Finding the strategies for your unique circumstances
Standard estate planning strategies don’t fit every situation. Planning for single people, subsequent marriages, unmarried couples, noncitizen spouses and grandparents may require special strategies.
Singles
Single people with large estates may be at a disadvantage because they don’t have the unlimited marital deduction, which allows a spouse to leave assets to a surviving spouse estate-tax-free. But trusts can help reduce taxes and ensure that your loved ones receive your legacy in the manner you desire.
Unmarried couples
Because unmarried couples aren’t 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, unmarried couples don’t have the benefit of the marital deduction. 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 ILIT or a CRT to benefit the other partner. Again, these strategies are complex and require the advice of financial, tax and legal professionals.
Same-sex married couples
Estate planning became considerably easier for same-sex married couples after the June 2015 U.S. Supreme Court decision Obergefell v. Hodges. The Court ruled that same-sex couples have a constitutional right to marry, making same-sex marriage legal in all 50 states.
Before the ruling, couples who resided in states that didn't recognize same-sex marriage may have had to implement strategies for unmarried couples in order to achieve their estate planning goals. Same-sex married couples can now enjoy the same estate planning opportunities as opposite-sex married couples, such as the marital deduction, for both federal and state purposes, regardless of where they reside.
Same-sex married couples who live in states where their unions haven’t been recognized until now should revisit their estate plans in light of the Court's ruling to ensure they’re taking advantage of all of the opportunities now available to them as married couples.
Noncitizen spouses
The marital deduction differs for a non-U.S. citizen surviving spouse. Why? Because the government is concerned that he or she 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 exclusion for gifts to noncitizen spouses is limited to a set amount annually. For 2016, the exclusion is $148,000.
Subsequent marriages
Estate planning for subsequent marriages can be complicated, especially when children from a prior marriage are involved. Finding the right planning technique for your situation not only can help ease family tensions but also help you pass more assets to the children at a lower tax cost.
A QTIP 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 trust with life insurance benefiting the children or creatively using joint gifts can further leverage your gifting ability.
A prenuptial agreement can also help you achieve your estate planning goals. But to hold up in court, certain legal requirements must be met. So consulting an attorney is essential.
Grandparents
If your children also face the prospect of high taxes on their estates, consider skipping a generation with some of your bequests and gifts.
But beware of the GST tax, which applies to transfers to a “skip person” — generally anyone more than one generation below you, such as a grandchild or an unrelated person more than 37½ years younger than you. Note, however, that a gift or bequest to a grandchild whose parent has died before the transfer is not treated as a GST. Also, gifts that qualify for the annual exclusion are generally exempt from the GST tax.
The GST tax rate is the same as the top estate tax rate. (See the Chart “Generation-skipping transfer tax exemptions and rates.”)
Fortunately, there’s a GST tax exemption. As with the gift and estate tax exemptions, the GST tax exemption has been increased to $5.45 million for 2016. (Also see the Chart “Generation-skipping transfer tax exemptions and rates.”)
Each spouse has this exemption, so a married couple can use double the exemption. Warning: The GST tax exemption isn’t portable between spouses.
Once you’ve used up your GST tax exemption, additional transfers (whether gifts or bequests) that aren’t otherwise exempt will be subject to the GST tax — in addition to any applicable gift or estate tax.
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’re married), plus the future income and appreciation on the assets transferred.
Even greater savings can accumulate if you use the exemption during your life in the form of gifts. If you can afford to do so without compromising your own financial security, you may want to use up some or all of your $5.43 million GST tax exemption on lifetime gifts to your grandchildren or other loved ones more than a generation below you. Warning: If you want to avoid all taxes on the transfers, you’ll also have to use up an equal amount of your gift tax exemption.
If maximizing tax savings is your goal, you may also want to consider a “dynasty trust.” Rather than the assets being included in the grandchildren’s taxable estates, the dynasty trust allows assets to skip several generations of taxation. This is available only in jurisdictions that have abolished the “rule against perpetuities.” (Talk with your estate planning advisor for more information on how this rule might affect your estate plan.)
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. And, 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 need for funds, the trust can make distributions to them. (See the Case Study “Dynasty trust provides many benefits.”) •
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