Tansey Estate Planning

Protecting You and Your Loved Ones

Advanced Estate Planning Principles

Understanding these Advanced Estate Planning Principles will enhance one’s understanding of Advanced Estate Planning Techniques.

Advanced Estate Planning Principles

Two principles guide advanced estate planning.

  1. Non-Taxable Assets should be distributed to Taxable Beneficiaries and Taxable Assets should be distributed to Taxable Beneficiaries (use slide)
  2. Maximize the use of Non-Taxable Assets

Two Types of Beneficiaries:

  1. Non-Taxable Beneficiaries
    • Charities
    • Surviving Spouse (Deferral Only)
  2. Taxable Beneficiaries
    • Everyone else

Two Types of Assets:

  1. Non-Taxable Assets
    • Annual Gift Exclusion
      Currently $14,000 worth of gifts to an individual per calendar year is excluded from the Gift Tax. The $14,000 amount will be increased by inflation in $1,000 increments. If a donor wants to make gifts of $14,000 each to five individuals in one calendar year, then the Annual Gift Exclusion will shelter $70,000 from Gift Tax. However, the gift must be of a Present Interest. A Present Interest is when the recipient of a gift has the immediate ownership rights of the gift. The recipient must not have to wait to exercise his or her right in the future.
    • Educational-Medical Exception
      Payments made for qualified tuition and medical expenses paid directly to the provider of such services are excluded from Gift Tax. Unlike the Annual Gift Exclusion, the Education Medical Exception can be used to pay for multiple years of tuition as long as the provider has the absolute right to the payment. Furthermore any payments that qualify for the Educational-Medical Exception for benefit of grandchildren or other Skip Persons are not subject to the GST Tax or use any GST Exemption.
    • Lifetime Gift Tax Exclusion
      The amount that is excluded from the Gift Tax in addition to the Gift Tax Annual Exclusion and the Educational Medical Exception. From In 2011 the Lifetime Gift Tax Exclusion was increased to match the Estate Tax Exclusion of $5 million (increased each year by inflation. The amount for 2014 is approximately $5.3 million, and it will be approximately $5.4 million in 2015. Use of the Lifetime Gift Tax Exclusion reduces the Applicable Exclusion Amount (Estate Tax Exemption Amount). For example, if one uses $1.5 million of the Lifetime Gift Tax Exclusion in 2014, then one will have only $3.8 million of the Applicable Exclusion Amount remaining.
    • Properly Structured Life Insurance
      Properly Structured Life Insurance is Life Insurance where the owner and beneficiary of a life insurance policy is an Irrevocable Trust. The insured may not have any “incidents of ownership,” which include: owning the policy, the ability to change beneficiary designations or borrow against the policy. In addition, the insured may not have any “incidents of ownership” within three years of death.
    • Post-Transaction Appreciation
      The appreciation in asset value after it has been transferred to a Trust or other entity. For example, if the value of an asset was $1 million when it was transferred to a trust for the benefit of junior family members, and 10 years later the value of the asset was $1.5 million, the Post Transaction Appreciation is $500,000. Post Transaction Appreciation is not subject to Estate or Gift Tax. Read more on Post-Transaction Appreciation.
    • Responsibility to Pay Income Taxes on Gifted Property
      A Grantor Trust does not exist for income tax purposes. The Settlor is liable for the income tax on the trust’s income and gains. The Settlor may also take the trust’s losses for income tax purposes. Therefore, the Grantor Trust is able to keep all the income and gains, and the Settlor pays the income tax on those gains. In California, a Settlor’s state and federal income tax liability could exceed 40%. The Settlor’s payment of the Trust’s income taxes is not a further gift, because, by law, the Settlor has the income tax liability.
  2. Taxable Assets
    • Everything else