Avoid Estate Tax

Louisiana Family Avoids Estate Tax and Simplifies Settling Their Estates

Was working with a family recently. Their child had searched online for information about how Louisiana families can establish an estate legal program to avoid estate tax and other government interferences.

Over the years, the family worked hard to establish and maintain a successful business. The parents owned the majority of the stock of the S Corporation, and their child owned a smaller number of shares.

The business had been informally valued recently and it appears it is likely there will be estate tax when the parents die. In short, a married couple can pass along about $11 million to their heirs free from the 40% federal estate tax.

The couple asked me how the tax would get calculated when they die. They asked, "Mr. Rabalais, will the government swoop in and take over all of our business records and business assets immediately after we die so that the estate tax can be calculated by the Internal Revenue Service?"

I said, "No, it doesn't work quite that way. After you die, your child will be responsible for filing a federal estate tax return within nine months of the date of your death. Your son will hire someone like me to help him comply with all of the estate tax reporting rules. Your son will hire an appraiser to appraise the value of your business and your property. All of these appraisals will be attached to the estate tax return. If tax is owed, your child will use your assets to pay the tax. The IRS audits every estate tax return. If they feel your child did an adequate job reporting all of the assets correctly, they will accept the return as filed. If the IRS wants to challenge the valuations or other information, they have the right to do so."

So, we're starting a plan now to help this family arrange their estate so that, with the actions that they take today and in the next several years, they will be reducing the value of their estate that will be subject to the 40% estate tax.

In addition to federal estate tax avoidance, we are also putting an estate legal program in place so that it will be simple for the surviving spouse, and the child, to inherit the assets without having to go through the court-supervised and government-controlled Succession procedure (also called "Probate") when they die.

Lafayette,Louisiana Family Benefits From Dad's Estate and Medicaid Planning

I've been working with a Lafayette area family lately. Dad has his home, his life savings, and a couple of other pieces of property, and he wants to make sure his kids get it when he dies. His biggest threats to his children, as he sees it, are:

  1. Losing the assets due to a long-term care nursing home stay;
  2. Taxes; and
  3. Probate

A large part of his life savings is tucked away in his Individual Retirement Account (IRA). He also has investments held in an account that is not an IRA, and he has some money in bank accounts.

He realized that his IRA is threatened. He knows that any distributions from the IRA during his lifetime or after he dies will be subject to income tax to the recipient of the distribution. He was questioning whether taking required minimum distributions each year was the smartest way to handle his IRA. Here's what he said:

"If I just keep taking my required distributions, then I will pay tax on those distributions and the remainder of my IRA will continue to grow tax-deferred. All of the future growth will be ordinary income to whoever receives a distribution and those distributions in the future could be taxes at a rate as high as 40%, particularly if they go to my kids. Plus, if I go to a nursing home, I will be forced to take large distributions, pay the income tax, and then spend the remaining amounts on my nursing home expenses."

Then he asked:

"Wouldn't it be better if I took larger distributions that the required distributions, pay the tax, and then place the after-tax proceeds in a special trust account where it will be protected from my future nursing home expenses? Oh, and since the trust is a Grantor Trust, any future appreciation of my investments after I take it out of the IRA will passtax-free to my kids due to the step-up in basis that they will enjoy when they sell the assets after my death?"

His analyses appears to make a lot of sense. Most people are encouraged to keep every penny that they can inside their IRA. I'm not saying that's wrong every time, but as long as the investments grow inside the IRA, then a big chunk of each distribution will go the IRS. If the IRA goes ahead and takes distributions faster than required, and pays the tax on those distributions, then future appreciation would escape taxation due to the step-up in basis. Plus, if the IRA owner takes distributions and places those funds into the right kind of trust, then there is the added benefit of being protected from future nursing home costs.

Anyone who has an IRA and is concerned about future taxes and about losing the IRA to nursing home expenses, should have a conversation with an estate planning attorney who understands not only the estate tax, but the income tax and capital gains tax consequences of taking minimum distributions versus taking distributions larger than the minimum required amount.

