Perspective | Vol. 1 Issue 1 | Fall 2021

Women and Wealth continued...

make annual tax-free gifts of up to $30,000 per recipient. You can also make tax-free gifts for qualifying expenses paid directly to educational or medical services providers. A basic exclusion amount protects a total of up to $11,700,000 (in 2021) from gift tax and estate tax. Federal Estate Tax The property you own at death is subject to federal estate tax. You can make deductible transfers to charity, and there is a basic exclusion amount that protects up to $11,700,000 (in 2021) from tax. Because the current estate exemption is so large, very few people are subject to federal estate tax. Portability The estate of someone who dies in 2011 or later can elect to transfer any unused applicable exclusion amount to their surviving spouse (a concept referred to as portability). The surviving spouse can use this deceased spousal unused exclusion amount (DSUEA), along with the surviving spouse’s basic exclusion amount, for federal gift and estate tax purposes. For example, suppose someone died in 2011, and the estate elected to transfer $5,000,000 of the unused exclusion to the surviving spouse. In that case, the surviving spouse effectively has an applicable exclusion amount of about $16,700,000 ($11,700,000 basic exclusion amount plus $5,000,000 DSUEA) to shelter transfers from federal gift or estate tax in 2021. Federal Generation-Skipping Transfer (GST) Tax The federal GST tax generally applies if you transfer property to a person two or more generations younger than you (for example, a grandchild). The GST tax may apply in addition to any gift or estate tax. Similar to the gift tax provisions above, annual exclusions and exclusions for qualifying educational and medical expenses are available for GST tax. You can protect up to $11,700,000 (in 2021) with the GST tax exemption. Indexing for Inflation The annual gift tax exclusion, the gift tax, estate tax basic exclusion amount, and the GST tax exemption are all indexed for inflation and may increase in future years.

Income Tax Basis Generally, suppose you give property during your life. In that case, your basis (generally, what you paid for the property, with certain up or down adjustments) in the property for federal income tax purposes is carried over to the person who receives the gift. So, if you give your $1 million home that you purchased for $50,000 to your brother, your $50,000 basis carries over to your brother—if he sells the house immediately, income tax will be due on the resulting gain. In contrast, if you leave property to your heirs at death, they get a “stepped-up” (or “stepped-down”) basis in the property equal to the property’s fair market value at the time of your death. So, if the home that you purchased for $50,000 is worth $1 million when you die, your heirs get the property with a basis of $1 million. If they then sell the home for $1 million, they pay no federal income tax. Lifetime Giving Making gifts during one’s life is a common estate planning strategy that can also minimize transfer taxes. One way to do this is to take advantage of the annual gift tax exclusion, which lets you give up to $15,000 (in 2021) to as many individuals as you want tax-free. As noted above, you can take advantage of several other gift tax exclusions and deductions. In addition, when you gift property that is expected to appreciate, you remove the future appreciation from your taxable estate. In some cases, it may even make sense to make taxable gifts to remove the gift tax from your taxable estate as well. Trusts There are several types of trusts that are often used in estate planning. Here is a quick look at a few of them. Revocable Trust You retain the right to change or revoke a revocable trust. A revocable trust provides for the management of your property in case of your incapacity and avoids probate at your death. Credit Shelter (Bypass, Family or “B” Trust) Trust A credit shelter trust (CST) is a trust created after the

death of the first spouse in a married couple. Assets placed in the trust are generally held apart from the surviving spouse’s estate so that they may pass tax-free to the remaining beneficiaries at the death of the surviving spouse. The assets held in the CST can benefit the surviving spouse during their lifetime. Grantor Retained Annuity Trust (GRAT) You retain a right to a fixed stream of annuity payments for a predetermined number of years, after which the remainder passes to your beneficiaries, such as your children. Your gift of a remainder interest is discounted for gift tax purposes. Charitable Remainder Unitrust (CRUT) You retain a stream of payments for a number of years (or for life), after which the remainder passes to charity. You receive a current charitable deduction for the gift of the remainder interest. Charitable Lead Annuity Trust (CLAT) A fixed stream of annuity payments benefits a charity for a term of years, after which the remainder passes to your noncharitable beneficiaries, such as your children. Your gift of a remainder interest is discounted for gift tax purposes. Life Insurance Life insurance plays a part in many estate plans. Life insurance may create the estate in a small estate and be the primary financial resource for your surviving family members. Life insurance can also be used to provide liquidity for your estate, for example, by providing the cash to pay final expenses, outstanding debts, and taxes so that other assets do not have to be liquidated to pay these expenses. Life insurance proceeds can generally be received income tax–free. Life insurance that you own on your own life will generally be included in your gross estate for federal estate tax purposes. However, using an irrevocable life insurance trust (ILIT) to keep the life insurance proceeds out of your gross estate is possible. With an ILIT, you create an irrevocable trust that buys and owns the life insurance policy. You make cash gifts to the trust, which the trust uses to pay the policy

premiums. (The trust beneficiaries are offered a limited period to withdraw the cash gifts.) If appropriately structured, the trust receives the life insurance proceeds when you die, tax-free, and distributes the funds according to the terms of the trust. It is essential to know that women tend to outlive men by five years or more because that means there is a greater chance that you will need your assets to last for a longer period of time. Keep this in mind when you are mapping out your estate plan and consider things such as making lifetime gifts. Any property you give away is no longer available to you.

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PERSPECTIVE Fall 2021 21

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