Estate Planning Techniques and Tax Strategies

By | March 5, 2015

Individuals might begin thinking about their estate plan, regardless of how soon it is likely to be used. Advance planning will help minimize the amount of tax paid and ensure that all distributions of property and money occur according to the decedent’s personal wishes.

Why do you need an estate plan?

If the individual has a business, middle age is the time to start thinking about a succession plan that will dictate what happens with the business upon retirement. Instead of continuing the business, another option is to sell the business and use the sale proceeds for retirement or bequests to subsequent generations.


When to start an Estate Plan?

As adults enter middle-age, they should begin to think about formulating an estate plan or revising an existing plan. An individual’s assets and goals influence the need for estate planning. By middle-age, adults may have children and extended family that they need to provide for and hopefully they have sufficient assets to accomplish this goal. Various estate planning techniques can be used to help a taxpayer prepare to pass her estate while lowering the potential tax imposed on her estate.


Life Insurance and Estate Planning

The impact of life insurance on an estate or an estate plan depends on who is named as the insurance beneficiary. If the estate or the executor of the estate is the beneficiary, the value of the life insurance must be included in the estate. If the beneficiary of the life insurance is not the estate, the proceeds are not included in the estate. However, even if there is a nonestate beneficiary, the proceeds are included in the estate if the estate has any¬†“incidents of ownership.”¬†Among the possible incidents of ownership that will require the inclusion of the insurance proceeds in the estate are:

  • A reversionary interest that is greater than five percent of the value of the policy.
  • The power to change the beneficiary.
  • The power to cancel the policy.
  • The power to surrender the policy.
  • The right to use the policy as security on a loan or to borrow against the policy.
  • The power to assign the policy.
  • The power to rescind an assignment of the policy.
  • The power to change, convert, or purchase a policy.
  • The power to receive dividends on the policy.
  • The right to choose among settlement options.


Creating Trusts for Estate Planning

Trusts are frequently used as a means to transfer assets at the death of the trustor. Under state law, the trust assets generally pass outside the probate estate, often smoothing the transfer process. The comparative convenience of transfer makes this technique appealing to those planning their estates.


Why Create a Trust for Estate Planning?

Trusts can also be used to accomplish a variety of goals. For instance, a charitable remainder trust allows the grantor to receive a charitable deduction for the present value of the charitable remainder. This is the case unless it is likely that the value of the remainder will be five percent or less than the trust’s value. Charitable remainder trusts can be in the form of an annuity trust or a unitrust.


Current Transfers of Property and Gift Tax

Current transfers as well as future transfers should be considered as part of the estate planning process. The most important consideration in determining whether inter vivos transfers need to be considered and planned for is the individual’s goals. Among the objectives that will influence the choice of inter vivos or post mortem transfers are:

  • Desire to keep a business in the family.
  • Desire to provide for children, grandchildren, or others both before and after death.
  • Desire to minimize the amount of estate taxes that are paid.
  • Desire to retain as much control as possible for as long as possible.