Give us a call at 866-491-3884 to start a conversation about how to protect your IRA from the government. Don't wait another day. Every day that you wait could be costing you and your family!!!

Seven New Louisiana Estate Matters That Walked Into Rabalais Estate Planning During The Last Two Days

I have been fortunate to have seven different families, from Metairie, Baton Rouge, Shreveport, Gonzales, and Zachary. ask me to help them with various estate matters over the last two days. Each family has a different situation and a different concern, so I thought I'd give you a general overview of their problems and how we are solving them so that if you have a similar problem you will know that you are not alone and there is someone that can help who has helped others in similar situations.

Here are the seven different situations that families have retained me in the last two days to help them:

  1. Mom's Investment Account Frozen. A gentleman came and met with me two days ago. His mother had passed away and, as a result, her investment account was frozen. Mom and the son had the same investment advisor. The investment advisor suggested that the son come see me so that we could complete the probate (also known in Louisiana as "Succession") to obtain the necessary court orders which will allow the family to have access to Mom's currently frozen investment account.
  2. Want To Protect Each Other and Teenage Child. A couple came in that had been referred by another financial advisor. The couple had a teenage child and wanted to make sure that their "legal affairs were in order" because they had done no estate legal planning in the past. We will be setting up an estate legal program for this couple to make legal matters easy or nonexistent when one spouse dies, and then making sure that guardians and trustees are named for their minor child should something happen to the parents before the child is an adult.
  3. Couple With No Children. Working with a couple that has been married for decades with no children. They have some pets that are important to them. We will be setting up an estate legal program so that when one of them dies, matters will be under the continued control of the surviving spouse, and that after they both pass away, funds will be set aside for the care of their pets, with the remainder of their estate being divided among four charitable causes that they care deeply about. Nice and fun couple - organized too!
  4. Blended Family. Working with a couple each of whom was in their second marriage. They each had one child. The children lived geographically far apart and had not spent much time together. The couple wanted to make sure that protections were in place for each other so that when one dies, there is no interruption from the children, and then when both spouses die, things are in place for the two children to inherit outside of probate and other court legal proceedings being necessary. Another really nice couple.
  5. Protect Mom's Money From Nursing Homes. Working with a family where Mom is currently residing in an assisted living facility. The family realized that all assisted living facilities in Louisiana are private-pay, but they are worried that if Mom's conditions worsens, Mom will have to move to a skilled nursing facility and be forced to spend $6,000 monthly or more on her care.  We are setting up a legal plan for the family so that Mom's money will be protected if she has to reside in a nursing home in the future. Plus, probate will be avoided when Mom dies.
  6. Execute Will. I wrote a Will for a woman many years ago. She passed away recently. I met with the family and they retained us to execute Mom's Will and complete Mom's Succession so that the home and Mom's CDs, and the vehicle, could be transferred 100% into Dad's name. We are also updating all of Dad's estate planning legal documents because he wanted to change how things would be disbursed upon his death.
  7. Plan For Two Children. Now working with a gentleman who contact me after "watching some of my videos and reading some of my blog posts online." He has a rather large estate, much of it in real estate, and he wants to make sure that it goes to his two children the right way and he wants it to be easy for his two children to inherit the property. We also had some discussions about capital gains tax and estate tax to make sure that his children would avoid as much tax as possible as this property gets transitioned to the next generation.

While many people think that estate planning is the same for everyone, you can see from reading these seven examples that every family and every individual has a unique situation that requires unique solutions. If you have an estate that you want to protect for your family, feel free to give my office a call at 866-491-3884 to start a conversation about the easiest ways to protect what you have for your loved ones.

Paul Rabalais


Louisiana Family Wants Estate Plan That Does 2 Things: Avoid Probate and Protect From Nursing Homes

Was working with a couple recently that had three grown children. One child lived in Lafayette. Another child lived in Lake Charles. The third child lived in Virginia. The couple told me they wanted to accomplish two things:

  1. They wanted an irrevocable trust that would protect assets from nursing home costs; and
  2. They wanted the surviving spouse and the children to avoid probate.

