The permanent federal estate-tax exemption levels do not mean that clients with estates of lesser value can avoid planning. Many aspects of estate-planning remain critical to a comprehensive financial plan.
Here are five estate-planning strategies to review with clients.
1. Review estate-planning documents
Clients with estates of all sizes need to plan for the future. Taxes are just one aspect of estate planning. In addition to establishing an orderly transfer of assets, estate planning can help clients prepare for unforeseen circumstances such as becoming incapacitated. It is important to review strategies for beneficiary designations on retirement accounts and insurance contracts, wills, powers of attorney, health-care directives, and revocable trusts.
2. Consider state tax laws
Many states have estate or inheritance taxes. Certain states apply different tax rates or exemption amounts than the federal government. A taxpayer’s estate may be valued below the federal exemption level, but could be subject to taxation by his or her state of residence. It is also important to consult with an attorney on specific state law and options to mitigate state estate and inheritance taxes.
3. Explore wealth transfer during a client’s lifetime
The unified lifetime exemption amount ($5,340,000 for 2014) for gifts and estates allows taxpayers to decide whether to transfer wealth while they are still living. Gifting during one’s lifetime shelters appreciation of assets post-gift from potential estate taxes. It also helps heirs now and utilizes certain valuation discounts available through strategies such as family limited partnerships.
4. Consult an attorney about complex techniques
Individuals or families with significant wealth, especially estates that include real estate or business ownership, may benefit from a range of more complicated wealth transfer strategies, such as grantor trusts, family limited partnerships, and dynasty trusts. These strategies have recently attracted more attention from lawmakers. It may be a good time to explore these strategies before any restrictions are introduced.
5. Evaluate a Credit Shelter Trust (CST)
A CST can shelter the appreciation of assets from the estate tax after the death of a first spouse. Since the portability provision became permanent in tax law, allowing the surviving spouse to use the unused exemption amount of the deceased spouse, some may question the utility of a CST. But CSTs offer some benefits including protection of assets from potential creditors, spendthrift protection for trust beneficiaries, planning for state death taxes, and preserving the generation skipping exemption, which is not portable. Still, clients will also want to consider the costs of a CST and how the rules determine when a step-up in cost basis can be applied to assets.
In addition to a financial advisor, clients should consult with a qualified tax or legal professional to explore estate-planning strategies. Because individual financial situations vary widely, it is important to work with experts who understand your financial situation and goals.