Each of us is allowed to give away up to $10,000 a year without gift tax to as many people as we choose. If our spouse wants to give away $10,000, he or she may either join us for a combined gift of $20,000 or give away $10,000 individually. There is no limit on how many $10,000 gifts we may make to individuals but we may not gift tax-free more than $10,000 annually to any ONE individual.

For Example:
If you have three children and six grandchildren (9 gift recipients), this year you may gift away $90,000 ($10,000 X 9). If your spouse joins you, you may gift $180,000 ($90,000 X 2). However, you are not limited to gifting to relatives. You may gift up to $10,000 each to your housekeeper, doorman and your gym coach.

Although there are some exceptions to the Completed Gift rule, the gift should be finished (the check cashed or the title changed) by December 31st.

Gift Leveraging

When you gift assets away, do you find a way to leverage them?

If you gift away $10,000 in cash, that gift removes $10,000 from your taxable estate. No estate taxes will be due on the $10,000. Assuming a 5% annual return, you have also avoided $500 of growth in your estate that would have been subject to estate tax and income tax, as well.

If you gift away $10,000 of stock, you again remove $10,000 from your taxable estate. And if the stock increases in value15%, you have removed an additional $1500 of growth from your estate and avoided income and estate taxes on the growth.

What if you gifted $10,000 in cash out of your estate and your child used it to pay for a $500,000 life insurance policy on you? You have removed $10,000 from your estate and if death should occur unexpectedly this year, your child will receive $500,000 completely income tax, gift tax and estate tax free! And each of your children and grandchildren could do this. In the above example, your annual gift could produce $4,500,000 (9 life insurance policies X $500,000). Your $10,000 gifts leveraged $4 ½ million out of your estate on which no taxes are due.

Wills

If you do not have a will or your will is invalid for some minor reason, don’t worry. The State has a will for you. It basically says that what you may have wanted to happen to your estate is irrelevant. Your estate could be divided up by the court according to your State’s law.

In 1995, Florida statutes were changed to address the issue of self-proving wills. When you die and your will is probated (or your LACK of a will is probated!), the people who witnessed the execution of the will generally have to come forward to state that your will is what they witnessed (proved). If these individuals live in another state, are ill, or are deceased, coming forward may be impossible.

The 1995 law allows you to have your witnesses’ signatures “witnessed” so that it is unnecessary for them to come forward. Your will is considered proven. An estate-planning attorney should be consulted to update your will. A simple codicil may be all that is necessary.

Trusts

There are many types of trusts used in estate planning. Most trusts are designed to protect assets from something, the most common being taxes, creditors, spendthrift children, greedy relatives, and lawsuits.

Frequently used trusts: A-B, Marital, Credit Shelter Trusts. These trusts are designed to protect the current Unified Credit exemption amount from estate taxes as well as ensure that certain assets will pass to specified heirs (usually your children) after the surviving spouse’s death.

Living or Testamentary Trust. Designed to hold assets during life so that they will pass by law at death. Trust assets avoid probate and generally are not recorded in public records. Pourover Trust. Designed to collect anything not specifically addressed at death by other instruments. These assets do not generally avoid public recording.

Revocable Trusts - The three previously mentioned trusts are examples of revocable trusts. They can be changed in any manner at any time.

Irrevocable Trusts. Designed to remove any “incidence of ownership” from an asset so that estate, gift and income taxes are reduced or eliminated. Two of the most commonly used irrevocable trusts in estate planning are the Irrevocable Life Insurance Trust (ILIT) and the Charitable Remainder Trust (CRT).

An Irrevocable Life Insurance Trust receives gifts (usually cash) from you (the grantor) which the beneficiary (usually your heir) has access to. The beneficiary leaves the cash in the trust. The trustee (who can be your child or a professional trustee or both) uses the money to buy a life insurance policy on you and/or your spouse. When the second death occurs, the life insurance policy pays into the trust. If the trust and insurance have been established properly, the entire amount should be received without any taxes of any kind. The trust may then loan the proceeds to your estate to pay estate taxes (so the family assets don’t have to be sold or used for taxes). Or the trust may actually buy assets from the estate so the estate will have sufficient liquidity to pay the taxes.

