Essential Estate Planning Strategies

Posted on July 6, 2023
by Brady Ramsay

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.

Is Your Estate Plan Up to Date Following a Divorce?

Posted on January 26, 2022
by Brady Ramsay

Is your estate plan up to date following a divorce?

If you’ve recently divorced, your time likely has been consumed with attorney meetings and negotiations, even if everything was amicable. Probably the last thing you want to do is review your estate plan. But you owe it to yourself and your children to make the necessary updates to reflect your current situation.

Keep assets in your control

The good news is that a divorce generally extinguishes your spouse’s rights under your will or any trusts. So, there’s little danger that your ex-spouse will inherit your property outright, even if those documents haven’t been revised yet. If you have minor children, however, your ex-spouse might have more control over your wealth than you’d like.

Generally, property inherited by minors is held by a custodian until they reach the age of majority in the state where they reside (usually age 18, but in some states it’s age 21). In some cases, a surviving parent — perhaps your ex-spouse — may act as custodian. In such a case, your ex-spouse will have considerable discretion in determining how your assets are invested and spent while the children are minors.

One way to avoid this result is to create one or more trusts for the benefit of your children. With a trust, you can appoint the person who’ll be responsible for managing assets and making distributions to your children. It’s the trustee of your choosing — not your ex-spouse’s.

Consider a variety of trusts

As part of the post-divorce estate planning process, you might include a variety of trusts, including, but not limited to a:

Living trust.

With a revocable living trust, you can arrange for the transfer of selected assets to designated beneficiaries. This trust type typically is exempt from the probate process and is often used to complement a will.

Credit shelter trust.

This trust type typically is used to maximize estate tax benefits when you have children from a prior marriage, and you also want to provide financial security for a new spouse. Essentially, the trust maximizes the benefits of the estate tax exemption.
Irrevocable life insurance trust (ILIT). If you transfer ownership of life insurance policies to an ILIT, the proceeds generally are removed from your taxable estate. Furthermore, your family may use part of the proceeds to pay estate costs.

Qualified terminable interest property (QTIP) trust.

A QTIP trust is often used after divorces and remarriages. The surviving spouse receives income from the trust while the beneficiaries — typically, children from a first marriage — are entitled to the remainder when the surviving spouse dies.

Make the necessary revisions

If you’re currently in the middle of a divorce, contact us to help you make the necessary revisions to your estate plan, as well as to discuss changing the titling or the beneficiary designations on retirement accounts, life insurance policies and joint tenancy accounts.

About the author

Opportunities and Challenges: Valuation in the Age of COVID-19

Posted on December 17, 2021
by Brady Ramsay

Valuation and estate planning go hand in hand. After all, the tax implications of various estate planning strategies depend on the value of your assets at the time they’re transferred.

The COVID-19 pandemic has had a significant impact on the value of many business interests and other assets, which may create some attractive estate planning opportunities. It also presents unique challenges for valuation professionals. As a result, it’s more important than ever to involve experienced valuation experts in the estate planning process.

What are the opportunities?

With the value of many assets depressed (in many or most cases temporarily), now may be an ideal time to gift them, either directly to family members or to irrevocable trusts and other estate planning vehicles. Transferring assets while values are low also allows you to use as little of your gift and estate tax exemption as possible, maximizing the amount available for future gifts or bequests. As the economy fully recovers and assuming your asset values rebound, your beneficiaries should enjoy substantial growth outside your taxable estate.

What are the challenges?

The pandemic has created a situation that’s truly uncharted territory for the valuation profession. Unlike other economic crises in recent years, most of the damage to the economy resulted from business closures and restrictions and other measures designed to help contain the virus.

For business valuations, the current environment presents several challenges, including:

Known or knowable. A fair market valuation generally doesn’t consider “subsequent events” — that is, events that occur after, and weren’t “known or knowable” on the valuation date. Experts generally agree that the COVID-19 pandemic wasn’t known or knowable as of December 31, 2019. Yet for valuation dates after that, determining whether the pandemic was known or knowable and should be considered in valuing a business or other asset can be a formidable task.

Valuation approaches. Generally, valuators consider all three of the major valuation approaches: the income, market and asset approaches. The pandemic may affect the relative appropriateness of each approach and the amount of weight they should be assigned.

For example, market-based methods, which rely on data about actual transactions involving comparable businesses, may be less relevant today if the underlying transactions predate COVID-19 (although it may be possible to adjust to reflect the pandemic’s impact).

Many valuators are emphasizing income-based methods, such as the discounted cash flow (DCF) method, which involves projecting a business’s future cash flows over a defined period (such as five years) and discounting them to present value. The advantage of DCF is that it provides a great deal of flexibility to model a business’s expected financial performance based on current conditions as well as assumptions about its eventual return to “normal” over the next several years.

