Clients About Estate and Gift

¶ … Clients About Estate and Gift Taxes

The discussion presented below in the memorandum will assist you in remembering and learning that estate planning is much more than a will and much more than planning for death. Estate planning is not only for a certain age bracket, but a process everyone over age 18 should address. The planning process with all its uncertainties with the tax law year after year can be tedious, but taxes are only one component of an estate plan, and the uncertainty of it all does not mean planning would be an impossible task; only that the planning has to be more flexible and adaptable to the current regulation and impositions. There have been quite a few alterations made in the past couple of years in estate and gift taxation in Minnesota. This memorandum will help encapsulate the applicable Estate and Gift Tax provisions as they influence estate planning. The words in bold are what you can do specifically to solve your estate tax problems.

THE IMPACT of GIFT and ESTATE TAXES:

There is a need to minimize estate taxes for you and your family. Minnesota's statutes impose a tax on all estates valued at over $40,000 at the time of the estate holder's death. The amount taxed caps at 16% above ten million dollars. The gross value of the estate is property, stock, securities, and real estate as defined by IRS section 2031 code. The inheritor of the estate must accurately report any and all of the estate to Minnesota Commissioner of Revenue. You have a total of nine million dollars in assets. In order to avoid large estate taxes since your estate is valued at over one million dollars, here are the steps that you can take to avoid over taxation.

2. The MARITAL DEDUCTION:

Although there is no gift tax in Minnesota, if your significant other dies, there can be an estate tax of up to $230,000 on the estate passed onto the surviving spouse due to the one million dollar tax exemption which is substantially less than the federal exemption. Since the total amount in assets is greater than one million dollars, there needs to be plans made in order to avoid heavy taxation on your assets. The rate of taxation on estate in Minnesota ranges from 6% to 24%. Now let's explain marital deduction. Marital deduction is set up to deal with the assets of the first spouse if he/she passes on. It tends to be formed into a trust so all of the assets of the deceased spouse go to the living spouse. After the living spouse passes, there is the option of transferring the assets to the children or someone specific. After January 1st 2011, the following qualify for the marital deduction: Outright gifts and bequests, jointly-held property, life insurance, joint and survivor annuities, certain life estates in real estate, and trusts of which the surviving spouse is sole income beneficiary for life. Your joint assets need to be split up and given as gifts or put in as martial deduction in order to avoid excess estate taxation.

3. MARITAL DEDUCTION ("Q-TIP") TRUST:

Minnesota permits a marital deduction in the estate of the first spouse to die, for a trust which provides for all income to the surviving spouse for life. In the case of his or her death the balance in the trust will pass to the person or persons named in the trust clause. This kind of trust - called a "Q-TIP" -- which can be used to hinder an alteration of assets from the decedent's family, in this case your wife and two children. A situation such as a remarriage might occur and this will be able to aid in the continual ownership of assets to the designated members. It is specifically good when transferring property to the living spouse or family member. You can transfer some of your property to your wife via a trust and ensure that it stays within the family even with the possibility of remarriage.

An additional feature of the Q-TIP Trust is that it enables the executor to elect to qualify all or a portion of the trust for the marital deduction, thereby allowing flexibility in post-death planning and allows for "breathing room" in any changes made to estate tax law. In particular, sometimes it is desirable to qualify only a portion of a Q-TIP trust for the marital deduction, thereby permitting part of the estate to be subject to Federal and Minnesota estate taxes. Although QTIP trust maybe taxed more now that the changes have taken effect, it still is important to create one in the case of property ownership greater than one million dollars. Your property ownership includes the business and the two homes. QTIP Trusts can yield significant tax savings when you own valuable family businesses like yours, or have larger estates, and are trying to protect family wealth for multiple generations through the use of generation-skipping tax planning. Since your business and estates are of considerable value, yet under the amount limit, it would be wise to put a large portion of the assets into a family trust and the rest into a QTIP trust so it can be given to the designated bearer in any case or situation without fear of paying too many taxes.