A Charitable Remainder Trust allows the grantor to place assets into a trust, receive an income tax deduction for the donation (based on the discounted value), receive income off the trust for life, and have the balance (remainder) go to charity. Gifts to qualified charities completely eliminate any estate taxes due. A Charitable Lead Trust works in much the same way except the charity receives the income up front (lead) for a period of time and the heirs receive the benefit that remains.

Generation Skipping Transfer Tax

Whenever you plan to gift to a relative more than one generation away (either up or down), the IRS imposes a flat tax of 55%. You, the grantor, may use a total exemption of $1 million to avoid this tax. The $1 million may be divided up over as many recipients as you choose but the TOTAL exemption is $1 million. Your spouse may also shelter $1 million from Generation Skipping Tax.

This GST is IN ADDITION to any gift and estate taxes due! If you plan to leave your grandchildren $1.5 million, you may shelter $600,000 from estate tax through a credit shelter trust but estate/gift tax will be due on the remaining $800,000. The flat 55% Generation Skipping Tax will also be due on the amount above the $1 million exemption, $500,000.

Special Needs Children

Children with special needs will require much additional expenditure over their lifetime. In addition to attendant care, they will probably need substantial medical or equipment care. The cost can become astronomical. There is also the important question of how to provide care for the child when the caretaker is gone. When planning, you want to position your assets so that they are protected from unscrupulous agencies and predatorial individuals. You also want to maximize every dollar you leave for the individual’s care. If your health is good, you should consider using an Irrevocable Life Insurance Trust, which will allow your annual gift to blossom into a substantial sum at death. Nothing else can change that $50,000 you placed in a mutual fund into $250,000 overnight.

Retirement Plans

Many wealthy who face the dilemma of leaving their estates to the IRS or to someone of their own choosing became wealthy in large part because of their pension savings. However, assets locked up in a pension, 401k, IRA, 403b, Keogh or some other form of income tax deferred dollars, are subject to a big tax bite at death. First, income tax will be taken out of the pension amount in a lump sum. Then estate taxes will be taken from the balance. Let’s use a $1 million pension as an example. If you are in a high tax bracket, i.e. 35%, you lose $350,000 right off the top to income taxes. The $650,000 balance will be assessed estate taxes, i.e. 40%, so you lose another $260,000. The balance to your heirs is $390,000 out of a total of $1 million. Your heirs receive 39 cents on the dollar! How instead can you maximize your pension assets? If you don’t need the pension to live on and if you planned to allow the pension to sit and grow, begin taking distributions now. Pay the income taxes on only the portion you withdraw this year rather than waiting to pay based on the lump sum at your death. Use some or all of the distribution to purchase life insurance inside an irrevocable trust. Your annual donation of dollars (that would have been taxable in your estate) will be turned into a much larger gift that doesn’t require any taxes!

Leveraging Your Dollars

Those of us face an estate tax problem want to move assets to our heirs with as little decimation to our estate as possible. You’ve paid income tax all your life, having given 25% to 50% of what you earned to the IRS. Yet, at death you face giving another 37% to 60% of your assets to Uncle Sam. By moving assets out of your estate now, you can reduce the tax penalty down the road. Whenever you gift assets, you should choose those assets which are expected to appreciate more than others. The greatest means of leveraging your dollars is life insurance. Nothing else will increase as dramatically in value on the day you die. If you do no estate planning, your estate will drop to about half its value on the day of your death. Why? Because your estate will owe taxes ranging around 50%.

If you gift annually, if you live long enough to gift many years, and if the investment your children put their $10,000 annual gifts into only goes up over those years, theoretically you can do an equal or better job than life insurance. But we know the market doesn’t only go up, that some of the gifts will be spent rather than invested, and most importantly, that we never have as many years left as we would like. Hence life insurance becomes a great means of removing all the “if” risks from your estate. Life insurance is a great vehicle for providing “discounted dollars” but it should be part of a well designed plan meant to accomplish the goal of giving what you want, to whom you want, when you want, at the least possible cost.

