The estate plan is intended to reduce the amount of both federal and state tax payable on the gross estate of the clients. The estate plan seeks to develop efficient gifting plans by the clients to specific beneficiaries and effectively reduce the amount of tax that is payable from the gifting plans to the minimum. The estate plan should enable Rich distribute his estate to all his beneficiaries without any conflict of interest arising from the remarriage of his wife after his death.
The estate plan seeks to revise the client’s will to be more effective and efficient in the distribution of then client’s estate after his death. The funding of the client’s daughter’s education for the next five years from the client’s estate while maintaining a minimum tax liability is an objective of the plan. The client also wants to integrate into his estate plans effective and efficient means of assisting his sister and her family through his estate.
Facts of the case
Henry and Harriet, Rich’s parents, made annual gifts to each of their children up to the allowable annual exclusions up to the year 2004 when in addition to these annual gifts, a taxable gift of $1.0 million was made to the children and the normal tax returns filed for the gift.
Henry died in 2008 and the balance of the will went to his spouse who received a estate amounting to $10 million.
Harriet died in 2011 and left in her will an estate of $ 15 million split between her two children. On the per capita basis, each of the children received $ 7.5 million.
Rich owns a construction company estimated to have a current value of $ 7 million and which has estimated annual earnings of $ 250,000. Rich earns an annual salary of $ 200,000 from the company. The company is expected to grow at a rate of between 10% and 15% in the next 7 or 8 years.
Rich estimates that he and his wife will need $300,000 to life comfortably after retirement.
Probate and non probate assets
Probate assets are those real and personal property that an individual owns either as a single owner or jointly with another individual in a tenancy in common and which contain no provision for automatic succession of ownership at the death of the owner. Non probate assets are those assets owned by an individual which do not require a court process in their administration after the death of the decedent. Non probate assets usually have an identified beneficiary and their ownership is transferred to the beneficiary at the death of the individual who owned the asset. Some types of probate assets are tax exempt; others are taxed at a rate lower than the normal rate of taxation for inherited estates while others are taxed fully. In the case of Rich, non probate assets have more advantages than probate taxes. By having his assets probate, Rich should be able to allocate his assets specifically to his beneficiaries as he deems correct, and since the ownership of assets transfers to the beneficiary upon the death of the owner of the asset, any conflicts that may arise because of leaving probate assets at death will be eliminated. Non probate asset cannot be claimed by the creditors of the decedent, and thus the lengthy and costly process of administration of the probate assets between beneficiaries and creditors is avoided.
Documents other than the will that can be used
There are other documents other than the will which can be used to effectively and efficiently transfer property to beneficiaries after death. A joint tenancy with the right of survivorship is one of these methods. An individual wishing to leave his property to a particular beneficiary will enter into a joint tenancy for the asset with the individual who is intended to be the beneficiary. At the death of the one of the owners, the property ownership is automatically transferred to the other owner. The document that will replace a will be the deed or ownership document which must specifically indicate the right of survivorship.
A revocable living trust deed is another document which can effectively replace the will. The document indicates the creation of trust to which the real and personal assets of an individual are transferred. A trustee is appointed to manage the trust and at the death of the owner of the assets, the trustee transfers the ownership of the assets to the intended beneficiaries without probate.
The deed indicating the creation of a payable upon death accounts is another document that can be effectively used to serve the purpose of a will. A bank account, an employee benefits account, an annuity contract, an individual retirement account or proceeds from a life insurance can be turned into a payable upon death accounts. Upon the death of the decedent, the ownership of the funds in such an account is transferred to the beneficiaries named. This process eliminates the need for probate administration of the funds
An owner of an asset can during his lifetime create a deed which expressly and immediately transfers the assets he owns to his intended beneficiary. The be4neficiary thus takes ownership of the asset at during the lifetime of the owner, at death of the original owner of the asset, the probate process is avoided since the beneficiary will already be enjoying ownership claim over the assets.
Calculation for the probate estate
Estate assets
Amount ($)
Bequest from mother (Harriet) 7,500,000
Business building 2,500,000
Value of construction company 7,000,000
Income from company 200,000
Income from building 250,000
Total estate 17,450,000
Less tax deductible gifts: Bequest to Pondunk polytechnic college (500,000)
Probate estate 16,950,000
Amount of federal estate taxes that will be due
Since the value of the probate estate is higher than $ 500,000, the applicable estate tax rate will be 35%.
