Planning to pass along assets helps lower estate taxes

Your relatives, friends or charities benefit when you prepare an estate plan that minimizes taxes and costs.

Jun 1st, 1996

Your relatives, friends or charities benefit when you prepare an estate plan that minimizes taxes and costs.

Rita Cron

It goes without saying that, after we pass away, Uncle Sam generally takes more of our assets than we would prefer (possibly 55 percent to 80 percent). But this doesn`t have to happen. Most of us have relatives, friends or charities to whom we would rather pass along our assets. This can be achieved by preparing an estate plan which can minimize estate taxes and administrative costs and maximize your ability to pass along assets to the people you choose.

Some of the ways people pass along their assets to others include:

Intestate-If you do nothing to plan for the disposition of your assets, the state in which you reside will do it for you. This is called intestate. For example, in New York state, your spouse automatically will receive one-half of your property and your children will equally divide the other half. If you are not married or do not have children, your property may go to your sisters or brothers and/or their children. In other states, all your property may go directly to your spouse or other family members. Since intestate laws vary from state to state, it`s important to find out what the law is in your resident state.

Legal Orders-Estate planning enables you to determine who will get what when you pass away. As part of your plan, you can apply certain legal orders that determine the settlement of your assets. For example, you can designate your assets as joint tenancy, apply beneficiary designations for "in trust" bank accounts, life insurance polices or company retirement plans and IRAs.

Wills-A will is a legal document that distributes your property in accordance with your wishes. It does not control jointly-owned property or assets that pass directly to a named beneficiary. A will, when combined with a trust, can provide your family financial security through asset management, satisfactory property distribution and estate-tax planning.

It contains instruction for distributing all the assets you currently own and also those you may eventually acquire. It is important to prepare a will whether you are single or married, with or without children, and without regard to the size of your estate. Wills should be prepared by an attorney and should be updated periodically to reflect changes in your family situation and in the tax laws.

Trusts-Trusts are written, legal agreements between two parties for the benefit of a third, such as your spouse or children. In a trust, assets are transferred to the trustee for protection, management and distribution to the beneficiaries.

The trustee has fiduciary responsibility while the beneficiaries hold title. A trust accumulates and distributes income and principal from your assets and can pay out income to the beneficiaries according to your directions. Or, you may instruct the trustee to hold onto the income for future allotment. Capital gains in the trust generally are kept within the trust and paid for by the trust.

Trusts can be divided basically into two classifications - those rendered during your lifetime (living trusts) and those which take effect after you pass away (testamentary). Testamentary trusts allow you to retain complete control over your assets during your lifetime, while living trusts provide professional management of your assets which you can monitor. Securing your assets in a trust is convenient and can provide continuity for your family upon your death or incapacitation, shielding them from additional paperwork and hassles during a trying time.

Living trusts can be either revocable or irrevocable. Revocable living trusts often are formed to manage your assets should you become incapable of doing so. They allow you to receive income from your investments (upon which you pay taxes) and they allow you to choose a trustee while you are living and observe his or her performance. If you are dissatisfied, the trust can be altered, amended or terminated at any time by you.

On the other hand, an irrevocable trust cannot be altered in any way. (You can provide for the trust to end at a specific time or terminate, based on a particular event, such as the death of a beneficiary.) Many individuals use irrevocable trusts to hold life-insurance policies on their lives, but the primary reason for choosing an irrevocable trust is to reduce your taxable estate. Since you permanently transfer assets out of your estate by putting them in this type of trust, you effectively remove that property and its appreciation from your taxable estate.

Charitable Gifts-Another way of passing along your assets is with charitable giving. Charitable gifts can be cash or property (such as corporate stock or life insurance) and they can be created while you are alive or after your death. These gifts can be made outright or by way of a trust (charitable lead trust or charitable remainder trust). In any event, they can reduce the amount of estate taxes. A major benefit of making gifts while you are alive is the income-tax deductions you are allowed. You also may be able to avoid capital-gains taxes on highly-appreciated assets used as gifts.

Gifts to Minors-One more popular way to lower your taxable estate is the $10,000 annual exclusion for gift-tax purposes; $20,000 for a couple. Gifts to minors must be structured in certain ways, so be sure to check with your accountant.

The main objective of estate planning is to maximize your ability to pass along assets to whom you choose by minimizing estate taxes and administrative costs. It takes time, patience and a sincere desire to organize a structured transfer of your assets. In addition to what has been mentioned here, there are other methods of passing along assets. It`s best done with the assistance of your attorney, accountant, financial adviser and trust-services professional, who can tell you all the pros and cons of estate-planning.

The author is an account executive with Advest, Inc., Louisville, KY, one of the country`s leading regional brokerage and investment firms. Her husband is a prosthodontist and practices in Louisville.

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