4. The CREDIT SHELTER TRUST:

This trust should be in place in the event that the second spouse dies. Significant estate tax benefits can usually be garnered by unifying the use of the marital deduction with a trust of the amount of property that can pass free of Federal estate tax in the estate of the first spouse to die. That is what you want, to make sure you have to pay as few taxes as possible. A trust (a "credit shelter trust") of this apex amount in the first estate will be covered from ever-changing Federal and Minnesota estate and inheritance taxes in the estate of the living spouse.

This trust is most often either a family trust, which would be for all living members of the family as previously mentioned before or a marital trust designated to the surviving spouse. The balance of the first estate over the amount of the credit shelter trust can pass tax-free to the spouse under the marital deduction, either absolute or in trust. The important part being that you don't have to pay Federal taxes in the first estate and the property designated in the credit shelter trust escapes taxation in the survivor's estate. The credit shelter amount can also be passed outside a trust by direct transfer to other family members if that is something you wish to consider.

Thus, when the credit shelter trust and the surviving spouse's exemption are united an apex amount of approximately $2.0 million in 2011 can pass through both estates free of Federal estate taxes. Since both your homes are under one million dollars, both estates can qualify.

There are some disadvantages to a credit shelter trust. A credit shelter trust can only be funded by property held in the individual's name of the decedent so there should be transferring of property to one person not joint ownership of which you to have on both the Florida and Minnesota homes. If this is not done it is not generally available where property is jointly-held since this property passes automatically to the survivor. Jointly-held property between spouses will not be available to fund the unified credit, because the value of the property which passes to the surviving spouse automatically qualifies for the marital deduction.

There are options. You have an option of splitting the homes. The Florida one can stay in ownership of both spouses and the Minnesota home can be transferred to one spouse so that way you get the marital deduction and have the option of creating a credit shelter trust. You save using both techniques.

5. CHARITABLE DEDUCTIONS:

Any gifts made to religious groups and/or other non-for profit charities, etc. can be deductible for estate tax reasons. The value of trust principal which is gifted to charity following the death of the income beneficiary - usually a family member - is also partially deductible if the trust is written in the proper format. Other trusts that pay money to charity with the assets going to a family member at the completion of the trust create quite a large amount of charitable deductions. People who have aided charities in any way during their lifetime, like you in your business may wish to consider charitable gifts in your Will as long as the security of the family is not affected. This could also help greatly in your business and avoiding gift taxes when giving 40% of your business to you children.

6. DISCLAIMERS:

If you further wish to avoid gift taxes, where applicable, arrangement may be made in a Will who expects a disclaimer (i.e., a renunciation) by the surviving spouse or other beneficiary of all or a portion of an endowment, with the effect that the disclaimed property passes without gift tax to others or is added to a credit shelter trust. So your wife can renounce the business given to her and then pass it without gift tax to the children. Disclaimers must be made within 9 months of the death of the first decedent if they are to avoid gift tax. An appropriate disclaimer may also be a very effective tool to assist in a poorly written estate plan.

7. JOINTLY HELD PROPERTY:

The joint tenancy form of ownership could result in many unintended and unfavorable consequences. For example, the entire property is usually subject to attachment by a creditor of any one of the joint tenants. There are also significant estate, gift, and income tax problems that are created from joint tenancy. If not given attention and consideration as part of a comprehensive estate plan, holding property together as a couple, can create bad results in terms of overpaying taxes.

Explanation: Solely half of the value of property held by you in joint ownership with the right of survivorship can be included in the estate of the first spouse to die unless that property was purchased solely by the decedent's spouse income or resources prior to 1977. It appears that is not the case so the property passes to the survivor and will qualify for the unlimited marital deduction. This inclusion will have no significant estate tax effect. The problem is in most cases, the survivor will have a different basis for the capital gain purposes should he or she sell the property after the first spouse expires: one-half will be the value of a half interest in the property as of the date of the death of the first decedent; the other half will be one-half of the historical pre-death adjusted cost basis (purchase price as adjusted) of the property in the hands of the husband and wife. It is wiser to sell before the first spouses dies rather than after. Or in the least, put the house under one name rather than both for at least one of the homes.

