Estate Planning for a Mid-Size Estate ($1 - $5 million)
The Family/Disclaimer Trust
Methods of Reducing Taxable Estate
We are in a period of flux with regard to
death tax planning which makes planning for the mid-size estate
extremely difficult. The small estate can disregard death
tax planning and focus on the more personal aspects of estate
planning, and the large estate can continue to take full advantage
of the myriad tax planning vehicles, but planning for the
mid-size estate involves a significant degree of uncertainty.
Under the Economic Growth and Tax Relief Reconciliation Act
of 2001, the estate tax will be phased out over the next several
years, repealed entirely in 2010, but then reinstated at its
present levels in 2011. The following tables show the impact
of the Act for selected years on estates of $2,000,000 and
$5,000,000, and assumes that both spouses die in the same
year and that their estate plan consists of a Family Trust
consisting of property with a total value equal to the then
estate tax exemption and a bequest upon the first death to
the surviving spouse of the remainder of the estate. Utilizing
the exemption amount and the marital deduction, there would
be no estate tax due until the death of the surviving spouse.
However, because the exemption amount continues to increase,
it could have the unintended result of disinheriting the surviving
spouse.
 |
|
|
|
$2,000,000 ESTATE |
|
|
Year |
|
Family Trust |
|
Marital Gift |
|
Estate Tax at Death of Surviving Spouse
|
|
2001 |
$675,000 |
$1,325,000 |
$260,000 |
|
2002 |
$1,000,000 |
$1,000,000 |
-0- |
|
2004 |
$1,500,000 |
$500,000 |
-0- |
|
2006-2010 |
$2,000,000 |
-0- |
-0- |
|
2011 |
$1,000,000 |
$1,000,000 |
-0- |
|
|
|
$5,000,000 ESTATE |
|
|
|
Year |
|
Family Trust |
|
Marital Gift |
|
Estate Tax at Death of Surviving Spouse
|
|
2001 |
$675,000 |
$4,325,000 |
$1,799,000 |
|
2002 |
$1,000,000 |
$4,000,000 |
$1,430,000 |
|
2004 |
$1,500,000 |
$3,500,000 |
$945,000 |
|
2006 |
$2,000,000 |
$3,000,000 |
$460,000 |
|
2009 |
$3,500,000 |
$1,500,000 |
-0- |
|
2010 |
$5,000,000 |
-0- |
-0- |
|
2011 |
$1,000,000 |
$4,000,000 |
$1,495,000 |
|
The Family/Disclaimer Trust
In mid-size to large estates, a typical estate plan will
use a formula designed to take maximum advantage of the
estate and generation skipping transfer tax exemptions but,
as the above table illustrates, a change in the exemption
can dramatically alter the results of the formula with possible
unforeseen and unintended results. Accordingly, the inability
to ascertain the tax consequences without knowing the year
of death makes it advisable to build flexibility into the
estate plan, and the best way to accomplish this is by using
a disclaimer estate plan.
A disclaimer estate plan passes everything to the surviving
spouse (either outright or in a Marital Trust) and creates
a Family Trust for the benefit of the surviving spouse and
children which will be funded only if the survivor disclaims
all or a portion of the marital bequest.
The benefit of this type of estate plan is that it permits
the survivor and his/her advisors to make tax planning decisions
following the first death when all of the relevant facts
are known.
Methods of Reducing Taxable Estate
In addition to the above method of taking maximum advantage
of the estate tax exemption, the size of your estate can
be reduced by the following fairly simple methods (see section
on planning for large estates for more sophisticated methods
of minimizing taxable estates).
-
Tax-free gifts to spouse to equalize spouse’s
estates or classify all property as marital property.
-
Annual gifts of $10,000 ($20,000 for a married couple)
to each child, grandchild (can be outright or in a qualifying
minor’s trust), or other individual.
-
Direct payment of tuition and medical expenses for
children and/or grandchildren.
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