As you probably have heard, the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 extended various tax rates for two more years, rather than allowing rates to jump when prior tax rate reductions expired.
In addition, the state of Illinois re-enacted a state estate tax to hit anyone with an estate of more than $2 million.
For the most part, while Illinois imposes increased taxes, the new federal law prevented a tax increase rather than cutting anyone's taxes. With one exception.
There is one significant, new federal tax break. It is an increased "lifetime gift tax exemption" of $5 million.
This is an opportunity you should use to your family's benefit. It allows anyone to give up to $5 million away, tax-free. This is over and above any annual $13,000-per-person gifts you make. Illinois has left this loophole open, because the state does not tax gifts made during life.
Some hasty people, without good advice, will simply identify $5 million worth of real estate and deed it to their children. Don't! This is a huge opportunity to do much more than just remove $5 million from your estate.
We always try to educate our clients before letting them decide how to plan, and after such education, most of them want to give their heirs whatever they will receive in protective trusts. A majority of those clients also consider their children mature and well able to manage whatever they will get, so the parents make sure each child will be in full control of his or her protective trust.
Whatever you have heard about trusts may cloud your vision here, so try to set all preconceived notions aside. This is a very specialized type of trust, in which the beneficiary (your adult child or grandchild, for example)
• Can receive any money they need from the trust, with no specific top limit on the amount;
• Can decide entirely how they want the trust property managed and invested; and
• Can decide whether to keep assets they inherited or liquidate those assets and re-invest in some other type of wealth.
So why do we call it a "protective" trust? Because the trust assets that the beneficiary controls will be and remain protected from:
• Lawsuits that might be filed against the beneficiary, such as resulting from an accident/malpractice claim;
• Divorce claims by an ex-spouse, including a spouse to whom the beneficiary is married at the time of the inheritance if that spouse later divorces the beneficiary;
• Creditors of the beneficiary that might result from a failed business, tax problem or other unfortunate event in the beneficiary's life;
• Estate or gift taxes when your child dies, or wants to give the assets away to his or her heirs.
Proper structuring of these gifts can also allow you to retain significant control over and access to the assets. You may want to manage the gifted assets, and you may need income as well. Preserve those benefits.
Despite Illinois' attempt to tax estates over $2 million, whatever you give while living will completely escape. Washington opened this window and Springfield hasn't blocked it, let's use it to absolute maximum benefit of our families!
Ferguson, an attorney, helps farm families preserve what they value. He owns The Estate Planning Center in Salem. Learn more on his website: www.tlcplanning.com.