We discussed some of the issues that were involved when a large portion of their life savings were in their IRAs. The couple was serious about protecting what they had because one spouse had a parent that was spending a fortune right now on nursing home costs and private sitter costs. The other spouse that I was working with had seen parents lose a home and significant savings to nursing home costs.

We discussed all of the tax aspects of their estate legal program, including:

  • The income tax consequences of assets held in a trust;
  • The protection of the step-up in basis of appreciated assets at their death;
  • The likelihood that there will be no estate or inheritance tax when they die;
  • The income tax consequences of distributions from their traditional IRA and their Roth IRA.

We also discussed how they wanted to provide funds for their grandchildren's education and the best ways to accomplish that. We also discussed, at their request, how owning long term care insurance might fit into their overall legal plan to protect their estate for themselves and their children. They mentioned that they were already staring to look into long term care insurance possibilities with an insurance provider.

At the end of the discussion, I believe they felt that by discussing these issues with me and working toward an estate legal plan to protect their family, they have a plan in place that gives them peace of mind, knowing that they have done what they could to protect their estate.

Signature on Life Insurance Form Saves Louisiana Family $1.2 Million in Federal Estate Tax

Been working with a couple from Lafayette, Louisiana on their estate legal program. One of the reasons they said they came to me was that I had a Masters Degree in Tax Law (from Boston University School of Law) and they wanted to make sure that they avoided estate tax as they passed their rather large estate on to their children.

We were going through their list of assets and I noticed that he had accumulated a number of life insurance policies during his lifetime. He had about $3 million of life insurance - it was a cluster of five different policies that he had been sold over his lifetime - some term insurance, some universal life, and some whole life.

He had done what most people do when they are married and they acquire life insurance. The husband had named himself as the owner of the life insurance policies, and he had named his wife as the beneficiary. This is what most people do.

So, if he has his policies structured this way, what will be the estate tax consequences? Well, if the husband dies first, there will be no estate tax as a result of these life insurance policies because the $3 million will be part of the Husband's gross estate, but they will be deducted from his estate under the federal estate tax marital deduction. But the problem is: THE WIFE NOW HAS AN EXTRA $3 MILLION IN HER ESTATE. There will be no way to exclude these funds from her estate. She can't give it away fast enough pursuant to the annual exclusion. These funds will cause an extra $1.2 million of federal estate tax when the surviving wife dies ($3 million * 40%)

We discussed having the husband and wife transfer OWNERSHIP of these policies either to their children, or to an irrevocable trust naming the children as beneficiaries, so that neither the ownership nor the proceeds of the policies would be in the estate of either spouse. We talked about how special rules apply to ownership of life insurance policies such that three years must pass after the transfer of ownership for the death proceeds to be excluded from the estate of the insured.

If you live in Louisiana, whether you live in Baton Rouge, Monroe, Shreveport, Lafayette, Lake Charles, or New Orleans, and you own life insurance and you would like for the death proceeds to not only avoid income tax but also the 40% estate tax, you may want to give our office a call at 866-491-3884 to start a conversation about how to set up your estate legal program to avoid estate tax when you (or you and your spouse) pass away.

Husband's Small Estate Can Do A Huge Favor to Wife's Family - the Estate Tax Portability Election

Blended families are common these days primarily because the divorce rate is high, and since people are living longer, it's common for someone to lose their spouse and then remarry in their 60's, 70's or 80's.

Many blended family situations are such that each spouse has their own children. It's common for the couple to establish a Marriage Contract (also referred to as pre-nup, pre-nuptial agreement, or separate property contract.

I've been working with a blended family in recent months that has strong ties to the Baton Rouge, New Orleans, and Lafayette communities. The wife has a very large estate (let's say, $10 million) and the husband has a much smaller estate (let's say $1 million). Each of them has their estate legal program set up so that when each spouse dies, their respective estates will go to their respective children. The problem is that the wife's estate, at $10 million, faces perhaps a couple of million dollars or more in estate tax when she dies (depending on value and tax law at time of death).

