Advanced Estate Planning

Many of our clients have complex estates that require special skill and attention. If you own a closely held business, investment real estate, are a professional, have a family with sensitive needs, or if you are a high net worth individual with a taxable estate, your planning needs go beyond the essential estate plan. If you fit into one of these categories, please read on for a primer on tax laws and other issues that likely affect you. (If you don’t already have an estate plan, please also look at our “Essential Estate Planning” page.)

Transfer Taxes:

Under federal law, a tax applies to transfers of property during life (the gift tax) and at death (the estate tax). The estate and gift tax systems apply to the gratuitous transfer of property (i.e., a gift or inheritance), and are “unified” in that the taxes are imposed on cumulative lifetime and death transfers. Said another way, one must keep a running total of lifetime gifts, because these will be added to the bequests made at death in order to compute the amount of tax due. The estate and gift taxes are calculated based on the same rate schedule. These tax rates are onerous and have been as high as 70%. As a result, tax minimization strategies play an important role in estate planning and, in turn, in maximizing the value that can be transferred to one’s heirs or beneficiaries.

Every decedent who is a citizen or resident of the United States is subject to the estate and gift taxes based on the value of his or her taxable estate. Each taxpayer is given a “credit” to cover the taxes on the “applicable exclusion amount”, which is commonly referred to as the amount that can pass free of estate and gift tax. For the year 2017, the exclusion amount has been adjusted for inflation to $5,490,000. Therefore, the credit on the exclusion amount allows each taxpayer to transfer assets worth up to $5,490,000 during life or at death without having to pay estate or gift tax. Currently, the marginal rate of tax is 40%.

As if the imposition of the estate and gift taxes was not enough, federal law also imposes a similar tax on transfers to heirs or beneficiaries, who are more than one generation removed from the donor or decedent or are 37 ½ years younger if unrelated to the donor or decedent; this category of individuals (or trusts) is known as a “skip person”. The typical example of a skip person is a grandchild or a trust for a grandchild. Each citizen or resident of the United States is also allowed to pass up to $5,490,000 (for 2017) worth of assets to such “skip persons” during life or at death.

Certain transfers do not erode or use up the applicable exclusion amount, because they are deemed “exclusions” or “deductions”. The exclusions consist of “annual exclusion” gifts, which allow the transfer of $14,000 per year, per donor, per donee ($28,000 if the gift is split with a spouse), and unlimited transfers for the benefit of an individual to educational or medical organizations. Deductions include transfers to spouses and charities and can be of unlimited value.

Below is a sample list of tools that can be used in advanced planning situations.

Planning in the Era of High Income Taxes, Large Exemptions and Portability:

The American Taxpayer Relief Act of 2012 brought about increased income tax rates, large transfer tax exemptions and made “portability” for spouses permanent. The combination of these three changes caused advisors like us to look at estate planning in a whole new light, and interesting opportunities emerged.

First, because the combined high federal and state capital gain tax rates now approximate the estate tax rate, not giving away assets during life and, instead, dying with low basis assets can result in lower overall taxes. The explanation for this counter-intuitive result is in Internal Revenue Code section 1014, which provides a “step-up” in basis for assets owned by a decedent to the assets’ fair market value on the date of death.1 The step-up can eliminate or greatly reduce capital gain taxes upon the later sale or an inherited asset and, even if a sale is not anticipated, can provide greater depreciation deductions and income tax savings. As a result, for most tax payers, planning to maximize basis step-up at death has become more important than ever.

Second, the large exemption amounts, when combined with portability and the high income tax rates, mean that married couples who plan to use their exemption as a family unit may be able to pass down greater wealth to their loved ones by doing planning that does not fully utilize their exemptions during life. “Portability” allows a surviving spouse to use the unused applicable exclusion amount of the first to die in making gifts or transfers at death. Although portability was intended to simplify things, using portability requires filing an estate tax return and making an election within the time required by law. Further, because the “ported” amount is not indexed for inflation, consideration must be given to the potential growth in asset values and the possibility that a transfer tax could result from such appreciation. Still, portability provides more options and great opportunities for married couples—and those who have an “old fashioned” A-B trust plan should at least test their existing plan to make sure it still meets their needs and lowers taxes overall.

