Level 5 Financial Blog

Lifetime Gifting Considerations

Recent increases in the estate tax exemption ($11.7 million per person, indexed for inflation) have allowed many estates to avoid federal estate transfer taxes. Nonetheless, executing gifts during one’s lifetime is still a wise and effective method for transferring ownership of one’s bounty to other individuals or entities. The logic here is for someone to give away property while living and, in doing so, reduce their taxable estate. There can also be non-monetary reasons for gifting, such as the donor reaping the pleasure of seeing the recipient enjoy the gift, and providing for the support, education and welfare of a donee. In addition, planning for change can also be prudent, as the estate tax regime in this country has always been a “political football”. It has been frequently changed at the whims of the politicians in power and the Biden administration has already made several proposals to lower the exemption amount. Even without legislative action, the current threshold is slated to “sunset” in 2026 back to the $5 million (adjusted for inflation) amount that was in effect prior to 2018. Because of this uncertainty, knowledge of the rules related to lifetime gifts can be beneficial.

Income Taxes and Estate Planning

The financial press generates numerous articles about federal estate transfer taxes, often detailing the misadventures regarding the estates of the rich and famous. However, only 1% of estates generate any estate transfer taxes. A working knowledge of the rules applying to possible income taxes, however, is more relevant to many more estates. Parents who are desiring to treat multiple children or heirs equally are sometimes surprised to learn that bequeathing equal dollar amounts will not be equitable after Uncle Sam’s claims are considered.

Irrevocable Life Insurance Trust

The “unholy trinity” is an insurance industry euphemism that describes a problematic circumstance with a life insurance contract. In addition to the insurance company, there are three named parties in the insurance contract. Party #1 is the owner of the insurance policy and this person has numerous rights. They are: (1) the right to name or change the beneficiary, (2) the right to cash in, surrender or cancel a policy, (3) the right to receive policy dividends, if any, (4) the right to borrow against policy cash value, (5) the right to pledge the policy as collateral for a loan, and (6) the right to assign any rights and/or the policy itself and the right to revoke such assignments. Party #2 is the person whose life is being insured and Party #3 is the beneficiary (ies) who receives the death benefit upon the passing of Party #2.

Qualified Disclaimers

Believe it or not, some people may not desire to receive an inheritance. Reasons for this could be many. Perhaps an inheritor is doing very well financially but wants to benefit a less wealthy sibling that may need the assistance. Or, the inheritor may already be in a very high income tax bracket and the required distributions from an inherited IRA will simply amplify their existing tax bill. This later situation may become more commonplace due to the Secure Act’s (see blog posting dated January 20, 2021) elimination of the “stretch IRA strategy” for non-spousal beneficiaries. Beneficiaries could have been designated decades ago and never updated. Yet, the passage of time can certainly affect the financial circumstances of these heirs.

Per Capita vs Per Stirpes

People who are preparing estate planning documents should be aware that these instruments might remain in effect for a lengthy period of time. We live in a dynamic world and circumstances can change over these years. Descendants might be born, pass away or develop cognitive impairments. Due to the possibility of these changes, estate planners often incorporate specific legal terms in drafting wills and other documents. Two of these terms are per stirpes and per capita. Having a good understanding of these two legal concepts can be very helpful in assuring that one’s property is distributed in a manner consistent with one’s wishes.