Estate Planning: Get it Right

Estate Planning is an organized process of transferring a person’s wealth or assets to beneficiaries, after his/her death. Estate Planning goes beyond creating a will or a trust. There are various Federal and State taxes that have a direct implication on Estate Planning, both during a person’s lifetime, and thereafter upon his/her death. If these are not accounted for, beneficiaries may have to pay large sums as Estate Tax, and these diminish the value of the inheritance.

Further, Estate Planning is closely tied to Retirement Planning. To ensure fewer compromises on your lifestyle, you must plan your investment in Life Insurance and other instruments in such a way that they reduce your tax burden after Retirement and the taxable value of your Estate after your death. An Insurance Agent or Investment Advisor who has adequate knowledge of these implications is best suited to advise you on Estate Planning. 

Most implications center on:        
   a. How your Life Insurance product is configured? 
b. How Gift Tax can be used to reduce Estate Tax?
a. Planning your Life Insurance 
Life Insurance policies are some of the assets that beneficiaries can inherit after a person’s death. Beneficiaries do not have to pay Income tax on the proceeds of Insurance Policies they inherit. However, these proceeds are added to the Net value of the Estate and are eligible for Estate Tax. Gifting the Insurance Policy to beneficiaries during your lifetime is also not an option. In case a person dies within three years of gifting the policy, Federal Estate Taxes still apply. 
A better option is to place your policy in an Irrevocable Life Insurance Trust (ILIT). This ensures premiums on the policy are paid on time,as long as you are alive. One of the beneficiaries can be a trustee, and monitor the functioning of the trust. 
b. Leveraging the relation between Gift Tax and Estate Tax  
Not all assets need be inherited by the beneficiaries after your death. Some of them may be gifted to beneficiaries during your lifetime, as long as the gift value does not exceed the gift tax exclusion limit for that year. This reduces the overall taxable value of the estate, and is beneficial to both parties.

The Gift Tax exclusion limit can be used to pay medical and educational expenses of beneficiaries on their behalf. You can gift up to USD 14000 per year towards such expenses, without incurring gift taxand additionally, up to USD 5.43 million across your lifetime without incurring Federal Estate Tax. This means, between you and your spouse, you can gift as much as USD 10.86 million across your lifetimes, without incurring Federal Estate Tax.

Land as an Asset: If the person or his/her beneficiaries do not wish to develop land owned by him/her, it could be donated to a non-for-profit organization. This reduces the income and estate taxes that must be paid by the beneficiaries.

Estate Planning is complex, time-consuming, and must be reviewed periodically. This is required due to changes in one’s health or financial situation. Further, Federal and State Taxes change with time, and not being aware of them can expose beneficiaries to unnecessary hassle or expenses.

To plan for a hassle free bequeathing of your estate, consult an insurance agent or broker, who with their foreknowledge and expertise, can work closely with you and your beneficiaries to understand your desires, and resolve any conflicts that may arise. They will also prepare, and maintain all legal documentation required for a smooth and hassle-free ‘probate’ process (execution of the will). All these go a long way in ensuring peace of mind during your lifetime, and goodwill thereafter.


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