In order for this trust to work properly, you should try to have your assets held in your individual names, as opposed to jointly, otherwise, if the assets are held jointly, then the surviving spouse will have to file disclaimers for the assets that need to go into the By-Pass trust after 1st spouse’s death.
- Revocable Living Trusts. These types of trusts are used in high probate cost states, such as New York and Florida, in order to avoid probate. For example in Florida, the estate is charged two percent of your probate estate, whereas in New Jersey, the cost to probate an estate is minimal, and therefore, there is really no need to have Revocable Living Trusts in this state. The object of this trust is to put all of your assets into this Trust, where you are the grantor, the trustee and the beneficiary during your lifetime, and at your death, the trust names a successor Trustee and beneficiaries. As a result of this trust, the assets pass outside of probate, or outside your will.
- Planning Beyond the Unified Credit. If your estate is over $4 million and you are married, there are ways through creating trusts to reduce your estate taxes.
- Irrevocable Life Insurance Trusts. This can be used if you are married and have an estate over $4 million. Life insurance proceeds are included in your estate for Federal Estate tax purposes. In order to get the life insurance policy proceeds out of your estate you can transfer the life insurance policy to a trust, where the beneficiary and the Trustee is someone other than you or your spouse. The trust also has to be irrevocable. In addition, there is a three-year look back, so that if it is transferred within three years of your death, it is brought back into your estate. During your spouses life, he or she will get the income of the trust and after the spouse’s death, your children will get the proceeds. The amount of the gift for gift tax purposes is the cash value of the policy when it is transferred into the trust, which is not much if it is a term life policy, and the annual premiums are a gift, but they may be able to qualify for the $11,000 year annual exclusion.
- Grantor Retained Annuity Trust. This can be used to make a discounted gift for gift tax purposes. For example if the Trust provides for a 10 year annuity, the gift is equal to receiving the money 10 years from now. The amount of the gift is determined by the term, the amount of the annuity, and the age of the grantor. The larger the term and the larger the annuity, the bigger the discount.
- The creation of a Family Limited Partnership or a closely held business is another way of reducing your estate tax. If you give your children a less than a 50 percent share of the partnership or business, you get a discount on the amount of the gift for lack of control and lack of marketability. It is equivalent to approximately a 25 percent discount.