One popular estate tax avoidance device is joint ownership of property between generations. Unfortunately, this device often leads to an ugly and expensive family feud. An article in Forbes discusses common pitfalls to be wary of when considering joint ownership between generations.
When you become a joint owner with another person, you become vulnerable to their creditors. Due to the very nature of joint ownership, one owner’s creditors can attempt to satisfy their claim through some or all of the shared assets. Similarly, if the spouse of one joint owner files for divorce, he or she may claim that the joint assets are part of the marital estate.
Another common pitfall arises when a joint owner decides to borrow from a joint asset, because joint owners can borrow from such assets without getting permission from the other. Finally, once you pass away, there is nothing requiring the joint owner to share the assets with other heirs unless they file a lawsuit to enforce the joint owner’s intent. Such lawsuits often end in bitter family court disputes.
If you are considering joint ownership as part of your estate plan, it is important to speak with an estate planning attorney about these and other pitfalls.
Many people do not realize that life insurance proceeds are in fact taxed. Although these proceeds escape income taxes, they ARE counted as part of your taxable estate. An article in The Wall Street Journal discusses one way to shelter such proceeds from estate taxes, the Irrevocable Life Insurance Trust.
In order to avoid such tax consequences, you may choose to transfer ownership of your existing life insurance policy to an Irrevocable Life Insurance Trust (“ILIT”). By transferring such ownership, the ILIT is removed from your estate. Once established, an ILIT also allows you to split death benefits among several beneficiaries any way you wish. You also retain the power to decide how and when the benefits will be distributed to your heirs.
If you believe that an ILIT is right for you, you should act sooner, rather than later. Existing policies transferred to ILITs are subject to a three-year look-back period, meaning that if you die within three years of its creation, your life insurance proceeds will revert back to your name and be included within your taxable estate (Although this is not the case for new policies purchased directly by the life insurance trust.
An ILIT is usually used for life insurance policies that were set up for the sole benefit of the heirs. If you need to own or access your life insurance policy at anytime, an ILIT may still be a good solution for you, but it must be drafted with that goal in mind.
There are many sophisticated estate planning strategies available to affluent families to ensure that the majority of their hard earned money stays within the family, rather than in the hands of the IRS and state taxing authorities. One such device is the Family Limited Partnership (“FLP”) or Family Limited Liability Company (“FLLC”.) FLPs & FLLCs are advantageous because they provide estate tax savings, gift tax savings, and asset protection.
A FLP or FLLC may own a variety of things, such as real estate or shares on your company. In order to retain control over the assets, you may choose to be the general partner or managing member. That way you can comfortably give your children a majority of the equity in the FLP/FLLC while maintaining control yourself.
By gifting limited partnership/membership interests to trusts or directly to members of your family, you reduce your taxable estate. Consequently, the amount of any applicable estate tax that your heirs will have to pay upon your death will be reduced by the ownership interest you gave away. Such gifts also apply for the annual gift tax exclusion.
As an article in Forbes points out, FLPs require not only good planning but good execution as well. Many times an FLP fails not because of a faulty set-up, but because of a poorly carried out transaction. The same can be said of FLLCs. It is therefore vital to coordinate between those who create your Family Entity, and those who will be working with it, such as accountants, to avoid problems.
Owners of private companies often hope that the business they have built will benefit their families in the long term. No matter whether you plan to benefit your loved ones by selling the business upon your death and providing them with the proceeds, or passing the business itself on, there are certain steps you can take now that will minimize the tax burden when your business eventually changes hands. An article in the Financial Post details some of these steps.
One of these steps is to provide for charitable donations in your will. Such donations are treated as gifts made in your last year of life, and therefore provide a credit on your final tax return. In the year of and immediately preceding your death, the charitable donation limit is 100%, rather than 75% in all other years.
There are also a multitude of trust arrangements you can set up in your will (testamentary trusts) as a tax-effective way to transfer business assets to your families. Testamentary trusts pay income tax at graduated rates as though it were an individual. Therefore, by creating a “new taxpayer” through the trust, you may provide your family with an annual tax savings. Moreover, your spouse will not have to pay capital gains tax on assets transferred from your will to a spousal trust.
For female entrepreneurs who juggle running a business as well as a family, it is often hard to find time to create an estate plan. However, as an article in Forbes discusses, not creating or updating an estate plan may create undesirable consequences for a female entrepreneur’s family after she passes.
The article suggests that female entrepreneurs take three simple steps to avoid leaving chaos for their families and business partners. Moreover, even if the female is responsible for managing the business and household finances, it is vital for her to make sure that her spouse — if any — has a working understanding of the finances.
One key area to focus on is ensuring that your business assets travel in the right direction. While many owners would like their ownership interest in the company to pass to their business partners, the laws of intestate succession — which dictate disposition of your assets if you die without a will — will most often pass your share to your spouse or children. One way to avoid this is to put in place a buy/sell agreement. Such agreements provide instructions for how shares will be sold or distributed if a partner dies or otherwise disposes of his shares.
It is also important to assemble and make sure that you and your family are familiar with your team of advisors, and to put mechanisms in place to protect your family assets.