The American Tax Reform Act of December 2012 has changed the focus of estate planning and the Tax Cuts and Jobs Act, which became effective in 2018 has underscored that change of focus. U.S. estate tax avoidance may seem less important to many as the federal tax exemption is now $11,400,000.00. However, state estate tax avoidance is still an issue that should be addressed. Massachusetts exempts only $1,000,000.00 from its estate tax – and it taxes not only Massachusetts residents, but also residents of other state who own real estate in Massachusetts.
Asset protection is now a major factor in estate planning, protecting your assets and the inheritance you leave your heirs from potential creditors they may encounter. “Divorce proofing” your children’s inheritance has become a concern in modern America, and is addressed in contemporary planning.
The basic principles of estate planning are not that difficult. The most basic principle of all is to plan early and often. There have been many changes in the law in recent years, so it is important to keep current. “Permanent” changes in tax law is usually a ploy to lower your guard. Remember there have already been three “permanent” total repeals of U.S. estate taxes!
Some core techniques we currently use in estate planning include:
A.) For long term marriages we frequently recommend a Joint Disclaimer Trust. This technique gives a step up in basis for all assets at the death of the first spouse. Typically the surviving spouse would then disclaim $1,000,000.00, (the Massachusetts estate tax exempt amount). This will allow a total of $2,000,000.00 exemption from Massachusetts death taxes.
B.) Another approach is either (1.) the above technique plus an Irrevocable Spousal Access Trust for asset protection and to get assets out of one’s taxable estate; or (2.) a Joint Tax Planning Trust which is similar to the disclaimer trust above, but with most assets in a credit shelter sub trust; or (3.) the classic two trust system.
C.) For multiple marriages with blended families we often recommend two trusts with QTIP (qualified terminal interest) provisions. That gives income to the surviving spouse, but assures the principle will go to the donor’s children.
Contemporary techniques include Asset Protection – for oneself with a Domestic Asset Protection Trust (DAPT), or Sposal Access Trust – or for your heirs with Personal Asset Trust provisions. Many older plans are lacking in these important tools. IRA Stretchout Trusts, and the use of Special Needs Trusts, LLC’s and FLP’s when needed, should be reviewed. There are so many reasons to keep your estate plan current. Periodic legal checkups can be as important as periodic medical checkups.
Estate Planning for residents of Cape Cod is as important as ever. Not only can estate planning frequently save a great deal in taxes, but proper documentation can save loved ones tremendous grief. Over the years of practicing law, an estate planner sees some “horror” situations that create anxiety and unnecessary grief for families. This is not an area to be penny wise and dollar foolish due to lack of basic documentation. Your goal is to facilitate collaboration among siblings/family members.
Classic estate planning includes wills and trusts. Modern estate planning also includes documents that go beyond death orientation. Health Care Proxies and Durable Powers of Attorney deal with situations of incapacity. Asset protection and IRA stretchouts are essential in current strategies.
A key principle to understand is that each person is allowed a federal exemption from the transfer tax of $11,400,000. The Massachusetts estate tax exemption remains at $1,000,000. Estates of over the Massachusetts exempt amount must take great care to leave assets FOR the spouse (in trust), not directly TO the spouse. The proper use of trusts can save those estates a great deal in taxes. The classic error is to leave assets TO a spouse which results in the surviving spouse being over funded for their state or federal tax exemptions. Proper use of trusts result in each spouse using their state or federal exemptions, leaving assets FOR the survivor, and in effect doubling the amount left to beneficiaries exempt from death taxes.
There have been many changes in estate tax law and regulations in the last few years. It is critical to keep current. Come in for a review or attend one of our estate planning seminars in Chatham, Dennis, Falmouth,Hyannis or Plymouth. It is for your family’s security and peace of mind. There are two things that must work — a parachute and your estate plan.
Good intentions are of little use to the family of someone who never implemented the best of plans.
An estate plan is a carefully designed set of documents structured to meet your specific objectives. Although objectives may vary from one family to another they generally may be summarized as wealth protection. For most families wealth protection breaks down into six specific objectives.
