Kansas and Missouri Estate Planning

How can I Avoid* or Minimize Estate Taxes?

Excellent question. However, unless you have more than $5.43 million as a single individual or $10.86 million as a married couple, then (under current law) you need not worry about federal estate taxes.

If you are still reading this blog post because your estate would be subject to estate taxes or you are just intellectually curious, then you may be interested in what The Motley Fool had to say on this subject in a recent article titled “3 Smart Strategies Designed to Reduce or Eliminate Estate Taxes.”

While you will want to click over to the original article, here is a quick look at these three strategies.

Annual Gift Exclusion.

For starters, consider giving while you are living so you are knowing where it is going.

It can be fun and informative to actually see your generosity at work while you are still alive to see your loved ones enjoy it.

In fact, I got a little granular on this very subject in a post but a few days ago.

One of the charms and attractive features of this strategy is just how simple it is.

Unless you exceed the applicable annual gift exclusion amounts (click over to that blog post I mentioned), then no attorney or other professional assistance is required.

 

Benefit: Every dollar you give now while you are alive reduces the value of your estate when you are not.

Qualified Personal Residence Trust (QPRT).

Oftentimes a home is one of the largest assets in an estate, especially if you life in a state with high housing prices.

As a result, creating a QPRT is worth considering.

Basically, you transfer your home into a QPRT, establish how long the trust is to last, and who will inherit your home when the trust ends.

You get to reside in the home throughout the time period you establish, but must continue paying real estate taxes and insurance. 

What about when the trust ends?

You may continue living in the home, but will need to pay rent to the trust beneficiaries at fair market value.

While it may seem off-putting to think of "renting" your own home, remember that this even enhances the amount of wealth your are transferring to your loved ones instead of the IRS.

That epiphany itself ought to make you smile.

As you can imagine, creating a QPRT is not a do-it-yourself project and there are more moving parts involved than I noted.

Be sure to engage an experienced estate planning attorney.

State Estate Taxes.

You may have rubbed your eyes when you read this third strategy.

No, you read that correctly.

Although the threshold for federal estate taxes excludes most taxpayers, about 15 states and the District of Columbia apparently did not get the memo.

Every state can have a different minimum and maximum tax threshold and differing exemptions.

So, what should you do? 

If you live in one of these jurisdictions with an estate tax, then you should consider moving or consult an experienced estate planning attorney to help you avoid or minimize the tax hit.

* The difference between tax "avoidance" and tax "evasion" is about 20 years in Leavenworth.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there. 

Reference: The Motley Fool (October 3, 2015) “3 Smart Strategies Designed to Reduce or Eliminate Estate Taxes”

Reconsidering the Venerable QPRT?

If your estate is presently below $5.43 million as a single person or is presently below $10.86 million as a married couple, then this blog post may not be of interest to you.

On the other hand, are you even a little bit curious to peek behind the curtain for a backstage glimpse at some estate planning "tax minimization magic" we use for taxpayers who still have estate taxable estates?

Pssst!

The best seats are down front.

Generally speaking, a "Qualified Personal Interest Trust," a QPRT, permits taxpayers to continue residing in their homes while ultimately transferring their homes to loved ones at the lowest possible tax cost.

This was the subject of a recent article in Accounting Today titled “Home Transfers to Children Can Work for Estate Planning if Done the Right Way.”

As the article notes, the main reason an individual would want a QPRT when his or her home is a significant part of the estate and the home is expected to really appreciate in the future. 

And with the estate tax exemption $5.43 million per taxpayer, the home will have to be a significant part of the estate or there will have to be other estate assets (read "family business") that likely could kick the estate above the estate exemption level.

While the best time in recent memory to have created a QPRT may have been in 2008 or 2009, the article advises reconsidering a QPRT now.

Why?

Apparently, we are recovering (somewhat) from a dismal real estate environment. Naturally, some areas of the country will be more attractive for a QPRT than others. 

Here is how it works:

First, the grantor/owner (or owners) of the trust chooses how long the trust will last and who will ultimately inherit it.

The current grantor/owner(s) retains a lifetime interest in the property through the trust until the death of the grantor/owner(s).

Second, upon the death of the grantor/owner(s), the home passes under the trust to its beneficiaries. These are usually children or grandchildren of the grantor/owner(s).

Third, the IRS, for its part, determines the value of the "lifetime" and "remainder" interests based on the applicable federal rates.

This calculus is what determines the value of the gift for wealth transfer purposes.

But wait, there is more:

For the QPRT to work as intended, the grantor/owner(s) must outlive the term of the trust ... or the home value is added back into the estate as if the transaction never happened.

Yikes!

Consequently, the grantor/owner(s) needs to select a term the grantor/owner(s) anticipates outliving.

So, what is the rub?

The shorter the trust term the smaller the wealth transfer tax planning. And the opposite is true the longer the trust term.

Bottom line: The QPRT term should be set just shy of the number of years the grantor/owner(s) expects to live. Naturally, the term will hinge in large part on the grantor/owner(s) age, health conditions and family history.

It may be tough to fool the gene pool, but talk about an incentive to get off of the couch!

Consequently, a QPRT may be just the incentive you need to adopt a GoyaAsma attitude and lifestyle.

If you are interested in learning more about how a QPRT may benefit you and yours, contact an experienced estate planning attorney.

As with all estate planning worth planning, this is not a do-it-yourself project project.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri) and to download free tools to help you organize your estate, visit my estate planning website. 

Reference: Accounting Today (May 14, 2015) “Home Transfers to Children Can Work for Estate Planning if Done the Right Way”

Estate Planning "Clinton-Style"

Much has been written of late regarding Bill and Hillary Clinton and their wealth (or lack thereof?). That issue aside, the Clintons used a qualified personal residence trust (a QPRT for short), as part of their estate tax planning.

While QPRTs are complicated trusts, the basics of what they do and why are easy to understand.

Basically, a QPRT is created with a predetermined time limit and ownership of the residence is transferred to that trust. The value of the residence is fixed for gift tax purposes on the date ownership is transferred.

When the time limit of the trust runs out, the trust is terminated and ownership of the residence passes to a beneficiary designated in the trust. In the case of Bill and Hillary, that beneficiary is presumably Chelsea Clinton.

For tax purposes, this transfer is then seen as a gift and, when the Clintons pass away, the residence will not be part of their estate for estate tax purposes.

However, there are some potential drawbacks to the use of a QPRT.

These drawbacks were addressed in a recent Motley Fool article titled “QPRT: This Tax Strategy Could Save Bill and Hilary Clinton (and You) Big Money.”

 For example, when the QPRT time limit expires, the Clintons will no longer own the residence. If they continue living in it after that, then they will have to pay fair market rent to the new owner. Additionally, if the Clintons pass away before the trust runs out, the trust will be destroyed and treated as if it never existed for estate tax purposes. [Think Jimmy Stewart as George Bailey in the last half of the Christmas classic "It's A Wonderful Life."]

Not everyone needs a QPRT and not everyone has enough assets to worry about estate taxes. However, for those who do have enough assets, a QPRT is one vehicle that can be used to lower the estate tax burden on their heirs.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri) and to download free tools to help you organize your estate, visit my estate planning website.

Reference: Motley Fool (June 21, 2014) “QPRT: This Tax Strategy Could Save Bill and Hilary Clinton (and You) Big Money”