Business Planning | Exit Strategy Planning | Huntington Beach CA | Susan Katzen

SPECIAL STRATEGIES FOR SPECIAL SITUATIONS

Standard estate planning strategies don’t fit every situation. Single people, unmarried couples, noncitizen spouses, individuals planning a second marriage and grandparents are among those who might benefit from less common techniques. In this section, we look at several special situations and estate planning ideas that may apply to them.

Singles
For single people, the repeal of the estate tax is especially helpful because it eliminates (at least temporarily) the disadvantage of not having the unlimited marital deduction, which allows a spouse to leave assets to a surviving spouse’s estate tax free. But a will or a living trust can ensure that your loved ones receive your legacy in the manner you desire. In addition, with the use of trusts, you can provide financial management assistance to your heirs who are not prepared for this responsibility.

Second marriages
Estate planning for the second marriage can be complicated, especially when children from a prior marriage are involved. Finding the right planning technique for your situation can not only ease family tensions but also help you pass more assets to the children at a lower tax cost.

A QTIP marital trust can maximize estate tax deferral while benefiting the surviving spouse for his or her lifetime and the children after the spouse’s death. Combining a QTIP with life insurance benefiting the children or creatively using joint gifts or GST tax exemptions can further leverage your gifting ability. (Turn back to page 12 for more on QTIP trusts.)

A prenuptial agreement can also help you achieve your estate planning goals. But any of these strategies must be tailored to your particular situation, and the help of qualified financial, tax and legal advisors is essential.

Unmarried couples
Because unmarried couples are not granted rights automatically by law, they need to create a legal relationship with a domestic partnership agreement. Such a contract can solidify the couple’s handling of estate planning issues. In addition, without the benefit of the marital deduction, unmarried couples face a potentially overwhelming estate tax burden as long as the estate tax is in effect.

There are solutions, however. One partner can reduce his or her estate and ultimate tax burden through a traditional annual gifting program or by creating an irrevocable life insurance trust or a charitable remainder trust benefiting the other partner. Again, these strategies are complex and require the advice of financial, tax and legal professionals.

Noncitizen spouses
The marital deduction differs for a non-U.S. citizen surviving spouse. The government is concerned that, on your death, your spouse could take the marital bequest tax free and then leave U.S. jurisdiction without the property ever being taxed.

Thus, the marital deduction is allowed only if the assets are transferred to a qualified domestic trust (QDOT) that meets special requirements. The impact of the marital deduction is dramatically different because any principal distributions from a QDOT to the noncitizen spouse and assets remaining in the QDOT at his or her death will be taxed as if they were in the citizen spouse’s estate. Also note that the gift tax marital deduction (for noncitizen spouses) is limited to a set amount annually.

Grandparents
You may be one of the lucky ones who is not only financially well-off yourself, but whose children are also financially set for life. The downside of this is that they also face the prospect of high taxes on their estates. You may also want to ensure that future generations of your heirs benefit from your prosperity. To reduce taxes and maximize your gifting abilities, consider skipping a generation with some of your bequests and gifts.

But your use of this strategy is limited. The law assesses a GST tax equal to the top estate tax rate (see Chart 1 on page 8) on transfers to a “skip person,” over and above the gift or estate tax. Keep in mind that this tax is being repealed along with the estate tax. A skip person is anyone more than one generation below you, such as a grandchild or an unrelated person more than 371⁄2 years younger than you.

Fortunately, there is a GST tax exemption, which this year equals the estate tax exemption of $2 million. (Also see Chart 1.) Each spouse has this exemption, so a married couple can use double the exemption. If you exceed the limit, an extra tax equal to the top estate tax rate is applied to the transfer — over and above the normal gift or estate tax.

Outright gifts to skip persons that qualify for the annual exclusion are generally exempt from the GST tax. A gift or bequest to a grandchild whose parent has died before the transfer is not treated as a GST.

Taking advantage of the GST tax exemption can keep more of your assets in the family. By skipping your children, the family may save substantial estate taxes on assets up to double the exemption amount (if you are married), plus the future income and appreciation on the assets transferred. (See Case study VI.) Even greater savings can accumulate if you use the exemption during your life in the form of gifts.

If maximizing tax savings is your goal, consider a “dynasty trust.” The trust is an extension of this GST concept. But whereas the previous strategy would result in the assets being included in the grandchildren’s taxable estates, the dynasty trust allows assets to skip several generations of taxation.

Simply put, you create the trust either during your lifetime by making gifts or at death in the form of bequests. The trust remains in existence from generation to generation. Because the heirs have restrictions on their access to the trust funds, the trust is sheltered from estate taxes. If any of the heirs have a real need for funds, the trust can make distributions to them.