1. Testamentary disposition: Testamentary disposition is what most people think of when they talk about estate planning. Testamentary disposition is how you leave your assets to your heirs at your death. To accomplish testamentary disposition we generally use one or two documents. Most people think of a will as their primary testamentary disposition document. I’m sure you’re probably familiar with the will. It’s a document that basically says,for example, I leave my assets to my spouse, or if my spouse doesn’t survive me to my children. All wills must go through probate, and as you’ll see later on probate has some undesirable elements. There are other documents that can accomplish testamentary disposition. You have a choice of structure. One of the most popular choices is the revocable trust. The revocable trust is a contract. There are three parties involved in this contract. The first party, the donor, is the person who creates the trust and gives property to it. The second party, the trustee, is the person who manages the assets owned by the trust. The third party, the beneficiary, is the person who gets to receive all of the income and use the principal of the trust in accordance with the terms of the contract. Most people initially want to be all three of the parties to this contract. After all, if you are creating a trust you want to be in control of the trust, and you want to be the beneficiary of the assets. In order to have a valid trust however, we must introduce some other party to the contract. You can not be the sole person involved in it. Therefore, we introduced what are called “future interest beneficiaries”. In other words, you can create a trust in which you are the trustee, so you retain control, and you are the beneficiary during your lifetime; but at your death, there will be a new or “future interest beneficiary”. For example, at your death your spouse might be the initial “future interest beneficiary”, or your children could be “future interest beneficiaries’. By using a trust we have accomplished testamentary disposition. Leaving assets to the future interest beneficiary is the same as leaving assets to heirs listed in the will. The primary difference is a will must go through probate where a trust need not go through probate. So by way of a review, we can accomplish testamentary disposition through one of two documents in estate plan: a will, or a trust.
2. Incapacity Care Planning: To make financial decisions during incapacity there must be at least one document in place which authorizes someone to make financial decisions for you. Without such a document it may be necessary to get a court appointment as guardian or conservator. Probably the better incapacity document is the revocable trust. Remember the contract you create when you make a trust. You give property to a trust and a trustee manages those assets for the benefit of the beneficiary, which initially is you . So if you become incapacitated you’ll need a successor trustee to manage the assets to take care of you. When you create a trust, at that time you nominate a successor trustee. By nominating a successor trustee, usually a spouse or child, you can accomplish incapacity care planning. When you create a trust you can give property to it. Only the assets owned by the trust will be managed by your successor trustee. If you have assets outside of the trust, for example, an IRA or other retirement plan assets, you’ll need someone to manage those assets. That can be accomplish through the use of a Durable Power of Attorney. With a durable power of attorney you nominate someone to make financial decisions for you if you’re unable to make those decisions for yourself. So, in order to achieve proper incapacity care planning you should have a revocable trust and a durable power of attorney. Also of great importance are health directed documents such as a Health Care Proxy and a Living Will. The Health Care Proxy appoints an agent to make medical decisions for you if you are unable to direct your medical care.
3. Probate Avoidance: In order to understand why people want to avoid probate you must first understand what probate is. In general, it is the process of changing ownership from the name of the decedent to the name of the heirs listed in that person’s will. It is somewhat like going to the Registry of Motor Vehicles when you buy a new car. When you go to the Registry, you bring the bill of sale a check and whatever other items the Registry might need. You wait in line, pay your fee and after a few moments the Registry will give you a title certificate establishing that you are now the owner of that new vehicle. Probate is very similar to this but the primary difference is probate takes a lot longer, and costs a lot more. In Massachusetts the typical probate lasts around 18 months, and typically costs approximately five percent of the value of the probate estate. If you can avoid an 18 months delay and cost to your heirs of five percent of the estate you really should try to avoid it. How can we avoid probate? Generally by one of two means. The first means many people are familiar with. By holding assets as joint property you can avoid probate. However joint property has a number of dangers associated with it. For example if you own joint property with a non-spouse that property may become subject to that non-spouse’s creditors. If you own joint property with a spouse, the property can cause the surviving spouse to be over-funded for estate tax purposes (see below). So instead of holding assets as joint property, you should hold assets as contract assets. What are contract assets? Things like a revocable trust, life insurance, annuities, IRA’s, and retirement plans.