The couple is predicting that the husband will die first - he is older and is not in as good health as the wife. He'll be leaving everything to his four adult children. His wife will not be involved in his estate settlement. There will no federal estate tax return due after the husband dies because his estate - at $1 million - will be less than the applicable exemption ($5.45 million for deaths in 2016).

Here's the kicker: when the husband dies, there will obviously be no estate tax because his estate is relatively small compared to the estate tax exemption. But if the husband's estate, after he dies, files an estate tax return and makes the portability election, then the wife's estate, when she dies, will not only have her $5.45 million estate tax exemption, but she will also get to use the husband's unused exemption. So, let's say the husband does not use $4.45 million of his exemption and his estate makes the portability election on his estate tax return (IRS Form 706), then the wife, at her subsequent death, could exclude $9.9 million of her estate from the 40% tax.

Bottom line - when the husband dies, the wife and her children should be REALLY nice to the husband's family (particularly his executor) in order to sweet talk him into filing an estate tax return and making the portability election. In fact, the wife should offer to pay for the accounting and legal work necessary to get that done. It will be a small price to pay to recognize as much as $2 million of tax savings at the subsequent wife's death.

If you are in a marital situation and one spouse has an estate that is much larger than the other spouse, you may want to have a discussion with someone like myself who can help you set up a Louisiana estate legal program to minimize or avoid the tax that both families may have to incur later.

One Ceremony Saves Monroe, Louisiana Family $2 Million of Federal Estate Tax

I am working to set up an estate planning program for a really nice couple from Monroe, Louisiana. They had four main concerns, and one of them was making sure they avoided whatever taxes they could avoid as they have an estate plan which transitions their assets to the next generation after both of them die.

Although unusual, the couple mentioned that they were not married. All of the assets were in the gentleman's name because there were some lawsuit scares for the woman many years ago - but all of those lawsuit scares are behind them.

The gentleman had an estate that was in excess of the $5.45 million estate tax exemption. The woman had almost nothing. When they brought up the fact that they were not married, I gave them some advice regarding future estate tax that their heirs will be burdened with. I said, "You know, because you are not married and because all of the assets are owned by only one of you, then you will only be able to exempt $5.45 million from the 40% federal estate tax. But if you get married, and you have the right legal program in place, and you make the right tax elections after one of you dies, you will be able to exempt $10.9 million of assets from the 40% federal estate tax."

By the time they had left my office, they had already scheduled their wedding plans.

The estate tax laws can be more favorable to married couples than to two single individuals, due to the federal estate tax unlimited marital deduction and the portability election. I'm not crazy about having estate tax laws dictate whether a couple should get married, but if simply by tying the knot a couple or a family can save as much as $2,000,000 of estate tax, it may be worth it if you're getting married for the right reasons - not just tax planning.

If you live in Louisiana, whether in Baton Rouge, Lafayette, Metairie, Monroe, Shreveport, Lake Charles, or Covington/Mandeville, and you want to have an estate planning legal program in place that will avoid federal estate tax and make it easy for the right heirs to inherit the right way, give us a call at 866-491-3884, and we'll start a conversation about how simple and important it is to have the right estate legal plan in place to protect your estate for your heirs and from the IRS and other taxing authorities.

Own a Business and Owe Estate Tax? Pay the Estate Tax in Installments: Section 6166 Election

Several of our estate planning clients own businesses in Louisiana (or elsewhere). Some of these business owners have an estate that will require estate tax to be paid when they die. Many business owners are told that "half of their estate will go to the government when they die" so they must take drastic action today to somehow reduce that tax.

What many people don't know is that there are breaks in our Internal Revenue Code which permits certain estates to pay the estate tax liability over a period of 14 years - if they qualify for it because they own a closely held business.

Generally speaking, if a business owner dies and the value of his ownership interest in his or her business exceeds 35% of his adjusted gross estate, then the executor is allowed a 14 year period to pay estate tax attributable to an estate's interest in a closely held business. The estate may pay interest only payments for the first four years, and the taxes can then be paid over a 10 year period.

