Advanced Estate Planning Concepts for Women
Statistically speaking, women live longer
than men; if you're married, that means that the odds are that you're going to
outlive your husband. That's significant for a couple of reasons. First, it
means that if your husband dies before you, you'll likely inherit his estate.
More importantly, though, it means that to a large extent, you'll probably have
the last word about the final disposition of all of the assets you've
accumulated during your marriage. But advanced estate planning isn't just for
women who are or were married. You'll want to consider whether these concepts
and strategies apply to your specific circumstances.
Transfer taxes
When you transfer your property during your
lifetime or at your death, your transfers may be subject to federal gift tax,
federal estate tax, and federal generation-skipping transfer (GST) tax. (The
top estate and gift tax rate is 40%, and the GST tax rate is 40%.) Your
transfers may also be subject to state taxes.
Federal gift
tax
Gifts you make during your lifetime may be
subject to federal gift tax. Not all gifts are subject to the tax, however. You
can make annual tax-free gifts of up to $14,000 per recipient. Married couples
can effectively make annual tax-free gifts of up to $28,000 per recipient. You
can also make tax-free gifts for qualifying expenses paid directly to
educational or medical services providers. And you can also make deductible
transfers to your spouse and to charity. There is a basic exclusion amount that
protects a total of up to $5,340,000 (in 2014, $5,250,000 in 2013) from gift
tax and estate tax.
Federal
estate tax
Property you own at death is subject to
federal estate tax. As with the gift tax, you can make deductible transfers to
your spouse and to charity, and there is a basic exclusion amount that protects
up to $5,340,000 (in 2014, $5,250,000 in 2013) from tax.
Portability
The estate of someone who dies in 2011 or
later can elect to transfer any unused applicable exclusion amount to his or
her surviving spouse (a concept referred to as portability). The surviving
spouse can use this deceased spousal unused exclusion amount (DSUEA), along
with the surviving spouse's own basic exclusion amount, for federal gift and
estate tax purposes. For example, if someone dies in 2011 and the estate elects
to transfer $5,000,000 of the unused exclusion to the surviving spouse, the
surviving spouse effectively has an applicable exclusion amount of $10,340,000
to shelter transfers from federal gift or estate tax in 2014.
Federal
generation-skipping transfer (GST) tax
The federal GST tax generally applies if you
transfer property to a person two or more generations younger than you (for
example, a grandchild). The GST tax may apply in addition to any gift or estate
tax. Similar to the gift tax provisions above, annual exclusions and exclusions
for qualifying educational and medical expenses are available for GST tax. You
can protect up to $5,340,000 (in 2014, $5,250,000 in 2013) with the GST tax
exemption.
Indexing for
inflation
The annual gift tax exclusion, the gift tax
and estate tax basic exclusion amount, and the GST tax exemption are all
indexed for inflation and may increase in future years.
Income tax basis
Generally, if you give property during your
life, your basis (generally, what you paid for the property, with certain up or
down adjustments) in the property for federal income tax purposes is carried
over to the person who receives the gift. So, if you give your $1 million home
that you purchased for $50,000 to your brother, your $50,000 basis carries over
to your brother--if he sells the house immediately, income tax will be due on
the resulting gain.
In contrast, if you leave property to your
heirs at death, they get a "stepped-up" (or "stepped-down")
basis in the property equal to the property's fair market value at the time of
your death. So, if the home that you purchased for $50,000 is worth $1 million
when you die, your heirs get the property with a basis of $1 million. If they
then sell the home for $1 million, they pay no federal income tax.
Lifetime giving
Making gifts during one's life is a common
estate planning strategy that can also serve to minimize transfer taxes. One
way to do this is to take advantage of the annual gift tax exclusion, which
lets you give up to $14,000 to as many individuals as you want gift tax free in
2013 and 2014. As noted above, there are several other gift tax exclusions and
deductions that you can take advantage of. In addition, when you gift property
that is expected to appreciate in value, you remove the future appreciation
from your taxable estate. In some cases, it may even make sense to make taxable
gifts to remove the gift tax from your taxable estate as well.
Trusts
• Revocable trust. You retain the right to change or revoke a revocable trust. A revocable
trust can allow you to try out a trust, provide for management of your property
in case of your incapacity, and avoid probate at your death.
• Marital trusts. A marital trust is designed to qualify for the marital deduction.
Typically, one spouse gives the other spouse an income interest for life, the
right to access principal in certain circumstances, and the right to designate
who receives the trust property at his or her death. In a QTIP variation, the
spouse who created the trust can retain the right to control who ultimately
receives the trust property when the other spouse dies. A marital trust is
included in the gross estate of the spouse with the income interest for life.
• Credit shelter bypass trust. The first spouse to die creates a
trust that is sheltered by his or her applicable exclusion amount. The
surviving spouse may be given interests in the trust, but the interests are
limited enough that the trust is not included in his or her gross estate.
• Grantor retained annuity trust (GRAT). You retain a right to a fixed stream
of annuity payments for a number of years, after which the remainder passes to
your beneficiaries, such as your children. Your gift of a remainder interest is
discounted for gift tax purposes.
• Charitable remainder unitrust (CRUT). You retain a stream of payments for a
number of years (or for life), after which the remainder passes to charity. You
receive a current charitable deduction for the gift of the remainder interest.
• Charitable lead annuity trust (CLAT). A fixed stream of annuity payments
benefits a charity for a number of years, after which the remainder passes to
your noncharitable beneficiaries, such as your children. Your gift of a
remainder interest is discounted for gift tax purposes.
Life insurance
Life insurance plays a part in many estate
plans. In a small estate, life insurance may actually create the estate and be
the primary financial resource for your surviving family members. Life
insurance can also be used to provide liquidity for your estate, for example,
by providing the cash to pay final expenses, outstanding debts, and taxes, so
that other assets don't have to be liquidated to pay these expenses. Life
insurance proceeds can generally be received income tax free.
Life insurance that you own on your own life
will generally be included in your gross estate for federal estate tax
purposes. However, it is possible to use an irrevocable
life insurance trust (ILIT) to keep the life insurance proceeds out
of your gross estate.
With an ILIT, you create an irrevocable trust
that buys and owns the life insurance policy. You make cash gifts to the trust,
which the trust uses to pay the policy premiums. (The trust beneficiaries are
offered a limited period of time to withdraw the cash gifts.) If structured
properly, the trust receives the life insurance proceeds when you die, tax
free, and distributes the funds according to the terms of the trust.
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(615) 427-8780
IMPORTANT DISCLOSURES
The
information presented here is not specific to any individual's personal
circumstances.
To the extent
that this material concerns tax matters, it is not intended or written to be
used, and cannot be used, by a taxpayer for the purpose of avoiding penalties
that may be imposed by law. Each taxpayer should seek independent advice from a
tax professional based on his or her individual circumstances.
These
materials are provided for general information and educational purposes based
upon publicly available information from sources believed to be reliable—we
cannot assure the accuracy or completeness of these materials. The information
in these materials may change at any time and without notice.