Regardless of the method or methods used, it’s important for valuators to consider a business’s available cash and expected cash needs to assess its viability as a going concern. These considerations will be critical in evaluating a business’s risk and the impact of that risk on value.

What’s it worth?

Depressed asset values can create attractive estate planning opportunities. While the pandemic has dropped the value of some assets, others haven’t been affected or have even increased in value. Contact us with questions regarding the valuation of your assets.

About the author

Review your estate plan in the midst of a major life shock

Posted on April 29, 2020
by Brady Ramsay

Generally, it’s recommended that you review your estate plan at year’s end. It’s a good time to check whether any life events have taken place in the past 12 months or so that affect your plan.

However, with a life shock as monumental as the coronavirus (COVID-19) pandemic, now is a good time to review your estate planning documents to ensure that they’re up to date — especially if you haven’t reviewed them in a number of years.

When revisions might be needed

The following list isn’t all-inclusive by any means, but it can give you a good idea of when estate plan revisions may be needed:

Your marriage, divorce, or remarriage
The birth or adoption of a child, grandchild or great-grandchild
The death of a spouse or another family member
The illness or disability of you, your spouse or another family member
A child or grandchild reaching the age of majority
Sizable changes in the value of assets you own
The sale or purchase of a principal residence or second home
Your retirement or retirement of your spouse
Receipt of a large gift or inheritance
Sizable changes in the value of assets you own

It’s also important to review your estate plan when there’ve been changes in federal or state income tax or estate tax laws.

Will and powers of attorney

As part of your estate plan review, closely examine your will, powers of attorney, and health care directives.

If you have minor children, your will should designate a guardian to care for them should you die prematurely, as well as make certain other provisions, such as creating trusts to benefit your children until they reach the age of majority, or perhaps even longer.

A durable power of attorney authorizes someone to handle your financial affairs if you’re disabled or otherwise unable to act. Likewise, a medical durable power of attorney authorizes someone to handle your medical decision-making if you’re disabled or unable to act. The powers of attorney expire upon your death.

Typically, these powers of attorney are coordinated with a living will and other health care directives. A living will spells out your wishes concerning life-sustaining measures in the event of a terminal illness. It says what measures should be used, withheld, or withdrawn.

Changes in your family or your personal circumstances might cause you to want to change beneficiaries, guardians, or power-of-attorney agents you’ve previously named.

Find calm in the middle of a storm

In the midst of the COVID-19 crisis, many people’s thoughts are turning to their families. Updating and revising your estate plan today can provide you peace of mind that your loved ones will be taken care of in the future. We can help you determine if any revisions are needed.

About the author

5 estate planning tips for the sandwich generation

Posted on March 22, 2018
by Brady Ramsay

The “sandwich generation” accounts for a large segment of the population. These are people who find themselves caring for both their children and their parents at the same time. In some cases, this includes providing parents with financial support. As a result, estate planning — which traditionally focuses on providing for one’s children — has expanded in many cases to include aging parents as well.

Including your parents as beneficiaries of your estate plan raises a number of complex issues. Here are five tips to consider:

1. Plan for long-term care (LTC).

The annual cost of LTC can reach well into six figures. These expenses aren’t covered by traditional health insurance policies or Medicare. To prevent LTC expenses from devouring your parents’ resources, work with them to develop a plan for funding their health care needs through LTC insurance or other investments.

2. Make gifts.

One of the simplest ways to help your parents financially is to make cash gifts to them. If gift and estate taxes are a concern, you can take advantage of the annual gift tax exclusion, which allows you to give each parent up to $15,000 per year without triggering taxes.

3. Pay medical expenses.

You can pay an unlimited amount of medical expenses on your parents’ behalf, without tax consequences, so long as you make the payments directly to medical providers.

4. Set up trusts.

There are many trust-based strategies you can use to financially assist your parents. For example, in the event you predecease your parents, your estate plan might establish a trust for their benefit, with any remaining assets passing to your children when your parents die.

5. Buy your parents’ home.

If your parents have built up significant equity in their home, consider buying it and leasing it back to them. This arrangement allows your parents to tap their home equity without moving out while providing you with valuable tax deductions for mortgage interest, depreciation, maintenance and other expenses. To avoid negative tax consequences, be sure to pay a fair price for the home (supported by a qualified appraisal) and charge your parents fair-market rent.

As you review these and other options for providing financial assistance to your aging parents, try not to overdo it. If you give your parents too much, these assets could end up back in your estate and potentially be exposed to gift or estate taxes. Also, keep in mind that some gifts could disqualify your parents from certain federal or state government benefits. Contact us for additional details.

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