Foreign Spouse

If you or your spouse is not a citizen, most of the estate tax laws discussed so far do not apply. Resident aliens and nonresidents face many more hurdles to receiving the benefits of their spouse’s estate.

The Federal Tax laws give relief to those who will later, if not sooner, pay estate taxes. Spouses who are not citizens could and often did return to their homeland taking U.S. assets with them thereby avoiding estate taxes entirely. Current tax law prevents this by not allowing the same exemptions.

Yet, there are a number of ways to increase the financial benefit for noncitizen spouses. A special kind of trust will provide some relief. The exceptions are restrictive and complex; so this is one area of planning where it is never too early to get started. Probate

Probate is the legal means of wrapping up the financial affairs of a person’s life. If you have any debt, your creditors will be paid from your assets. If you have a will, the items mentioned therein will be distributed (after your debts are paid) to those who are designated to receive them. If there are minor children, they will be allowed to live with the guardians who are named (assuming suitability). In essence, probate doesn’t sound like a bad thing.

Why, then, do so many people design their estate to avoid probate? Time and expense are two of several very good reasons: The process of probate generally costs the estate approximately 5% to 10% of its total because the attorney, the court, the judge, and the executor of your estate each get paid by the hour. If you don’t have a valid will or a will at all, your estate will generally require more time to locate assets, determine creditors, and find heirs. Not having a will may inadvertently set up a situation which requires your spouse to report to the court how he or she spends the money on your children. The longer it takes to finalize your estate, the greater the expense and the smaller the amount remaining.

Assets from your estate can be given to heirs in other ways besides through will and probate. Some things are automatically given to others by “contract” and by “law.” For instance, joint owners with right of survivorship may own property together. When the first dies, the other automatically receives total ownership of the property because that is how the law was written. Life insurance is another means of avoiding probate. It pays its benefit according to the beneficiary designation written in its contract. If your assets are placed in a revocable testamentary trust (one which becomes irrevocable when you die), these assets generally will not go through probate. In addition to the expense saved by having assets in a revocable living trust, none of this information is released to the court so it does not appear in public records for anyone’s review. Privacy can be very important when disposing of your estate.

Long Term Care

Many individuals who are doing estate planning are not extremely wealthy. There may not be any concern over having to pay estate taxes because the Unified Credit is sufficient to protect their total assets. But a major concern for these people is the risk that a long or debilitating illness will wipe out their entire life savings. Consider for a moment a couple in their 70’s who saved every dime. They took no major vacations, owned no toys, bought used cars, and lived in the same house for 45 years. When they retired their net worth was $350,000. They anticipated a retirement in keeping with the lifestyle they had lived.

Three years later the wife was diagnosed with Parkinson’s Disease. As she slowly debilitated, the couple eventually needed at-home-care. Two years later, she required nursing home care. The nursing home monthly base rate was $3,000 per month. Her wheelchair, stomach feeding pump, medication, physical therapy and so forth came to an additional $3,000 per month. In one year the couple spent over $70,000. After three years the home was sold (where the husband still lived) so the funds could be used to pay for another year of nursing home care. The husband went to live with one of his children. At age 78 he was healthy enough to hope for at least ten more years of life and he had approximately $70,000 left. In addition, his wife still lingered in the nursing home and would continue requiring $70,000+ a year of care.

Five years of nursing home care wiped out the couple’s entire life savings. The future now held Medicaid care for the wife. The husband depended on family goodwill to provide him a home. Neither of these hardworking, independent people planned to spend their retirement in this manner. And had they completed some early planning, it would have been unnecessary.

At age 67 they had been offered a long-term care insurance policy which would have paid $100 per day toward nursing home care. They refused it because of the cost of the premium. In five years of nursing home care they would have received $182,500. The cost of the policy from age 67 to age 73 (when she entered the nursing home and further premiums were waived) would have been $28,000.

Owning insurance which pays for at-home care or nursing home care may seem expensive. However, in a sense the protection is cheap because it frees up your dollars so that you can do the things you were saving those dollars for. Don’t deny yourself a summer cabin or a visit across the country to see your new grandchild because you are saving money for possible later care.

If you don’t have long term care insurance in place you can be sure that if you do need care, your hard saved assets will dwindle quickly.