Estate Planning 102: Beyond the Bare
In my last article, Estate Planning 101: The Basics, we talked about the basic principles of planning your estate and the tools that allow you to shape a stable foundation. Building upon that, today we'll use the same format to list some techniques used to navigate estate tax liabilities, plan for more unique situations, and some of the tools used in the estate planning process to reach your goals. I'm first going to lay out a few important exemption amounts to keep in mind throughout this article that are relevant to the estate planning process. I will focus on my home state of Massachusetts in the scope of state law.
*MA state exemption doubled on October 4th, 2023.
Estate Tax Liability - How is it calculated?
The IRS defines the estate tax as the following:
"The Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death. The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them."
Once you arrive at the amount of your taxable estate, you must account for all gifts given since 1977 that exceeded the annual gift tax exclusion for the year the gift was given. This lowers your estate tax exemption by the amount of those gifts. I will go into more detail about this specifically in the gifting section later, but for now just know that giving away large sums of money at once is not typically an effective way to avoid the federal estate tax.
If your estate (adjusted for those lifetime gifts) does not exceed the estate tax exemption for the year of death, your estate does not require the filing of an estate tax return. As you can imagine, the majority of people aren't required to file one as the exemption for this year is nearly $13 million.
However, some states impose their own estate taxes with varying exemption limits. In Massachusetts, estate tax liability planning is more relevant than most states as it was previously tied for the lowest exemption limit of any state at $1 million. This estate exemption limit just recently doubled in Massachusetts, as Chapter 50 was signed into law on October 4th, 2023.
MOLST: A MOLST, or a medical order for life sustaining treatment, is a particular medical form that is used for patients with illnesses that advance over time. You complete this with your trusted doctor and it details what treatments you would like to receive down the line. Imagine you're just experiencing the onset of dementia and when it's to get worse, you want to avoid or receive a certain treatment or reside in a particular facility. Instead of leaving these wishes to another individual in the form of a health care proxy, you might simply list your preferences on your MOLST for all future health care professionals to follow.
Gifting: Gifting to the people you care about while still living can not only bring you fulfillment and satisfaction, but it can also potentially have substantial tax benefits. Let's first cover how gifting works in the eyes of the IRS, then how this might apply to an estate plan.
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Anyone is allowed to gift up to the annual gift tax exclusion each year to as many people as they choose with no questions asked. Like I noted at the top of this article, that amount in 2023 is $17,000 (in 2022 it was $16,000). So for instance: as a single grandparent, you can give each of your five grandchildren $17,000 this year without worrying about paperwork or taxes. However, when your gifts to an individual in a single year exceed this annual exclusion amount, you must file a form 709 with the IRS that takes note of the gift. Later upon your passing, these substantial gifts are noted against your total estate/gift tax exemption. So if you gifted one grandchild $25,000 this year, $8,000, or the difference from the annual exemption, would be taken from your total estate exemption limit. This is to prevent individuals from giving away all their assets prior to their death in order to avoid estate taxes altogether. However, some high net-worth individuals consider taking full advantage of the annual exclusion to lower their taxable estate throughout the later years of their life.
Charitable Giving: Charitable giving, beyond the obvious philanthropic benefits, can also have some major benefits toward tax liability, both while living and for your estate. I won't go into detail here as I'll be writing a whole article on this topic early next year, but I will list some tools used to meet this end.
Family Business Succession: There are many different strategies used to facilitate the management and transfer of a business or real estate. One such arrangement is a family limited partnership, or FLP, which can allow family members to transfer many forms of wealth held through the business tax-free. A cross-purchase agreement is another form of business succession in which co-owners of a business agree to purchase the other's interest upon a triggering event, namely one owner's death in the context of this article.
Long-term care insurance: Long-term care insurance, or LTC as it's often known, is a form of insurance that offers financial protection against the high costs of long-term care services such as nursing home residence, at-home medical care, or assisted living facilities. The premiums on these types of policies seem high to many consumers and many opt to self-insure because of that. However, the total impact on one's finances are generally not considered fully when making this decision. Let's imagine for a moment that you have saved diligently your whole life even with the consideration that you will self-insure for the costs of long-term care. The median cost of a semi-private room in a Massachusetts nursing home was $12,623 per month in 2021, according to the Genworth Cost of Care Survey. With the hefty rate at which the cost of these services inflate, you can imagine how much it will cost if you don't require these services until 2050 or beyond. Long-term care costs quickly erode into the savings of those that opt to self-insure, especially for those without dependents to assist them or those who may need extended care. For this reason, LTC insurance is often a vital component for those creating a comprehensive and sound financial plan.
Life Insurance: People buy life insurance for many reasons: to ensure the financial stability of their family if something were to happen to them, to cover key employees of their business, to cover final expenses upon their death, or even to leave a legacy for others. Life insurance proceeds (outside of earned interest) paid to the beneficiary are not taxable, often to the surprise of consumers. One strategy surrounding estate planning is for those who find themselves wanting to leave something for their children but are not themselves great savers. In a case like this, you might consider using certain types of permanent life policies as a way to 'finance' a larger lump sum to your beneficiaries. For some, paying a monthly premium is easier to manage than handling a large accrual over time, and in return the insurance company will pay out those proceeds upon your death. An ILIT, or irrevocable life insurance trust, can even hold your life policy outside your own taxable estate. Speaking of trusts...
Trusts: Trusts are legal entities formed under state law in which one person or entity holds title to property, subject to an obligation to keep or use the property for the benefit of another. There are several different types of trusts that are used for a wide variety of things; Even just in the context of estate planning there are several different situations where trusts can be helpful. Below I'll list some of these cases; just know that trusts are complex and an entire paper could be written about each of these cases in itself - a lawyer should always be consulted:
Estate Planning can be a complex journey. If you're ready to take the next step in securing the future for your legacy and loved ones that's tailored to your individual goals, feel free to contact me. I enjoy going on this journey with my clients and giving them confidence in their affairs. At Dowd Wealth Management, it is our mission to aggressively ensure fair and ethical treatment of our clients’ interests in each and every circumstance, without exception.
Please Note: The contents of this article are for educational purposes only and should not be considered legal, tax, or financial advice. Everyone's situation is unique to them and you should always consult with your respective professionals before taking action.
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