4. Tax Avoidance: In order to understand how to avoid estate taxes you must first understand the estate tax system. Estate taxes are somewhat similar to income taxes. The primary difference is what is being taxed is the transfer of wealth at your death. In order to know what is being taxed, we must first determine the value of all of the assets that you are transferring at your death. That includes assets you own individually, jointly, IRAs you own, trust that you have, pension plans, life insurance and a variety of other assets. Basically if you have any ownership interest in assets at all, they will be included in your estate for estate tax purposes. Once we know the value of your estate we may take some deductions against it. But unlike income taxes, there are only four basic deductions you can take for estate taxes. The first is a deduction for final expenses. Things like the cost of the funeral. You can also deduct the cost of your executor’s fees or attorney’s fees or accountants fees associated with settling the estate. A deduction might also be taken for any unpaid bills the decedent had at date of death. But when you total up the value of all of the various final expenses they tend not to amount to a significant deduction. The second deduction a person could use would be a charitable deduction. If you leave an asset to charity you’re allowed to deduct the full value of that asset from the estate tax return. Again this isn’t a very important deduction because most people tend not to leave large amounts of money to charity. The third deduction is basically a credit against taxes but it is commonly referred to as a deduction. Technically it’s known as the exemption amount a person is allowed to leave $11,400,000 without having to pay any federal estate tax. If an estate is planned properly a husband and a wife can each leave $11,400,000 without federal estate tax for a total estate exemption of $22.8 million. Changes may occurin the federal estate tax law, however, so we must be alert. Issues of “Portability” are complex, and must also be considered. Massachusetts has a separate and distinct state estate tax. The amount that can be passed tax free for Massachusetts is $1,000,000. Proper use of trusts can mean a husband and wife can each leave $1,000,000 without Massachusetts estate tax for a total of $2,000,000. The fourth deduction is a marital deduction. if you leave an asset to a spouse you’re entitled to deduct the full value of that asset from the estate tax of the first to die.
Basically, to avoid estate tax we use the revocable trust in order to preserve each person’s unified credit amounts. A revocable trust may contain language which will allow the unified credit of the first to die to be segregated and held out as separate from the estate of the second to die. In other words if you are to be the first to die and you have a revocable trust the first $11,400,000 ($1,000,000 MA) of your estate would be put into a subpart of your trust. This money would be held for the benefit of your spouse. Your spouse can get the income from it, and the principal to maintain their standard of living and for their medical needs. By putting that restriction in place as to the access to the principal we can say that the spouse does not own that $11,400,000 ($1,000,000 MA). Therefore it will be excluded from the estate of the surviving spouse. By doing this the surviving spouse can pass their own $11,400,000 without any federal estate tax, as well as $1,000,000 without Massachusetts estate tax.
5. Asset Protection: Asset Protection may be achieved by several different means. One of the older, more popular tools is the Family Limited Partnership (FLP). With this important estate planning tool a family creates a business which owns the family real estate, investments and/or business interests. Asset Protection is achieved by making the interests in the FLP owned by each of the family members unattractive to creditors as a means to satisfy the claims of the creditor. NOTE: FLPs generally provide protection only from future creditors. By following this link you may learn more about Family Limited Partnerships.
Asset Protection Trustshave become the tool of choice to protect your beneficiary’s inheritance from divorce and other possible creditors. Who knows what the economic conditions will be when your family members inherit assets. Your foresight now may be critical to your children. For more information see Download Forms on the Home Page and pull down the tab entitled The Beacon Issue 6 “Personal Asset Trust”. Boyd & Boyd, PC has these important cutting edge plans for your needs. Click on the image below or see the “Download Forms” page.
Many families can also protect their estates from Medicare expenses by obtaining Long Term Care (LTC) Insurance. If you would like more information about the advantages of LTC Insurance contact: Asset Management Resources.
6. Legacy Continuation: Recent changes in the law have added exciting new opportunities for estate planners to assist clients in legacy planning. The IRA Inheritance Trust offers maximum income tax strecthout for non-spouse beneficiaries to continue compounding the IRA investments, tax free, over a much longer period of time – yet maximizing protection and flexibility. The new Required Minimum Distribution for a child and/or grandchild allows the child/grandchild to greatly elongated stretch distributions, with greatly elongated compounding of the investments, tax deferred. Add to this “divorce proofing” the inheritance and other creditor protection features, and we have a new tool of great interest! For more information see Download Forms on the Home Page and pull down the tab entitled The Beacon Issue 4 “A Trust for your IRA”. It is a gift that keeps on giving! Click on the image below or see the “Download Forms” page.
Other new legacy continuation vehicles are the Mega Trust, and the Dynasty Trust. Imagine a trust which could give your beneficiaries the use and enjoyment of trust property without the transfer tax problems (i.e., you could save federal transfer taxes), protect trust assets from the claims of a spouse who divorces a beneficiary, and insulate property from creditors claims. Just as a traditional trust for tax purposes does not leave assets to a spouse but instead leaves assets for a spouse; so too does a Dynasty Trust leave assets for children not to children. A person will create a trust (usually providing a trustee with discretion to “sprinkle” income and “spray” capital powers and with limited – ascertainable standard – withdrawal powers) to provide for a spouse for life, then provide for children for life, and then whatever is in the trust passes to grandchildren. Admittedly this is not for everyone. There is no single device that will solve all problems!
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