Amount of probate tax payable = 35/100 × $ 16,950,000 = $ 5,932,500
Recommended revisions to the client’s will
To efficiently pass his assets to his beneficiaries in an efficient an effective manner, Rich should consider making revisions to his will to accommodate the following changes.
Rich should make a direct payment towards his daughter’s education. He should make adjustments to the will to change any part that intended to leave any part of his estate towards the education of her daughter and instead make direct payments to the educational institution in which Karen studies. This will have an advantage since it will be considered as a gift and gifts made directly to educational institutions are not taxable. This will reduce the tax liability on his assets.
To effectively avoid any conflict of interest that may arise at the remarriage of Ruby after the death of her husband, Rich should institute a pay upon death account to benefit his wife, daughter and son. The pay upon death account will ensure that specific proceeds from specific of his accounts are transferred specifically to each of the intended beneficiaries upon his death. With the creation of pay upon death accounts, Rich will be able to transfer his estate specifically to his beneficiaries and avoid probate that may arise as a result of his wife’s remarriage.
Rich can also choose to make revisions to his will and transfer some of his estate to his beneficiaries during his lifetime. This will lead to the elimination of some parts of the will, and the intended beneficiaries will have the ownership of such assets transferred to them immediately and thus avoid the probate costs that may arise in case of his death before making adjustments in the will to reflect his increased assets as a result of his inheritance.
Rich also has the option of revising his will and creating a trust to which he will transfer the part of his estate to which he intends for his beneficiaries. Upon his death, the trustee if the trust will transfer the assets to his intended beneficiaries and any probate costs that would have arisen will be eliminated.
Rich can also get into a joint tenancy for the assets intended for a beneficiary with the beneficiary. By doing this, he will effectively make the intended beneficiary a co-owner of the property, and upon his death, the ownership of the property will automatically transfer to the beneficiary effectively avoiding the conflicts and costs that can arise.
Gifting strategies
Rich and Ruby should bequeath to their daughter Karen a gift of the amount needed for her to complete her education. This will be an effective gifting strategy since gifts made to beneficiaries by making direct payments to an educational institution are not taxed. This will reduce the tax liability on them since they will not bear any tax liability as a result of making that gift.
Rich has made a specific bequest of $500,000 to his alma mater. He can instead make that a direct gift to the college. This will reduce the tax liability on his estate since this will be considered as a direct gift to an educational institution which is not taxable. A gift can also be made in form of a direct payment to the educational institutions in which Rich’s nephew, Robbie, studies. This will enable him to effectively transfer some of his estate to the nephew and indirectly assist his sister without increasing the tax liability on his estate.
Rich can make a gift of any amount to his wife without attracting any tax liability on his estate. This is because gifts made to a spouse of any amount are not subject to estate tax, and such a gift will not negatively affect the tax liability due from the estate.
Rich and Ruby can adopt a gifting strategy which ensures that they do not exceed the minimum threshold that does not attract taxes. The minimum amount of bequest that can pass this threshold is a lifetime gift of $ 5.0 million to a non spouse. Rich and Ruby can therefore choose to gift all or any of their beneficiaries with amounts equal or less than $ 5.0 million. This will ensure that the tax liability of the estate is reduced. Rich or Ruby can choose to make lifetime gifts of $ 5.0 million or less to their children or any other beneficiary intended and make the rest of the estate a bequest to the spouse. This strategy will ensure that the federal tax liability on the estate is reduced to the minimum amount.
Liquidity strategy
To ensure the availability of liquidity to settle the estate tax due, Rich can choose to purchase marketable securities with part of his estate to ensure the liquidity required to meet the tax due on the estate. This will be an effective strategy because it will not only provide the required return but will also earn income which will increase the size of the estate. An option to open a cash account specifically for meeting the tax expense of the estate can also be adopted. A trustee will then be appointed to mange the accounts and upon the death of the decedent and when the taxes become due, the trustee can meet the liquidity requirements for the estate tax.
