A comprehensive estate plan is critical. It should be reviewed and updated regularly to reflect your current goals, including family dynamics.
Nonresidents face special estate tax considerations. A qualified domestic trust (QDOT) can help mitigate US federal estate tax rules that are less favorable for nonresidents.
Gifting
The estate tax responsibilities in California are about federal tax on large wealth transfers from one person to another. It is the most progressive federal tax, subsidizing family-held businesses and farms.
Moreover, it reduces the extent to which inheritances concentrate wealth in certain social classes or families. While critics assert that the estate tax significantly reduces savings, labor supply, and entrepreneurship, little evidence supports these claims.
Many strategies exist for reducing potential estate tax liability by transferring assets during an individual’s lifetime. In addition to revocable living trusts, other tools for gifting include charitable trusts and family limited partnerships. The appropriate choice depends on the giver’s goals, the property’s nature, and the recipient’s specific financial circumstances.
People with significant assets need to work closely with their attorneys, accountants, and financial advisors when engaging in this form of wealth transfer. It is also advisable to periodically review plans with these professionals to ensure the current program meets the client’s goals and objectives. Finally, people should be sure that they have a clear understanding of the impact that their decision to gift may have on their potential income tax liability. This is especially important because the lifetime exemption will revert to $5 million per person in 2026.
Charitable Giving
Since the recent tax reform, many donors have re-evaluated their charitable giving strategies. Many are seeking to increase their impact while also reducing taxable income. This can be accomplished by donating appreciated non-cash assets or using techniques like tax-loss harvesting. Donors should talk to their financial and legal advisors to determine which strategies may be right for them.
For those who itemize, annual deduction limits are still in effect for cash and stock/bonds. However, if you plan to donate property worth more than $5,000 ($10,000 for closely held stock), it will require an independent appraisal before claiming the gift for tax purposes.
It is essential to know where your money goes, whether it’s being donated locally or abroad.
Another way to maximize your impact is by making a planned gift, such as a charitable remainder trust (CRT) or a private foundation. These irrevocable vehicles hold various assets and pay annual distributions to you or another beneficiary for a fixed period, after which the remaining assets are donated to a public charity. Depending on your situation, these vehicles can significantly reduce taxable income and increase your gift to U-M.
Trusts
Irrevocable trusts can be practical tools for estate planning, as they move assets out of an individual’s possession and away from their taxable estate at death. This can help ensure that beneficiaries don’t waste their inheritance on excessive expenses and that taxes are paid as they should be.
However, there are some essential things to remember when establishing a trust. First, it’s necessary to select a trustee (or trustee). While it may be tempting to name a family member as a trustee, doing so could create potential conflicts of interest. Instead, an unbiased third party—like a bank or investment firm—may be better suited to the task.
Also, it’s essential to clearly define what assets will go into the trust and how they will be distributed to beneficiaries. This can save heirs from paying unnecessary taxes and provide greater transparency regarding the trust’s assets and liabilities.
In addition, some heirs may be eligible for tax benefits that can be obtained by creating certain charitable trusts. These include a charitable remainder trust and a charitable lead trust, which can be established during life or as part of an estate plan.
Executor or Trustee
As the executor or trustee, the selected individual manages the deceased’s property and handles claims against the estate. They must also distribute assets according to the deceased’s wishes as the will or trust document stipulates.
The executor must also pay the deceased’s debts, including estate administration and funeral expenses. The executor needs to keep meticulous records of all transactions. This helps avoid confusion, misunderstandings, and disputes. Using an estate checking account to make payments and track out-of-pocket expenses is also a good idea.
Larger estates with complex affairs may require professional assistance from an accountant or tax attorney. The complexities of estate tax filings and the potential impact on assets like real estate demand competent advice to ensure that obligations are fulfilled efficiently and correctly.
The executor should facilitate the transition of a business from one person to another, or if the will stipulates that a company should cease operations, work with new management to prepare for their takeover. They should also ensure that any real estate is appropriately secured, maintained, and insured and that any mortgages or property taxes continue to be paid. For trusts that provide a beneficiary with an income, the trustee must manage those investments and ensure that distributions occur as stipulated in the trust document.