Finally, the large exemptions and high income tax rates may make it worthwhile to bring older family members and close friends to the planning table. Opportunities may exist to leverage their estate tax exemptions (i.e., if the relatives or close friends don’t have a taxable estate of their own), obtain a step-up in basis, and pass down assets to lower generations or even for the benefit of the person who brought the assets into the planning mix. For example, Kobe Bryant could plan to use some of his parents’ exemption to pass on assets to his children (or even to himself, under the right circumstances) with a stepped-up income tax basis and without transfer taxes. This, of course, requires careful advanced estate planning, often using the tools described below.

Even those who are not married can now do planning to help minimize capital gain taxes, by taking advantage of the applicable exclusion amount of parents or other folks close to them that will go unused at their death.

1 But note that in the unusual case where the fair market value on the date of death is lower than the decedent’s basis, a step-down in basis results. Also, not all assets receive a basis adjustment on death; these assets generally include notes receivable, proceeds under contracts, IRAs, 401ks, etc.

The Process-Driven collaborative Planning Approach:

The Process-Driven collaborative Planning Approach: Clients who require advanced planning also require knowledgeable advisors from various disciplines. It is impossible for one advisor to know everything, but it is possible to know other advisors who can satisfy a particular need. We really enjoy being part of our clients’ team of advisors and playing nice with others. As a graduate and regular participant of the Laureate Center for Wealth Advisors, Jackie has unique skills to bring about a collaborative environment designed to maximize a client’s return on his or her planning investment.

Please contact us to discuss your particular situation.

Advanced Estate Planning Tools:

Our firm can help with the orderly transfer of assets through the use of several techniques designed to provide control, asset protection, management, and which can deliver added benefits such as the minimization of estate, gift, generation skipping transfer and income taxes. These techniques include:

  • Exclusion planning;
  • Portability and Marital deduction planning (including QTIP trusts and equalization of the spouses’ estates in order to maximize the use of each spouse’s exemption);
  • Income tax basis maximization planning;
  • Charitable deduction and income tax planning through the use of
    • Charitable lead trusts (CLUTs, CLATS)
    • Charitable remainder trusts (CRATs, CRUTs and NIMCRUTs)
    • Private foundations
  • Gifting strategies that allow for control of management, transfer and investment of assets and provide the added benefit of fractional interest discounts, such as limited partnerships, LLCs, corporations, or forms of joint ownership;
  • Planning techniques designed to minimize the use of gift tax exemption while removing the appreciation of assets from the taxable estate through the use of grantor retained annuity trusts (“GRATs”) and sales of assets to intentionally defective grantor trusts (“IDGITs”);
  • Use of life insurance trusts (“ILITs”) to provide liquidity for estate taxes, funds to buy out a partner in a closely held business, or replace family wealth that is diverted to charities or other beneficiaries. Life insurance proceeds payable to an ILIT are not included in the taxable estate;
  • Qualified Personal Residence Trusts (“QPRTs”);
  • Self-cancelling installment notes and private annuities;
  • Leveraging of the generation skipping transfer tax;
  • Use of dynasty trusts to avoid the generation skipping transfer tax upon the successive transfer of assets; and
  • Captive insurance companies.

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The Law Offices of Jacqueline Real-Salas is a full service Estate Planning & Tax Planning law firm. They provide comprehensive planning in the areas of wills, trusts, powers of attorney, medical directives, advanced estate planning, income tax planning, probate & trust administration, probate avoidance planning, special needs trusts, disability planning and asset protection. Jacqueline Real-Salas serves clients and their families all throughout the Los Angeles Area, including Temecula, Pasadena, Murrieta, French Valley, North San Diego County, and the surrounding areas, cities and towns.

Copyright © IMS. All rights reserved. You may reproduce materials available at this site for your own personal use and for non-commercial distribution. All copies must include this copyright statement. Some artwork provided under license agreement.