Here's the most important thing to know about estate planning: If you don't have a plan, the tax collectors have one for you.
It's easy to assume that your wealth is too modest to justify an estate plan. Yet, the reality is that your estate includes the equity in your home, your everyday and retirement accounts, proceeds from life insurance, any foreign assets, coming inheritances … the list goes on. All of this is potentially vulnerable not only to federal, but in some cases state, inheritance tax1, state estate tax2, or both3.
The good news is that there are a variety of gifting strategies and wealth-transfer tools that can help you distribute your assets to your family and other beneficiaries — while avoiding probate and mitigating estate and gift taxes.
Strategic gifting allows you to transfer assets to children, grandchildren or other beneficiaries during your lifetime, with the added benefit of reducing your taxable estate. For 2015, the annual gift tax exclusion allows gifting of up to $14,000 per person, per year, tax-free (a combined $28,000 per married couple). Note that these annual gift exclusions don't count toward the federal estate tax exemption, which is currently $5.43 million per person.
For parents or grandparents needing to save for a child's or grandchild's college, forming a 529 college savings plan is a good idea. These plans can be funded with five years' worth of exclusion gifts up front without incurring gift tax. For parents who can afford to pay for college from their cash flows, it is important to remember that paying tuition and related costs directly to a school of higher learning is not a taxable gift, which can leave the parents free to continue to make annual exclusion gifts, outright or in trust, up to the maximum amount allowable.
Designate Beneficiaries Strategically
By specifically designating the beneficiaries of your annuities, life insurance, IRAs or other qualified retirement plans, you can ensure that assets are automatically distributed upon your death — in many cases bypassing the probate process. When you're developing your estate plan, keep in mind that beneficiary designations take precedence over any other instructions you provide in a will or trust.
Utilize Wealth-Transfer Trusts
Used properly, irrevocable trusts allow for the efficient transfer of wealth while avoiding probate and reducing estate taxes. Irrevocable life insurance trusts, for example, are structured so that the death benefit of your life insurance policy remains outside of your estate and can provide your estate with the liquidity needed to pay estate tax if needed. In the end, more of your actual wealth goes to heirs, not the IRS.
You can count on the planning professionals at City National for candid advice and an unbiased assessment of your options. To learn more, please contact us at (800) 773-7100.
(1) Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania.
(2) Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Rhode Island, Tennessee, Vermont and Washington, DC.
(3) Maryland and New Jersey.