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Why Everyone Needs an Estate Plan, Part 3: Avoiding the Estate Tax

Mar 31st 2017
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Should you be lucky enough to work with a client who is trying to avoid the estate tax, you need to temper your enthusiasm with a dose of reality. Remember, what you are planning is something that your client will have to live with.

When I had my first estate planning client, I inadvertently made his situation so complicated that I ended up losing him as a client. We must remember that just because it can be done doesn’t mean that it should. But sticking it to the government can be fun ... or what I mean to say is that finding a creative way around a regressive tax that causes families to hold onto wealth can be quite the rush.

In this article, we are going to discuss certain ways to remove assets from one’s estate so they aren’t taxable at death.

Know the Gifting Rules
First and foremost, what you want to do is use the gifting rules. But first, a word about gifts. The downside to gifts is that once they are completed, the client loses control of the asset being gifted. For example, if the client and his spouse give their 18-year-old kid $28,000, they cannot control what that teenager does with the money. The exception is if they put the money in a trust.

When I meet with a client for estate planning, I ask what is important to them. Outside of avoiding the estate tax, they want to pass wealth on to their family. However, as planners, we know that people are imperfect. I would no more want my 18-year-old to have unchecked access to $28,000 that is gifted than I would want to avoid a tax. For this reason, there are irrevocable trusts. I like to start off the explanation of an irrevocable trust by saying that irrevocable means that it can’t be changed, while trust simply means a legal contract.

In my first article, I explained the different parties to a trust, but I will review them briefly for clarity’s sake. The grantor of the trust is the person who creates the trust, the trustee is the person or entity that controls the assets, and the beneficiary is the person or entity that ultimately benefits from the assets.

With an irrevocable trust, you can put restrictions on the corpus (the assets) of the trust. For example, you can have your kid inherit 25 percent of the assets of the trust when she is 23, as long as she is a full-time student with a B average and drug and alcohol free. This provides some sort of control to your client. Note that in an irrevocable trust, in order for the assets to be removed from your client’s estate, the grantor cannot be associated with the trust. What that means is that he or she can’t be the trustee of the trust. Usually the lawyer or accountant would be the best choice for the trustee.

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