GOAL OF ESTATE PLANNING
The goal of estate planning is to pass your property where you want it to go at your death with minimum tax cost and other expense.
With a married couple, estate planning tax goals are generally:
- no estate tax when first spouse dies (maximize amount available to surviving spouse)
- minimize estate tax when second spouse dies
- provide for management of assets for children if both spouses die while the children are young
For a single person, the goal is generally to minimize estate tax at that person’s death.
ESTATE TAX TOOLS
There are five primary tools we generally use to accomplish these tax goals:
1. Use of Federal Basic Exclusion Amount and Massachusetts Estate Tax Exemption. The first technique involves the use of the "basic exclusion amount" against federal estate tax. The basic exclusion amount allows a certain amount of your property to escape federal estate tax no matter who you leave it to. The "basic exclusion amount" has an advantage over the marital deduction described below. Unlike the marital deduction, property passing under the basic exclusion amount need not be included in the estate of the second to die if the plan is set up properly. The amount which may pass free of federal estate tax under the basic exclusion amount is $10,000,000 plus cost of living increases which bring it to $12,920,000 in 2023. The amount which may pass free of Massachusetts estate tax is $2,000,000.
2. Use of Marital Deduction. The second technique is the use of the marital deduction. Generally, everything you leave to your spouse passes to him or her free of federal and Massachusetts estate tax. The marital deduction only defers tax, however. While the marital deduction property is not taxed when the first spouse dies, it is all included in the second spouse's estate. The rule is that property is only eligible for the marital deduction in the first estate if left in such a way that it is includable in the second estate for purposes of calculating estate taxes. Obviously, this technique is only available to married couples.
3. Removal of Life Insurance From Estate. The third technique is to remove life insurance proceeds from the estate, if significant, so that they are not subject to estate tax on the death of the insured. This is done by irrevocably transferring ownership of the policies away from the insured during the insured's life. Ownership of the policies may be transferred to individuals or to irrevocable life insurance trusts.
4. Generation Skipping. The fourth basic technique sometimes used is to leave property in such a way that it will be available to successive generations of beneficiaries without being subject to estate tax in each generation and without being subject to generation-skipping transfer tax. Everyone now has a $10,000,000 exemption from generation-skipping transfer tax plus cost of living increases which brings it to $12,920,000 in 2023. The idea is to make use of this by assembling up to $12,920,000 in a trust exempt from generation-skipping transfer tax which may continue for several generations if that is your wish, or only for the lives of your children or a shorter period. While long-term generation-skipping transfer tax trusts may save estate taxes, some clients prefer not to use them, but rather prefer to give their children or other beneficiaries control of the assets at some point.
5. Lifetime Gifts. The fifth technique, not as widely applicable as the others, is to make lifetime gifts to reduce the estate and therefore the estate taxes. Gifts may be made outright or in trust. All sorts of trusts have been developed for lifetime gifting. You may have heard of some of them referred to by their initials - such as "GRITS", "GRATS" "UNITRUSTS", and many others.
The five techniques are designed to minimize or defer estate taxes and generation skipping taxes. However, a particular technique may not be appropriate in a particular estate plan for non-tax reasons - use of some of them may require too much of a departure from the way the person wants to leave his or her property. A balance must be struck, minimizing estate taxes and generation skipping taxes within the desired disposition of property.
There are also techniques for Medicaid planning. These techniques involve reducing your income and assets to a level where you would qualify for what is essentially a welfare program - Medicaid. Medicaid planning may also be used to try to protect the property of a spouse who is able to remain at home from being used to pay the expenses of a spouse who must go into a nursing home. This area is highly regulated and the regulations change frequently, making it more and more difficult for people with substantial assets to position themselves to qualify for Medicaid. We refer Medicaid planning to lawyers outside of Tyler & Reynolds who specialize in it.
In addition to wills and trusts, some other documents are generally drawn up in connection with an estate plan:
1. Power of Attorney. By this you would give someone power to manage your assets while you are alive, but incompetent. A power of attorney expires at your death.
2. Health Care Proxy. By this you authorize someone to make health care decisions for you during any period when you are incompetent. You can also give instructions as to "pulling the plug" (withholding or removing respirators and artificial feeding and similar life sustaining procedures if you are terminally ill).
3. HIPAA Authorization. This gives your health care agents and attorneys in fact permission to obtain medical information about you.
4. Homestead Declaration. With certain limitations, this allows protection of the equity in your home from creditors.
5. Appointment of Guardian of a Minor. Parallels guardian appointment made in a will but operates while you are alive but incompetent.