ESTATE PL ANNING
TAX STRATEGIES
Procrastination can be the biggest enemy of sound
estate planning—but as Benjamin Franklin so astutely
noted over 200 years ago, “In this world nothing can
be said to be certain, except death and taxes.”
While a proper estate plan will not enable you to
avoid death, it can help eliminate, or at the very
least, minimize estate taxes.
ILITs at-a-Glance
YOU
On January 2, 2013, President Obama signed the American Taxpayer
Relief Act of 2012. This Act, known as ATRA, gave us a permanent
set of estate, gift, and generation-skipping transfer (GST) tax rates
and exemptions. The new law is identical with respect to the estate
tax and gift tax rules that applied in 2012, with two exceptions:
the marginal rate was raised from 35% to 40%, and there are no
longer any sunset provisions.
Federal estate taxes are imposed when an individual’s taxable estate
exceeds the “applicable exclusion” amount. For 2017 that amount
is $5,490,000. If you are concerned that you may have a taxable
estate, there are a variety of trust and gifting strategies available
that may help reduce or even eliminate your tax bill.
Determining the most appropriate estate planning strategies
requires careful consideration by you, your Trust Administrator, and
your other financial and legal advisors. The following is a sampling
of some strategies to get you thinking about how you can better
position your estate.
STRATEGIES
Irrevocable Life Insurance Trust (ILIT)
An ILIT can be an effective strategy for transferring wealth to your
beneficiaries without incurring any income tax or estate tax liability.
An ILIT is designed so that death benefits remain outside of your
taxable estate.
You make annual exclusion gifts—up to $14,000 per beneficiary
in 2017—to an irrevocable trust. You must then notify the benefi-
Annual gifts
Trustee sends annual notice
of withdrawal rights
ILIT
Distribution of death benefits
(income-tax and estate-tax-free)
BENEFICIARIES
ciaries of their right to withdraw the gift for a limited amount
of time. This temporary right to withdraw creates a “present interest” in the gift and allows the ILIT to qualify for the annual gift
tax exclusion.
An independent trustee then uses these gifts to acquire and
maintain life insurance on you. Because the ILIT is the insurance
policy’s owner, the death benefits are not considered part of
your taxable estate. At the time of the ILIT’s creation you have
control over how and to whom the death benefits are to be distributed, i.e. immediately distribute proceeds out to beneficiaries,
keep proceeds in the ILIT and have the trustee pay income and
principal to beneficiaries according to standards you set, or use
proceeds to cover estate taxes.
Portability Election
The portability election is an estate tax-saving strategy that is used
to “transfer” a deceased spouse’s applicable exclusion to the surviving spouse ($5,490,000 in 2017). This tax legislation was introduced
in 2010 and under ATRA it has been made permanent. This approach
depends on action taken after one spouse dies. You must rely
on the executor of your estate to make important tax decisions
after your death, and be willing to incur the extra costs necessary to
file a timely and complete tax return—due nine months after death.1
free from gift taxes. Gifting also removes any future growth of
the gifted assets from your estate. There are many gifting vehicles
available to help reduce and transfer wealth out of your taxable
estate. Some of these include:
It is important to note that state exclusions are not portable,
and therefore, this is not an optimal choice if you live in a state
that imposes its own estate tax. Additionally, portability does not
address asset appreciation. Any appreciation on the deceased
spouse’s assets will be included in the estate of the surviving spouse.
Moreover, portability does not apply to the GST tax exemption;
any unused portion does not transfer to the surviving spouse.
In many cases, a credit shelter trust (discussed below) will continue
to be the preferred approach for married couples who want to
use both of their applicable exclusions.
Front-loading a 529 college savings plan allows you to make five
years worth of annual exclusion gifts at one time without incurring
any gift tax liability. If, however, you should die within five years
of the gift, the pro-rated portion for the years after death will be
included in your estate for estate tax purposes.
Credit Shelter Trust
Unlike the portability election, which is made after the death of one
spouse, a credit shelter trust must be created before death (within
the terms of couple’s revocable living trusts). The credit shelter trust
has many different names: “bypass” trust, “B” trust in an “A-B” trust
plan, or “family” trust in a “family/marital” trust plan. It enables married couples to use each spouse’s applicable exclusion.
As previously noted, federal estate taxes are imposed when an individual’s taxable estate exceeds the applicable exclusion amount.
However, married couples do not automatically get the benefit of
two exclusions. A married couple can avoid federal estate tax on
estates worth up to twice the applicable exclusion ($10,980,000)
by implementing a credit shelter trust.
The trust is created from the estate of the first spouse to die; an
amount equal to the applicable exclusion is set aside in the trust.
The surviving spouse can receive income from the trust and may
have access to principal. When he or she dies, trust assets are
distributed to heirs as directed in the trust document. Because the
surviving spouse has limited control over trust asset distribution, they are not considered part of the taxable estate. Using
this strategy is important because, at the 2017 flat estate tax rate
of 40%, being able to protect an additional $5,490,000 could
translate into significant estate tax savings.
Gifting
You may gift up to the annual exclusion amount ($14,000, if single
and $28,000, if married for 2017) to as many individuals as you wish
without incurring gift taxes. For example, a married couple with
two married children and four grandchildren can give $28,000 to
each child, their spouse, and each grandchild—a total of $224,000
Direct tuition or medical care provider payments for your loved
ones’ educational or medical costs are not considered part of
your annual or lifetime gift tax exemption.
Grantor retained annuity trusts (GRAT) are useful in a low-interestrate environment and also work especially well with assets currently
depressed in value. You (the grantor) transfer assets to a trust for
a specified term, during which time you receive an annuity from
the trust. The annuity payments reduce the gift’s value for gift tax
purposes. At the end of the term, the remaining assets pass to
the beneficiary. If, however, the grantor dies before the specified
term ends, the assets are included in the taxable estate.
Charitable remainder trusts (CRT) can help reduce your overall
gross estate, create a higher cash flow during your lifetime while
generating an income tax deduction, lower investment risk, and provide greater portfolio diversification. CRTs are good for highly
appreciated stock, and for those who are charitably inclined. A
charity you choose is given a vested future interest in property—
you retain an income for life with the remainder interest going to
the charity.
Charitable lead trusts (CLT) are used when income is not needed.
Instead of contributing a remainder interest, the grantor donates
an asset’s income interest for a period of years to a charity with
the remainder interest then passing to a beneficiary. The grantor
or grantor’s estate receives an income tax deduction for the value
of the interest income. CLTs are often designed to take effect at
the grantor’s death, thus reducing the gross estate.
GETTING STARTED
Your Wintrust Wealth Management Financial Advisor works closely
with Trust Administrators in our Trust organization and can answer
questions on estate planning and help determine which strategies
best align with your particular situation and goals.
1. Revenue Procedure 2014-18, issued on January 27, 2014, will allow taxpayers who meet certain criteria to obtain an extension of time to make a portability election simply by filing an estate tax return in accordance with the procedure the IRS has set forth.
This information may answer some questions, but is not intended to be a comprehensive analysis of the topic. In addition such information should not be relied upon as the only source of information, competent tax and legal advice
should always be obtained.
Securities, insurance products, financial planning, and investment management services are offered through Wayne Hummer Investments, LLC (Member FINRA/SIPC), founded in 1931. Trust and investment management services offered
by The Chicago Trust Company, N.A. and Great Lakes Advisors, LLC, respectively. Investment products such as stocks, bonds, and mutual funds are not insured by the FDIC or any federal government agency, not bank guaranteed or a bank
deposit, and may lose value. ©2017 Wintrust Wealth Management
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