Advanced Estate Planning
What can an advanced estate plan do for you?
An effective estate plan will take into consideration your current assets as well as the anticipated increase in value of your existing estate. In anticipation of your family’s needs, you should take steps to preserve your estate and protect it from excessive costs and taxes.
Ultimately, the goal will be a stress-free and orderly settlement of your assets to your chosen beneficiaries upon your passing. Estates that are or may become subject to the estate tax would benefit from more advanced planning techniques.
Types of Advanced Estate Planning
Lifetime Estate and Gift Tax Exemption Amount
Generally, when you die, your estate is not subject to the federal estate tax if the value of your estate is less than the exemption amount. For people who pass away in 2021, the exemption amount will be $11.7 million (it's $11.58 million for 2020). For a married couple, that comes to a combined exemption of $23.4 million.
Gifts that you make during your lifetime are generally counted against your exemption amount. There are a few exceptions, such as gifts that are less than the annual exclusion amount.
2. Annual Exclusion
The annual gift exclusion amount for 2021 is $15,000. What that means is that you can give away $15,000 to as many individuals—your kids, grandkids, their spouses—as you’d like with no federal gift tax consequences. A husband and wife can each make $15,000 gifts, doubling the impact. Separately, you can make unlimited direct payments for medical and tuition expenses. Making gifts in excess of $15,000 annual exclusion gifts is counted against your lifetime gift/estate tax exemption.
3. Charitable Giving
A charitable lead trust lets you provide a payout to a charitable cause during your lifetime (or a term of years) and preserve assets for other beneficiaries, such as children or grandchildren. The value of the remainder gifted to your descendants will be a taxable gift if the trust is funded during your lifetime, or subject to estate tax, if the trust is funded at your death.
Charitable Remainder Trust- If you have substantially appreciated assets (such as real estate or stocks), you can reduce current capital gains tax on the assets by contributing the assets to a charitable remainder trust. You can also give a portion of the current value of your assets to charity, and generate a payout from the trust to yourself or someone else during your lifetime, or for a specific term.
4. Irrevocable Trusts
Irrevocable trusts cannot be revoked or amended. Despite their restrictive nature, there are some circumstances where irrevocable trusts are warranted.
To Minimize Estate Tax:
Irrevocable trusts can be drafted such that the assets contributed to them are not included as part of the estate of the donor. The initial contribution to an irrevocable trust may or may not use some of the settlor’s exemption amount, depending on the technique used.
To Become Eligible for Government Programs:
Disabled beneficiaries on Medicaid and Supplemental Security Income have stringent income and asset limitations — if they own or receive too much money they can lose these and other government benefits. Irrevocable trusts can shelter income and assets, so these limits are not exceeded. For example, parents can create a “special needs trust” to give money to a disabled child without disqualifying him from government benefits. The beneficiary must not have substantial control over the trust, otherwise the trust assets would be counted as the beneficiary’s own assets.
To Protect Assets:
Protecting your assets from creditors usually requires a trust to be irrevocable, and the beneficiary cannot also be the trustee. California law does not permit someone to transfer assets to an irrevocable trust in contemplation of a lawsuit. More commonly in California, irrevocable trusts are those which are created to hold a gift or inheritance.
