Essential Estate Planning Strategies

Essential-Estate-Planning-Strategies

When it comes to estate planning, there’s no shortage of available techniques and strategies. If applicable, the two specific strategies discussed here should be used to reduce your taxable estate and ensure your wishes are carried out after your death. Keep reading to learn more about these essential estate planning strategies.

Take Advantage of the Annual Gift Tax Exclusion

Don’t underestimate the tax-saving power of making annual exclusion gifts. For 2023, the exclusion increased by $1,000 to $17,000 per recipient ($34,000 if you split gifts with your spouse).

For example, let’s say Jim and Joan combine their $17,000 annual exclusions for 2023 so that their three children and their children’s spouses, along with their six grandchildren, each receives $34,000. The result is that $408,000 is removed tax-free from the couple’s estates this year ($34,000 x 12).

What if the same amounts were transferred to the recipients upon Jim’s or Joan’s deaths instead? Their estate would be taxed on the excess over the current federal gift and estate tax exemption ($12.92 million in 2023). If no gift and estate tax exemption or generation skipping transfer tax exemption was available, the tax hit would be at the current 40 percent rate. So, making annual exclusion gifts could potentially save the family a significant amount in taxes.

Use an Irrevocable Life Insurance Trust to Hold Life Insurance

If you own an insurance policy on your life, be aware that a substantial portion of the proceeds could be lost to estate tax if your estate is over a certain size. The exact amount will depend on the gift and estate tax exemption amount available at your death as well as the applicable estate tax rate.

However, if you don’t own the policy, the proceeds won’t be included in your taxable estate. An effective strategy for keeping life insurance out of your estate is to set up an irrevocable life insurance trust (ILIT).

An ILIT owns one or more policies on your life, and it manages and distributes policy proceeds according to your wishes. You aren’t allowed to retain any powers over the policy, such as the right to change the beneficiary. The trust can be designed so that it can make a loan to your estate for liquidity needs, such as paying estate tax.

Are These the Right Strategies for You?

Bear in mind that these two essential estate planning strategies might not fit your specific estate plan. We can provide you with additional details on each and help you determine if they’re right for you. Contact the estate planning professionals at Ramsay & Associates with questions.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.

4 Estate Planning Techniques for Blended Families

estate planning strategiesToday, it’s not unusual for a family to include children from prior marriages. These “blended” families can create estate planning complications that may lead to challenges in the courts after your death.

Fortunately, you can reduce the chances of family squabbles by using estate planning techniques designed to preserve wealth for your heirs in the manner you want, with a minimum of estate tax erosion, if any. Here are four examples:

1. Will. Your will generally determines who gets what, when, where and how. It may be combined with “inter vivos trusts” established during your lifetime or be used to create testamentary trusts, or both. While you can include a few tweaks for your blended family through a codicil to the will, if the intended changes are substantive — such as removing an ex-spouse and adding a new spouse — you should meet with your estate planning attorney to have a new will prepared.

2. Living trust. The problem with a will is that it has to pass through probate. In some states, this can be a costly and time-consuming process. Alternatively, you might transfer assets to a living trust and designate members of your blended family as beneficiaries. Unlike with a will, these assets are exempt from probate. With a revocable living trust, the most common version, you retain the right to change beneficiaries and distribution amounts. Typically, a living trust is viewed as a supplement to — not a replacement for — a basic will.

3. Prenuptial agreement. Generally, a “prenup” executed before marriage defines which assets are characterized as the separate property of one spouse or community property of both spouses upon divorce or death. As such, prenuptial agreements are often used to preserve wealth for the children of a first marriage before an individual enters into a second union. It may also include other directives, such as estate tax elections, that would occur if the marriage dissolved. Be sure to investigate state law concerning the validity of your prenup.

4. Marital trust. This type of a trust can be customized to meet the needs of blended families. It can provide income for the surviving spouse and preserve the principal for the deceased spouse’s designated beneficiaries, who may be the children of prior relationships. If certain tax elections are made, estate tax that is due at the first death can be postponed until the death of the surviving spouse.

These are just four estate planning strategies that could prove helpful for blended families. You might use others, or variations on these themes, for your personal situation. Consult with us to develop a comprehensive plan.

About the author

Brady is the owner of Ramsay & Associates. He specializes in financial statement preparation and personal, fiduciary and corporate tax and accounting.

His professional experience includes seven years' experience for local and national CPA firms before joining Ramsay & Associates in 2006.

He has a Bachelor of Accounting degree from the University of Minnesota Duluth. He is a Certified Public Accountant, a member of the Minnesota Society of CPA's, an Eagle Scout, as well as an active volunteer in the community.