Planning strategies may benefit estates of all sizes

Bill Cass

Bill Cass , 1/10/2017


For 2017, the unified lifetime exemption amount for the federal gift and estate tax is $5.49 million, which means most estates will not owe federal estate tax. Many investors may conclude that estate planning is not needed.   But taxes are only one component of estate planning. An estate plan is essential for the orderly transfer of assets or to plan for unforeseen circumstances such as incapacitation.

Here are some timely estate planning strategies to consider right now.

Review estate-planning documents and strategies. Reviewing documents is an important first step in estate planning. The review may include ensuring proper beneficiary designations on retirement accounts and insurance contracts, and updating information for wills, powers of attorney, health-care directives, and revocable trusts.

Plan for potential state taxes. While an estate may be exempt from the federal estate tax, it may be subject to state estate and inheritance taxes. Many states have different exemption levels and tax rates. It is important to consult with an attorney on state laws and potential options to try to mitigate these state taxes.

Evaluate whether to transfer wealth during lifetime or at death. Federal law provides for a unified lifetime exemption amount ($5,490,000 for 2017) for gifts and estates, that provides flexibility for taxpayers to decide whether to transfer wealth while living or at death. Lifetime gifting shelters the post-gift appreciation of assets from potential estate taxes, helps heirs now, and utilizes certain valuation discounts available through strategies such as family limited partnerships. Transferring assets at death allows individuals to maintain control of property while living and provides a step-up in cost basis benefit for heirs.

Consult with an attorney about more complex wealth transfer techniques. Individuals and families with significant wealth, especially within non-liquid assets such as real estate or family-owned businesses, may benefit from a range of more complicated wealth transfer strategies. Examples include grantor trusts, family limited partnerships, and dynasty trusts. In recent years, some of these strategies have been under scrutiny by lawmakers, which could result in restrictions. It may be an opportune time to examine these strategies while they are still viable options.

Evaluate the value of a Credit Shelter Trust (CST). A properly designed CST will shelter appreciation of assets from the estate tax after the death of the first spouse. However, trust planning may not be necessary for all investors now that the portability provision allows a surviving spouse to utilize the unused exemption of a deceased spouse. There are some benefits to using a CST, including protection of assets from potential creditors, spendthrift protection for trust beneficiaries, and planning for state death taxes. A trust also preserves the generation-skipping exemption, which is not portable. However, costs and effort are required to set up the trust, while the portability provision doesn’t require any special planning outside of filing an estate tax return at the death of the first spouse (IRS Form 706). Additionally, assets transferred to a trust at the death of the first spouse do not receive a “step-up” in cost basis at the death of the last surviving spouse.

It is important to discuss these strategies with a tax or legal professional as well as with your financial advisor to determine which strategies may be appropriate for your overall financial and estate plan and legacy goals. For more information on these and other tax-related strategies, review Putnam’s article, “Ten income and estate planning strategies for 2017.”

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