Goldman's "Golden Rules" of Estate Planning – Part I
For those of our readers whose New Year resolutions included creating (or updating) their estate plan, here are some “golden” rules:
1. “The only things certain in life are death and taxes”
- Talk of an estate tax repeal is past. The Federal estate tax for an estate exceeding $5,340,000 in 2014 is 40%. Add New Jersey or New York estate tax of up to 16%. That could result in a big bite out of your estate.
- Need to consider the ATRA 2012 provisions – the interplay of higher income tax rates and a decreased amount of estates subject to Federal estate tax (on account of the increased exemption) which has dramatically changed the dynamic of estate tax planning.
2. “Failing to plan is planning to fail”
- Assets may pass in a manner you didn’t intend.
- Unnecessary estate tax costs.
3. “It’s not what you say – it’s what you do”
- Even the best estate plan is worthless if it’s not implemented.
- Make sure assets are titled properly to achieve estate tax savings.
4. “What have you done for me lately?”
Even if you have a Will, the changes to the estate and gift tax laws make it important that you review it.
- Formula credit shelter – because of the increased exemption amount, your spouse could get much less outright than you think.
- De-coupling of State estate tax (NY, NJ) from Federal estate tax – there is often a State estate tax on the death of a surviving spouse, even if there’s no Federal Estate tax.
- After ATRA 2012, weigh potential estate tax saving strategies through gifting against loss of “stepped-up” basis to transferee for income tax purposes.
5. “Let’s talk of Executors and make Wills”
- Even Shakespeare knew the importance of having a Will.
- Cornerstone of estate plan.
- If you don’t make a Will, the State you live in makes one for you.
- Tax planning through use of trusts, disclaimers.
- Set up trusts to manage property for minors, spouse.
- Name your fiduciaries (executors, trustees) and guardians.
6. “Credit check”
- Two basic rules of estate tax planning – (a) unlimited marital deduction, and (b) unified gift and estate tax credit.
- Take advantage of credit in each spouse’s estate to avoid unnecessary estate tax in surviving spouse’s estate.
- The de-coupling of the New York estate tax and the New Jersey estate tax from the Federal estate tax could cost you – unless you make the right changes to that credit shelter provision in your Will.
- New York credit amount capped at $1,000,000 (although the pending New York Budget Bill would raise it to conform with the federal exemption).
- New Jersey credit amount capped at $675,000.
- Don’t rely on “portability” – not recognized for State estate tax purposes or for generation skipping transfer (“GST”) purposes.
- After ATRA 2012, need to weigh the estate tax benefit of keeping assets out of surviving spouse’s estate v. increased income tax due to loss of “stepped-up” basis on surviving spouse’s death.
7. “Think of the children”
- Make a Will to name a guardian for your minor children – or else the State will do it for you! Not a tax reason, but maybe the most important reason to have a Will.
- Create trusts for management of property for children, even if they have reached the age of majority.
8. “From generation to generation”
- Use a Will to take advantage of generation-skipping transfers and reduce estate taxes to the family.
- GST exemption tied to credit shelter amount ($5,340,000 in 2014).
- Trust for child for life, remainder to grandchildren – avoids tax in child’s estate.
9. “Who(m) Do You Trust?”
- Use trusts as part of your estate plan, to manage property for minor children: (a) Set ages for mandatory distribution of principal (e.g., 1/3 – 25, 1/3 – 30, balance at 35); (b) Income from age 21; (c) Discretionary principal; (d) “Hold-back” provisions – gives trustee authority to hold back any mandatory distribution if not in best interest of beneficiary – bad marital, financial or mental situation.
- Use trusts to manage property for surviving spouse: (a) Not subject to tax in first estate; (b) Ensures that trust property goes to children.
- Use testamentary trusts to minimize state taxes: (a) Credit Shelter Trust – Not included in surviving spouse’s estate, but watch out for triggering NJ or NY state estate tax on account of “decoupling;” (b) Marital Trust (QTIP) – (1) not subject to tax in first estate – deferred until death of surviving spouse), (2) testator names remainder beneficiaries, (3) useful in second marriage situations.
- Use inter vivos trusts: (a) Life Insurance Trust – (1) proceeds not included in grantor’s estate, (2) can keep proceeds in trust for surviving spouse’s lifetime so also not includible in surviving spouse’s estate, (3) can provide needed liquidity; (b) Qualified Personal Residence Trust (“QPRT”) – (1) discounted gift-giving, (2) reserve an interest for a term of years, then title passes to remainder beneficiaries, (3) if not a QPRT (e.g., a life estate), retained interest is valued at zero and entire value of residence is treated as a gift, (4) grantor must survive the QPRT term; (c) Grantor Retained Annuity Trust/Unitrust (“GRAT,” “GRUT”) – (1) discounted gift giving, (2) trust is funded with income-producing property, (3) reserve an annuity for a term of years, then assets pass to remainder beneficiaries, (4) if not qualifying as a GRAT, retained interest is valued at zero, and entire value of asset is treated as a gift, (5) grantor must survive the GRAT term; (d) Charitable Trusts – (1) remainder trusts, (2) lead trusts; (e) Supplemental Needs Trust – preserve governmental benefits.