8. EMPLOYEE BENEFITS:

Even though an estate tax deduction is not currently available for lump sum distributions under qualified pension and profit-sharing plans, there are some options to keep open that remain for approved plans. A good illustration would be the appellation of a spouse as a beneficiary of a plan would authorize the employee benefit for the marital deduction. There also is an assortment of crucial income tax options available to a plan beneficiary which should be talked about with your tax adviser, specifically retirement planning purposes.

9. The IRREVOCABLE INSURANCE TRUST:

A good way to avoid more estate taxes continues to be the ownership of life insurance by a trust. The benefit to creating an irrevocable insurance trust is that the person's life insurance benefits will be taken out of their taxable estate after their death. How does it do this? It does this by making the trust the holder of the policy, rather than the person. The downside to this would be that, in order to create this type of trust, the person needs to give up all rights to the life insurance policy, leaving you with few options. It is imperative to consider all circumstances before choosing this kind of option.

If a new policy is purchased by a properly written up trust, the entire proceeds of the policy can pass through the estate of both spouses, without tax. For your case, it would be an existing policy that is owned by you that is transferred to a trust. The insured then must live through the transfer by a minimum of three years in order for the amount garnered by the life insurance to be free of estate taxes. In each case, the trust must be irrevocable - a fact which requires that requires careful thought and caution to be given before such a trust is made. The trust agreement must be drawn up in a way that will keep your family's assets safe.

10. ANNUAL GIFT TAX EXCLUSION:

Although there is currently no gift tax in Minnesota, there are some limits to gifts due to the federal gift tax. The amount of gifts that an individual can make without incurring gift tax liability is now $13,000 per donee per year. This amount will increase to account for inflation and rising costs of living. This means that $26,000 may be given by a married couple each year to each child, grandchild, or others without incurring gift taxes (regardless of whose property is. Moreover, an unlimited gift tax exclusion is provided for amounts paid on behalf of the donee for medical expenses and school tuition, provided that the payment is made directly to the school, doctor, hospital, etc. who or which provides the service.

Since your daughter Barbara has two children, you cannot give them $26,000 annually for school tuition and but you can for medical expenses. You can also give gifts of $26,000 to your two children and offer to pay the legal fees of your son. This can all create tax excluded money that goes directly to your family. You can also give gifts between each other that will not accrue taxes no matter the amount. The only problem is you would have to survive the three years after you give your gift in order for it to leave your estate and not get taxed. A lifetime gift is a wonderful way to reduce estate tax.

A payment made directly to a child or grandchild for tuition will not qualify for the exclusion. The IRC, as amended, eliminated most of the income tax advantages of trusts for children. Nevertheless, various trust options are still available to achieve income, gift and estate tax savings in relation to gifts for children or grandchildren. These include "grandparent trusts" which permit funding of educational or similar trusts up to the $13,000-$26,000 annual gift exclusion; and various forms of charitable trusts.

11. GENERATION SKIPPING TRANSFER TAX - (GST TAX):

Generation-skipping trusts are also known as dynasty trusts. The GST tax in general imposes a tax at a rate of 45% on all transfers outright or in trust for grandchildren or more remote descendants to the extent that the aggregate of such transfers exceeds a $2.0 million total exemption per transferor.

These long-term trusts are designed to avoid estate taxes when one generation transfers wealth to the next generation. Over four generations, estate tax savings could add up to 70%. A grantor can set up a dynasty trust during lifetime using the grantor's annual gift tax exclusion and/or $1 million gift tax exemption. Dynasty trusts can also be done at death with the grantor's estate tax exemption. When the beneficiaries die, the assets in the trust pass to the next generation free of estate and gift tax. Individuals can leverage their GST tax exemption with life insurance too.