Are You Mitigating Estate Taxes in the Best Possible Ways?

As an example of ever-changing estate tax laws, if you were to pass away in 2013 with an estate worth more than $5.25 million, your heirs are required to pay Federal estate taxes estimated at 40%. This payment must be made in cash within nine months of your passing. If you plan appropriately, however, your heirs will pay significantly less or perhaps nothing at all. Gill Capital Partners would like to share four options for you to consider and understand in your estate planning and preparation: 1.     Understand Marital Benefits and Possible Unforeseen Problems The marital estate tax deduction does not have a limit and is a very common tool in estate planning. Often times, people who do not know otherwise–or simply those who want to provide the best possible future for their loved one–will leave all assets to their spouse upon their death.

However, doing so only delays estate taxation. It does not eliminate it. The estate that is passed on to heirs upon the death of the remaining spouse will ultimately be taxed. Leaving all assets to the remaining spouse also has an additional implication: If the estate is worth more than $5.25 million at the time of the first spouse’s death, the remaining spouse will have utilized their entire lifetime exemption.

The marital estate deduction is a great estate planning tool, but it should be utilized properly. Understanding other deductions and tools can not only better provide for your spouse upon your death but for the ultimate heirs upon your spouse’s passing.

2.     Give Yearly Monetary Gifts to Your Children and Grandchildren Legally, you can give any family member $14,000 annually, tax free. This means a married couple could give a member of the family up to $28,000 yearly without incurring tax implications for themselves or the recipient. This allows individuals to reduce the overall net worth of their estate while keeping assets in the family and avoiding tax penalties. If the family member is under the age of 18, a monetary gift can be given via a custodian for distribution once the minor reaches the appropriate age. The same financial limit of $14,000 annually applies in this case.

3.     Investigate AB and QTIP Trust Options A QTIP Trust assists in estate planning in a few different ways:

  1. It delays estate taxes until both individuals in a marriage are deceased
  2. It leaves money and assets for the use of the surviving spouse but does not necessarily indicate the remaining spouse has final ownership
  3. It clearly identifies the final beneficiaries of a trust upon the death of both individuals
  4. It qualifies as a marital deduction
  5. It allows for a certain level of flexibility and revision upon your death
  6. It provides the remaining spouse an annual income from the trust for the remainder of his/her life. (The remaining spouse can also receive principal payments if deemed necessary.)

An AB Trust is similar to a QTIP Trust except estate taxes are handled differently. If the assets given to the surviving spouse in an AB Trust exceed the personal exemption, they are subject to estate taxes.

This is the reason many use the both AB Trust and QTIP Trust via placing an amount equal to the personal exemption in the AB Trust, and the remainder is placed in a QTIP Trust, which is not subject to estate taxes until the death of the remaining spouse.

4.     Understand Irrevocable Life Insurance Trusts Irrevocable Life Insurance Trusts (ILITs) are used to help lower or eliminate the burden of estate taxes. You can transfer a life insurance policy into a trust or even more beneficial to your heirs – the trust can purchase a life insurance policy. As the life insurance policy is held in a trust it is not considered an asset, and therefore it is not taxable. This final life insurance payout cannot only assist with estate taxes if necessary, but can also serve as a low risk investment to maximize your heirs’ inheritance.

Do you have a trusted Denver estate planning partner to help you and your heirs prepare? Call Gill Capital Partners at 800-288-3777, if you would like to learn about The Gill Capital Difference applied to estate and multi-generational planning.

*Educational information in this blog is based on 2013 estate tax law.

BlogJames O'Brien