Will my estate be subject to death taxes?
What is my taxable estate?
What is the unlimited marital deduction?
What is a Credit Shelter or A/B Trust and how does it
work?
What is a Qualified Personal Residence Trust (QPRT) and
how does it work?
What is an Irrevocable Life Insurance Trust and how does
it work?
What is a Family Limited Partnership and how does it
work?
Q: Will my estate be subject to death taxes?
There are two types of death taxes that you should be concerned about:
the federal estate tax and state estate tax. The federal estate tax is computed
as a percentage of your net estate. Your net taxable estate is comprised
of all assets you own or control minus certain deductions. Such deductions
can be for administrative expenses such as funeral and burial costs as well
as charitable donations. The federal estate tax currently taxes estates with
net assets of $5,250,000 or greater.
Even if you believe that that you may not be affected by the federal estate
tax, you still need to determine whether you may be subject to state estate
and inheritance taxes. Further, you may have a taxable estate in the future
as your assets appreciate in value. You should regularly review your estate
plan with an estate planning attorney to ensure your estate plan takes into
account changes in the tax laws as well as shifts in your individual
circumstances.
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Q: What is my taxable estate?
Your taxable estate comprises of the total value of your assets including
your home, other real estate, business interests, your share of joint accounts,
retirement accounts, and life insurance policies minus liabilities and deductions
such as funeral expenses paid out of the estate, debts owed by you at the
time of death, bequests to charities and value of the assets passed on to
your U.S. citizen spouse. The taxes imposed on the taxable portion of the
estate are then paid out of the estate itself before distribution to your
beneficiaries.
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Q: What is the unlimited marital deduction?
The federal government allows every married individual to give an unlimited
amount of assets either by gift or bequest, to his or her spouse without
the imposition of any federal gift or estate taxes. In effect, the unlimited
marital deduction allows married couples to delay the payment of estate taxes
at the passing of the first spouse because at the death of the surviving
spouse, all assets in the estate over the applicable exclusion amount ($5,120,000
) will be included in the survivor's taxable estate. It is important to keep
in mind that the unlimited marital deduction is only available to surviving
spouses who are United States citizens.
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Q: What is a Credit Shelter or A/B Trust and how does it work?
A Credit Shelter Trust, also known as a Bypass or A/B Trust is used to eliminate
or reduce federal estate taxes and is typically used by a married couple
whose estate exceeds the amount exempt from federal estate tax.
Because of the Unlimited Marital Deduction, a married person may leave an
unlimited amount of assets to his or her spouse, free of federal estate taxes
and without using up any of his or her estate tax exemption. However, for
individuals with substantial assets, the Unlimited Marital Deduction does
not eliminate estate taxes, but simply works to delay them. This is because
when the second spouse dies with an estate worth more than the exemption
amount, his or her estate may be subject to estate tax on the amount exceeding
the exemption. Meanwhile, the first spouse's estate tax credit was unused
and, in effect, wasted. This could be avoided by ensuring that after
the passing of the first spouse, an estate tax return is filed even if no
taxes are due. The purpose of a Credit Shelter Trust is to ensure
preservation of both spouses' exemptions. Upon the death of the first spouse,
the Credit Shelter Trust establishes a separate, irrevocable trust with the
deceased spouse's share of the trust's assets. The surviving spouse is the
beneficiary of this trust, with the children as beneficiaries of the remaining
interest. This irrevocable trust is funded to the extent of the first spouse's
exemption. Thus, the amount in the irrevocable trust is not subject to estate
taxes on the death of the first spouse, and the trust takes full advantage
of the first spouse's estate tax credit. Special language in the trust provides
limited control of the trust assets to the surviving spouse which prevents
the assets in that trust from becoming subject to federal estate taxation,
even if the value of the trust goes on to exceed the exemption amount by
the time the surviving spouse dies.
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Q: What is a Qualified Personal Residence Trust (QPRT) and how does it work?
Our homes are often our most valuable assets and hence one of the largest
components of our taxable estate. A Qualified Personal Residence Trust, or
a QPRT (pronounced 'œcue-pert') allows you to give away your house
or vacation home at a great discount, freeze its value for estate tax purposes,
and still continue to live in it. Here is how it works: You transfer the
title to your house to the QPRT (usually for the benefit of your family members),
reserving the right to live in the house for a specified number of years.
If you live to the end of the specified period, the house (as well as any
appreciation in its value since the transfer) passes to your children or
other beneficiaries free of any additional estate or gift taxes. After the
end of the specified period, you may continue to live in the home, but you
must pay rent to your family or designated beneficiary in order to avoid
inclusion of the residence in your estate. This may be an added benefit as
it serves to further reduce the value of your taxable estate, though the
rent income does have income tax consequences for your family. If you die
before the end of the period, the full value of the house will be included
in your estate for estate tax purposes, though in most cases you are no worse
off than you would have been had you not established a QPRT. An added benefit
of the QPRT is that it also serves as an excellent asset/creditor protection
vehicle since you no longer technically own the property once the trust is
established.
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Q: What is an Irrevocable Life Insurance Trust and how does it work?
There is a common misconception that life insurance proceeds are not subject
to estate tax. While the proceeds are received by your loved ones free of
any income taxes, they are countable as part of your taxable estate and therefore
your loved ones can lose over forty percent of its value to federal estate
taxes. An Irrevocable Life Insurance Trust keeps the death benefits of your
life insurance policy outside your estate so that they are not subject to
estate taxes. There are many options available when setting up an ILIT. For
example, ILITs can be structured to provide income to a surviving spouse
with the remainder going to your children from a previous marriage. You can
also provide for distribution of a limited amount of the insurance proceeds
over a period of time to a financially irresponsible child.
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Q: What is a Family Limited Partnership and how does it work?
A Family Limited Partnership (FLP) is simply a form of limited partnership
among members of a family. A limited partnership is one which has both general
partners (who control management) and limited partners (who are passive
investors). General partners bear unlimited personal liability for partnership
obligations, while limited partners have no liability beyond their capital
contributions. Typically, the partnership is formed by the older generation
family members who contribute assets to the partnership in return for a small
general partnership interest and a large limited partnership interest. Then
the limited partnership interests are transferred to their children and/or
grandchildren, while retaining the general partnership interests that control
the partnership.
The FLP has a number of benefits: transferring limited partnership interests
to family members reduces the taxable estate of the older family members
while they retain control over the decisions and distributions of the investment.
Since the limited partners cannot control investments or distributions, they
can be eligible for valuation discounts at the time of transfer which reduces
the value of their holdings for gift and estate tax purposes. Lastly, a properly
structured FLP can have creditor protection characteristics since the general
partners are not obligated to distribute earnings of the partnership.
The Attorneys of Lane Law Group assist clients with Estate Planning, Wills,
Trusts, Probate/Estate Administration, Residential Real Estate, Corporate
Law and Limited Liability Companies in San Pedro California as well as Manhattan
Beach, Hermosa Beach, El Segundo, Wilmington, Harbor City, Lomita, Rancho
Palos Verdes, Palos Verdes Estates, Rolling Hills, Rolling Hills Estates,
Long Beach, Torrance, Carson, Redondo Beach and Gardena in Los Angeles
County. |
