Does Your Estate Plan Call for More Than Just a Will?

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Estate planning is not a one-size-fits-all proposition. The strategies used by young couples just starting their careers and families will not work for seniors with significant assets and multiple generations to consider. How individuals approach these decisions must be governed by their unique circumstances, as well as their ultimate goals.

Regardless of income, assets, or family circumstances, everyone wants to minimize taxes and ensure a smooth transfer of assets when the time comes to distribute their estates. These are the top strategies I recommend people consider when making estate plans.

1. Revocable trusts

Everybody needs a will. Wills let others know how you want your property to be distributed after your death. They ensure that your minor children will be cared for by the friends or family members whom you trust.

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But executing a will takes time, and your beneficiaries may have to wait for the court probate process to conclude before enjoying your gifts — also turning the state and attorneys into a larger beneficiary of your estate. Thus, the chief benefit of a revocable trust: It bypasses probate, allowing your property to transfer immediately, in accordance with your wishes. Because it creates no public record of your estate plans, your wishes will remain confidential.

So, who should have a revocable trust? To my mind, everyone should at least consider it. It may seem overkill for those of limited means or few assets, but there is little downside to creating a trust, and there could be considerable upside.

Imagine, for example, that a person has become incapacitated due to illness or old age and is no longer capable of managing their affairs. A power of attorney is certainly an option for ensuring that the person’s interests are protected, but these powers do not easily cross state lines. They are disfavored and looked upon with skepticism by banks and other financial institutions that have become increasingly wary about the prevalence of fraud.

Trusts are recognized in every state. They can spell out in clear and incontrovertible terms the wishes of an incapacitated person. Who will handle their finances? Who will oversee their tangible and intangible assets? Who will make important decisions on their behalf?

Revocable trusts are seriously undervalued, but they address almost every contingency that a standard bank form misses. A will may be useful when you’re dead, but a trust can help you while you’re still alive as well.

2. Family limited partnerships

For those who – presently valued at more than $12.06 million – they owe it to their beneficiaries to take measures to lessen or eliminate the burden of estate taxes. A family limited partnership is one of the smartest ways to do this. And because the federal estate tax exemption is a moving target – it could go down to $5 million or any other number Congress chooses – it is important to consult with a knowledgeable estate and probate attorney as you make your plans.

By setting up a partnership and allocating the assets among the partners (typically your same family), you can provide a benefit right now, reducing estate taxes by lowering the book value of assets. If you were to take your $1 million ranch, for example, assign ownership to a partnership, and then give interests through gifts to your family members, you would effectively lower the taxable value of your estate both from gifting and in creating a “discount” on your remaining interests.

What might someone be willing to pay for your interest in such a limited partnership? If structured well, your interest should have minimal market value. Yet it will allow transfer of the majority ownership in your assets to children and grandchildren while vesting day-to-day control over the assets to you, a general partner who retains just a nominal share.

In addition to tax mitigation, a family limited partnership can help protect your assets against seizure by creditors, including plaintiffs in lawsuits. If structured in accordance with prevailing state law, a limited partnership can effectively circumvent the designs of divorcing spouses, enabling the testator to put into place his or her desired succession plans.

3. Gifting trusts

On top of the estate tax, your heirs could find themselves on the hook for a generation-skipping transfer tax, also known as a "GST tax." The GST tax is currently calculated at a flat rate of 40% – the highest estate and gift tax rate – on transfers above the lifetime GST tax exemption amount, currently $12.06 million per individual but scheduled to grow each year based on inflation through 2025.

The GST kicks in when grandparents directly transfer money or property to their grandchildren or younger descendants without first leaving it to their children. It similarly applies even when the assets are transferred to a trust for your grandchildren’s benefit directly, or as future beneficiaries of trusts created for a child’s lifetime. If you intend to transfer significant asserts down two or more generations, you will want to work with counsel to set up an effective vehicle for bypassing this.

An irrevocable GST trust enables you to make non-taxable gifts during your lifetime, with a 2022 limit of $16,000 per person per year. Not only will this remove the property from your estate, but it allows retained control over those assets compared to outright gifting. Using an irrevocable trust, you can direct your gifts into a common trust for the benefit of all of your beneficiaries and can better invest those funds in a pooled trust so that your gift will grow over time.

Beyond the very real tax benefits provided by such a trust, it also lets you make gifts to your minor heirs without the necessity of setting up custodial or other oversight accounts typically required for minors’ financial protection. The trust provides you with full control over who gets what, when they get it, what they get it for, while facilitating succession planning. It also provides a high degree of asset protection against creditors, similar to a family limited partnership. When there have been previous marriages, previous children and blended families, this can be priceless for strategic estate planning.

During your lifetime, all applicable transfers of wealth that you make are automatically applied to your lifetime GST exemption, unless you elect otherwise. You can make a gift of up to $12.06 million into an irrevocable trust that ultimately distributes assets to your grandchildren, sheltering projected appreciation for future generations.

At your death, the exemption may be allocated as you direct in your will or as your executor directs if discretion is granted in your will. You may leave up to $12.06 million in lifetime trusts for your children. At their deaths, the trust’s $12.06 million, along with any appreciation, passes to your grandchildren without incurring a GST or estate tax.

The Bottom Line

An ounce of prevention is worth a pound of cure. Trusts, estate taxes and the GST are complex concepts subject to ever-changing federal laws, as well as state-specific laws. To ensure the strongest position for your estate and your heirs, work with qualified tax, legal and financial professionals to create and implement your estate plan.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Jack Hales is a founding partner at Hales & Sellers PLLC and is board-certified in Estate Planning and Probate Law. Hales primarily focuses on areas of estate planning and probate, including representation of executors, fiduciaries and beneficiaries in uncontested and contested estate and trust matters.