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Estate Planning: Preparing for What’s Ahead

Everyone’s worst nightmare is having something unexpectedly happen to a family member.

This news can be compounded significantly if there is no estate plan in place.  Today, more than 50% of Americans have no estate plan at all.

In addition to leaving a burden of work on descendants, spouses, parents and siblings, the lack of a plan can also mean the maximum amount of estate tax will have to be paid on all assets.

A recent tragedy in pop culture revealed the consequences of failing to establish an estate plan. When the music artist Prince unexpectedly passed away last year, he did so without any estate planning documents. As a result, his estate could reportedly end up paying 40% of his estate's value in taxes.

Of Prince’s perceived $250 million in assets, the tax bill could be in excess of $100 million. This is before the massive amount of attorneys' fees to get the estate through probate. There were also no beneficiaries of his estate indicated.

Likely, there will be endless court battles between half-siblings and siblings as to who is entitled to what. If there were any close friends, charities or managers that Prince wanted to benefit, they will 
not receive anything.

Planning ahead can help to diminish the tax burden that relatives have to bear. It can also assure that assets end up where you intended. Good estate plans can make sure your final wishes are carried out. Otherwise, everything will go to the closest heirs and it would be at their discretion to give assets to anyone else.

Another excellent benefit to having an estate plan is there will be less that is left for a court to decide, reducing the amount of legal, probate and 
estate costs and expenses.

Tools Needed for an Estate Plan

A fundamental part of a sound estate plan is having several basic legal documents. These documents include a will, a revocable living trust, a durable power of attorney for financial matters, a health care power of attorney and a living will (health care directive). These documents provide the foundation for any estate plan and help you stay in control. If you already have these documents, be sure to review them regularly. 

Some basic estate tax terminology is important to understand throughout the estate planning process. These include:

  • The annual exclusion is the amount you can gift to an individual in a single year without incurring gift tax implications. The amount is $14,000 in 2017.
  • The applicable exclusion amount is the value an estate must exceed before estate taxes become due. The amount is $5,490,000 in 2017.
  • The lifetime exclusion is the amount you can gift during your lifetime without incurring gift tax implications. It is $5,490,000 in 2017. As you make gifts to individuals that exceed the $14,000 annual exclusion, you begin to reduce the lifetime exclusion.

Using the $14,000 annual gift exclusion, allows taxpayers to pass money or assets every year, reducing the remaining value of their estates. The best practice is to start with assets that have the potential to highly appreciate so that you can avoid taxation on the appreciated value. 

One other easy option that an individual can utilize for gifting is for the payment of medical or education expenses for someone else. As long as the payments are made directly to the provider, they do not count against the annual exclusion or lifetime exclusion. They are essentially tax-free gifts.

Using trusts is a backbone of smart estate planning. Trusts come in many sizes, shapes and forms. There are a variety of trusts to 
use to transfer assets and hold them until their final distribution. Revocable living trusts are one example of a basic way to get assets into a trust that won’t “activate” until your death.

Qualified terminable interest property (QTIP) trusts allow assets to be put aside for a surviving spouse to use to live on during his or her lifetime. There may also be access to principal based on discretion of the trustee.

When the surviving spouse passes away, then the money continues on to the remainder beneficiaries.

There are also trusts designed to help people with donating to charity, such as charitable remainder trusts.

Another strategic planning tool is to transfer a portion of business interests to future generations with limited shares. By giving limited, or non-voting shares, many times a valuation discount can be obtained to reduce the amount taken from the lifetime exclusion. These are sometimes held in a family limited partnership.

There are some legislative changes that could take place in the wake of the recent election. The possible new adjustments to estate taxation could mean only capital gains over $10 million would be taxed.

This would continue to relieve the tax burden for smaller estates. However, there is still speculation as to whether assets would miss out on the step up of basis that they are currently entitled to. There is also a chance the estate tax could be repealed.

As an overall best practice, have your estate in order regardless of age or income level. This includes knowing value, ownership, beneficiaries and location of your assets.

Another important aspect to estate planning is ensuring that your spouse and descendants are abreast of all estate plan information. Having a trusted advisor to coordinate this information is extremely helpful.

It is also important to continue to keep apprised of your situation and update your estate plan accordingly. As things change in your life, so should your estate plan.   

Coordinate Your Estate Plan with Your Overall Financial Plan

  • Put into place the basic estate planning documents and retitle assets into a revocable living trust.
  • Set up a life insurance trust.
  • Use strategic donations to charitable trusts or organizations to coordinate your estate plan with your income tax plan to reduce your overall tax liability.
  • Determine which appreciable assets should be gifted and determine the most strategic deployment of one asset versus another for any given planning technique.
  • Consider a charity as an IRA beneficiary to minimize the overall family estate and income tax exposure.

Estate Planning Points

  • Estate and lifetime gift tax exemption amount: $5,490,000 (in 2017).
  • Portability: The unused amount from a deceased spouse can be carried forward and used when the surviving spouse passes away.
  • Estate assets are stepped up to the fair market value at the date of death.
  • The most recent legal documents are followed, regardless if circumstances have changed.

RubinBrown Advisors help clients identify, prioritize and achieve their financial goals and objectives utilizing an experienced group of professionals that can integrate income taxes, estate taxes, financial planning, risk management and investment management needs, all in one place, throughout their lifetimes.


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