Category: Gift Tax

Get a Life Insurance Check-up to Be Sure the Prognosis Is Good

Insurance planning shouldn't begin until there's been some financial planning, according to CNBC in its article “3 life insurance mistakes you can easily avoid.” They cite three common mistakes that can be easily avoided or fixed: 11-03-2016

  1. Not enough insurance. About 37% of parents with young children don't have sufficient life insurance, according to a 2015 report. Of those who do have insurance, 50% have less than $100,000 in coverage. Do a thorough analysis of your life insurance needs to be sure you’ve enough to cover funeral expenses, replace your income for the family and cover debts like the mortgage.
  2. Not reviewing your medical records. You should ask for a copy of your medical records from your primary care physician before applying for life insurance because the insurers will get those records, as well. They’ll look at your medical history to gauge risk and determine rates. There could be potentially costly mistakes in the record that should be fixed.
  3. Focusing on avoiding estate taxes. You may have your spouse own the life insurance policy on you so that you can be smart with your estate planning. Since you don't own the policy, it won't be included in your estate when you die. However, what’s known as "three-corner life insurance"—where the owner, insured and beneficiary are all different is to be avoided.

This three-corner configuration has the effect of transforming the policy proceeds into a gift from the policy owner to the beneficiary but anything above the annual $14,000 annual gift tax exclusion would be considered a taxable gift to the owner. That would decrease his or her annual lifetime exclusion.

Reference: CNBC (Sept. 16, 2016) “3 life insurance mistakes you can easily avoid”

The 411 on the Generation-Skipping Trust

The estate tax impacts just a small number of Americans, but those who are affected have a heavy burden. At the tax rate of 40%, estate tax is onerous enough to make efforts to avoid at all costs, especially those who intend to leave assets to grandchildren or younger heirs with generation-skipping trusts, GST trusts, or dynasty trusts. They will need to address the added burden of generation-skipping transfer tax. Generation-skipping trusts can incur this tax, but if they are established properly with the help of an experienced trust attorney, they can allow you to sidestep tax liability. 10-07-2016

The Motley Fool’s recent article, “Do You Need a Generation-Skipping Trust?,” explains what a generation-skipping trust is and how it works.

Generation-skipping trusts involve skipping a generation in planning your estate. Most people leave their assets to a surviving spouse, and then to their children. In generation-skipping trust, assets go directly to grandchildren, great-grandchildren, or other young descendants, who are known collectively as "skip persons."

The simplest generation-skipping trust is one that involves just grandchildren as the eligible beneficiaries, but a common generation-skipping trust involves multiple generations of beneficiaries. It can take years or even decades before grandchildren and other skip persons become eligible to receive trust distributions.

Generation-skipping trusts go through a second level of taxes beyond gift and estate taxes. The 40% tax rate is applied in addition to any regular estate taxes to ensure that the assets see two rounds of taxation as they go down two or more generations. This is consistent with what would happen if the assets were first given to children and then passed to grandchildren at the child's death. Your estate planning attorney can structure a generation-skipping trust to make use of the lifetime exemption that applies to the generation-skipping transfer tax.

You can fund a generation-skipping trust with up to $5.45 million and allocate your lifetime exemption to the trust to avoid future GST tax liability. Once the trust is funded and the exemption applied, any future appreciation in trust assets is allocated to the trust beneficiaries directly. If it’s an irrevocable trust, you won't have to pay GST tax even if the value of the trust assets increase after your gift is complete.

Along with the lifetime exemption, you can make annual exclusion gifts to skip persons without incurring the GST tax. The maximum annual gift is $14,000, and gifts can be made to as many different grandchildren, great-grandchildren or others as you wish.

GST are complex, as well as the taxes that go along with them. Speak with an experienced trust attorney to set up a trust and take best advantage of the generation-skipping transfer tax lifetime exemption.

Reference: Motley Fool (August 17, 2016) “Do You Need a Generation-Skipping Trust?”