Estate Planning May Save Your Family More Than Just Taxes
The death of a loved one is hopefully a time when family members draw closer together and celebrate their dear one’s life and the bonds of family unity. Unfortunately, a family member’s passing often becomes a time of disagreement and bickering over how the loved one’s assets will be divided. Decades-old sibling rivalries, perceived offenses and hard feelings too often boil to the surface when money is involved and can leave scars that last a lifetime.
From the outside, the disagreement may seem ridiculous; but to those involved, the stakes are extremely high. One sibling may want to maintain their childhood home and another may only be interested in selling it. Small items such as jewelry, paintings, furniture or silverware may have specific sentimental value to one heir and only monetary value to another. Deciding how to distribute assets and money can be difficult if greed takes over and clouds good judgment.
Estate Planning Techniques
When people think of distributing the assets in an estate, a personal will usually comes to mind first. A will memorializes the desires of the deceased person as to who gets what, but is powerless until the estate enters the probate process in court, and there the will provides instructions for asset distribution. However, disagreements among heirs about how assets should be divvied up can launch a lengthy and particularly expensive process in probate court. In a will contest, a judge may have to decide the asset division and distribution.
Fortunately, some estate planning techniques can be employed in addition to a will to reduce the time and expense of probate court. For example, a person can gift up to $13,000 each year to as many people as he or she likes without either the giver or the recipients paying tax on the amounts transferred. Spouses can jointly gift up to $26,000 per year per recipient. In addition, there is presently (2012) a lifetime exclusion of $5,120,000 per person from gift taxes. This technique not only reduces your taxable estate by the amount gifted, it avoids court involvement (probate) of the amounts gifted.
A revocable trust allows a person to transfer the titles of assets to the trust and maintain control of the property during his or her lifetime. At the time of the trust owner’s death, a designated trustee can take the reigns and distribute the trust’s assets to the beneficiaries as directed, by the terms of the trust. This avoids the probate process altogether on the assets placed in the trust. A well-written trust can help reduce the family conflict that often accompanies wills.
An irrevocable trust may also be used to avoid probate. In addition to avoiding probate, an irrevocable trust protects assets placed in the trust from creditors, lawsuits, medical and nursing-home bills.
Irrevocable life insurance trusts, also called ILITs, are often used to avoid taxation on life insurance policy proceeds. The policy proceeds in an ILIT are not considered part of the policyholder’s estate so they are not subject to federal estate taxes when they are distributed to the trust’s beneficiaries. ILITs can be used to pay for a child’s or grandchild’s education or to provide a slow and steady payout to the beneficiaries.
Married couples can use a bypass trust to make their children or grandchildren the estate beneficiaries, rather than each other. Bypass trusts are often combined with marital trusts in an A/B arrangement, which reduces the estate tax on inheritance, but still allows a surviving spouse to receive payments from the trust for reasonable living expenses. Many people add a qualified terminable interest property, or QTIP, trust to their A/B arrangement to maintain even greater control over asset distribution.
Inheritance can lead to nasty disagreements among family members that can cause irreparable harm. However, such conflict can be largely avoided with a few thoughtful estate-planning techniques. If you are concerned over the effect the distribution of your wealth might have on your family, contact an experienced estate planning attorney too discuss your situation and your options.