By Julius H. Giarmarco

Part 1 / Part 2 / Part 3

Don’t let the chaos of the holiday season prevent you from minimizing federal estate taxes and fine-tuning your estate plan. What better gift for your heirs than avoiding the 40% federal estate tax and making sure your affairs are all in order? Although many of the tips discussed below are not time sensitive, year-end is a good time to revisit and review these matters.

1. Make Annual Exclusion Gifts. In 2015, the annual gift tax exclusion is $14,000 ($28,000 for married couples), and will remain at $14,000 in 2016. Therefore, you can give up to $14,000 to as many donees you choose on or before December 31, 2015, and again on January 1, 2016. Married couples can each gift $14,000. And no Gift Tax Return (Form 709) will have to be filed. However, if one spouse gifts $28,000 and the other spouse elects to “split” that gift, a Gift Tax Return must be filed to report the split gift. To protect the donee from his/her inability, disability, creditors and predators (including ex-spouses), the gifts can be made to an irrevocable trust for the benefit of the donee. However, in such case, the beneficiary must be given the opportunity for a limited time period (usually 30 days) to withdraw the gift in order to qualify for the annual gift tax exclusion. The withdrawal right is commonly referred to as a Crummey power named after the court case that validated this technique. Moreover, by making the trust a “grantor” trust for income tax purposes, the grantor/donor will be responsible for paying the trust’s income taxes, allowing the trust to grow “tax free”. The grantor’s payment of the trust’s income taxes is essentially a tax-free gift to the beneficiaries of the trust.

2. Fund a Section 529 Plan. IRC Section 529 affords you an opportunity to establish an account for the purpose of paying a child or grandchild’s college expenses. Contributions to a 529 Plan accumulate income tax free and distributions from the plan to pay for qualified education expenses are not subject to income tax. You can “frontload” gifts to a 529 Plan by making five (5) years’ worth of annual exclusion gifts ($70,000 for a single person and $140,000 for a married couple for 2015). Annual exclusion gifts to that person over the next four (4) years, however, are reduced by $14,000/$28,000 per year.

3. Make Payments that Qualify for the Medical and Educational Exclusion. Direct payments to educational institutions for tuition are not considered gifts for gift tax purposes. The payment must be for tuition only – not for books, supplies or room and board. Likewise, direct payments to medical institutions or to health insurance companies are not considered gifts. In general, the medical and dental expenses that qualify for the exclusion are the same as those that are deductible for federal income tax purposes. The payment must be made to directly to the institution providing the education, medical care, or health insurance. If the money is given to the person receiving the benefit, even with the explicit instruction that it be used to pay for the educational or medical care, the exclusion will not apply and the payment will be considered a gift.

4. Consider a Roth IRA Conversion. If your income is down in 2015, it may be a great year to do a partial Roth IRA conversion. By converting your regular IRA into a Roth IRA, you are electing to be taxed in 2015 while you are temporarily in a lower tax bracket. Not only will you pay tax at the lower rate, but now your IRA can grow tax free and withdrawals are not mandatory during your lifetime or your spouse’s lifetime. And, when distributed, Roth IRAs pass to the beneficiaries income tax free. However, if you don’t have the money to pay the tax without dipping into the IRA itself, or if you are close to retirement and plan to use your IRA, it probably does not make sense to convert.

5. Consider Life Insurance. The estate planning process is meant to help you manage and preserve assets while you are alive and to conserve and control distributions after your death in accordance with your goals and objectives. Your estate plan is unique, because it is based on your net worth, age, health, lifestyle, and other factors. But whatever your needs, life insurance can be a valuable tool in your estate plan. For example, life insurance can be used to provide liquidity to pay estate taxes (which are due nine months after death). In such case, the life insurance will usually be held in an irrevocable life insurance trust (ILIT) so that the death proceeds will be both income and estate tax free. Life insurance is commonly used to replace income in the event of the breadwinner’s premature death so that the family can maintain its lifestyle. A business owner whose business is earmarked to pass to a child active in the business can fund an ILIT (for the benefit of the inactive children) to “equalize” the inheritances. Life insurance can also be used to “create” an estate for the insured’s heirs. Finally, in blended families, life insurance can be used to provide children from a prior marriage with an inheritance, while allowing the insured to leave other assets to his/her spouse, or vice versa.

6. Have a Strategy for Long-Term Case in Your Estate Plan. There is a 50% likelihood that you will eventually need nursing home care, and the costs of that care are increasing rapidly. The average monthly cost of a nursing home can range from $5,000 to upwards of $15,000, depending on the location and the facility. Medicaid requires a person have minimal resources and the inability to pay for the nursing home before providing assistance. The best way to tackle this problem is to have long-term care (LTC) insurance. Your age and health will be determining factors in whether LTC insurance will be available to you and its cost. If LTC insurance is not an option, one possibility is to move assets into a Medicaid Asset Protection Trust at least five years before applying for Medicaid. However, there are many factors to consider when deciding whether a Medicaid Asset Protection Trust is right for you and your family.

7. Protect Yourself from Lawsuits. If you work in a field where lawsuits are common – doctors, lawyers, accountants, architects, business owners – getting sued seems inevitable. Fortunately, asset protection techniques are available to protect your financial accounts and real estate. Following are some steps to take to make you a less attractive target for a lawsuit. The first line of defense is to acquire insurance for yourself, as well as for your business. If you are married and have financial accounts in joint name with your spouse, your creditors may be able to force you and your spouse to liquidate jointly-held assets to collect the debtor’s share. So, it may make sense to protect assets by signing them over to your spouse (assuming you are not attempting to delay, defraud, or hinder a known creditor). Be aware, however, if you wind up divorcing, the divided property could become the subject of disputes. Another technique is to create an entity (e.g., a limited liability company or corporation) to hold real estate or equipment. This way, only the assets owned by the entity involved in the lawsuit are at risk. This requires creating multiple entities to maximize the creditor protection. Finally, if you have substantial liquid assets that you want to protect from creditors, consider establishing a domestic asset protection trust (DAPT) in one of the 16 states (e.g., Nevada, Alaska, South Dakota) that allow individuals to establish trusts for their own benefit but are still protected from creditors. An alternative to a DAPT is a FAPT – a foreign asset protection trust. A FAPT places your assets out of the reach of U.S. courts and under the jurisdiction of a country with debtor-friendly laws (e.g., Belize, Nevis, Cook Islands).

8. Do You Still Have Marital-Family Trust Planning in Your Estate Plan? If you are married and have not had your estate plan reviewed since January 1, 2013, it is time to revisit your living trust – particularly if your estate is below the $10.86 million estate tax exemption available to a married couple ($5.43 million per spouse). Because of the larger estate tax exemption (which is indexed for inflation) and because the unused estate tax exemption of the first spouse to die can now be used by the surviving spouse (i.e., portability), you may not need marital-family trust planning. In fact, such planning may result in your heirs having to pay higher capital gain taxes when they sell inherited assets. There are, however, many other factors to consider besides estate taxes when deciding whether you still need marital-family trust planning. These factors include state death taxes (if you live in a jurisdiction that collects death taxes), whether you and your spouse have different final beneficiaries, property management, and generation-skipping transfer taxes.