Here's an example that would not occur in real life but it shows how this election can help an estate. Let's say that Fred owns Fred's construction company. This is the only asset in Fred's estate. The business is worth $10.45 million. Fred is told by some that half of his estate will go to the government when he dies. This concerns Fred because there is not $5.225 million in liquidity in his estate to pay this tax and Fred worries that his children will lose the business.

But the Fred realizes that his estate could make a Section 6166 election timely after Fred dies. First, the estate tax must be calculated. Since there is a $5.45 million exemption, and a 40% estate tax on the balance, Fred figures there would be $2 million in tax - still a big worry to Fred. But if his estate makes the timely IRS Section 6166 election after he dies, his estate can pay interest only payments of $40,000 for four years after Fred dies, and then his estate can $200,000 annually for another 10 years. Fred now realizes that his business will produce enough revenue annually to pay this tax over the 14 year period, and his children will not lose the business due to estate tax liabilities.

If you are a business owner in Louisiana, whether your business is in Baton Rouge, Lafayette, New Orleans, Lake Charles, Shreveport, or Monroe, and you want to make sure that your estate passes intact to your family or other heirs, you may want to give my office a call at 866-491-3884, and tell our great staff that you own a valuable business and you want to speak to me to find out how to leave it the right way, I look forward to the opportunity to speak with you about how the IRS Section 6166 election for owners of closely held businesses can help your family, or how other little-known tax elections can help your family.

What Happens If I Set Up a Trust For My 30 Year Old Child - and Then My Child Dies?

I was working with a couple from Lake Charles, Louisiana, on their estate planning legal program. For estate tax avoidance purposes, they wanted to set up a trust for their 30 year old child, who lives in Baton Rouge. Assets in this trust will not be part of the couple's estate when they die.

Their 30 year old child was not responsible with money, but he was getting more mature by the years. But the parents did not just want to dump a big sum of money in their child's lap - for him to blow. They decided that the trust should stay in effect until their son is 55 years old, at which time he can have the trust assets put into his own name. When we were discussing other terms of this irrevocable trust, they asked me a question.: "Paul, what if our son happens to die unexpectedly while this trust is in existence for him?"

I told them, "It depends. Does your son have children?" Why did I ask them if their son had children? Because the Louisiana Trust Code provides guidance on your right to re-direct the trust assets of the trust if the beneficiary dies prior to the termination of the trust.

The couple told me that their son did not presently have children, but that he had a serious girlfriend and would likely get married in the next couple of children.

So, I told them, "If your son dies while this Louisiana Trust is in existence for him, and he does not have children (or grandchildren), then you can determine where the trust assets go if he dies before he turns 55 years old. The couple indicated to me that if their son dies with no children, the couple would then want the trust to be for the benefit of four nieces and nephews they had.

But then I said, "If your son dies while this trust is in existence for him, and he DOES have descendants, then his interest in the trust will be in his estate and will be for his heirs. Although you do have the authority to shift the trust principal to one or more of his descendants, under these circumstances where he dies with descendants.

I verified all of this by double-checking the relevant provisions of the Louisiana Trust Code, in this case it was Title 9, Section 1973, which was revised by the Louisiana legislature in 2016.

If all of this sounds confusing, don't be alarmed. It is confusing. So if you want to set up a Louisiana estate planning legal program so that what you own goes to your family, the right way, the first time, and protected from government interference, then you may want to call our estate planning law firm at 866-491-3884 and ask to set up a time to start a conversation about how to leave your estate to your family.


When an Estate Should Give Information to the IRS - Even When You Don't Have To

I've been working with a Baton Rouge family that had an estate plan set up. The wife died. Her separate property and her one-half of the community property totaled about $2 million. She owned property in Baton Rouge, Lafayette, and Gonzales.

After the wife died, I was working with the surviving husband and the children. They assumed, rightly so, that the wife's estate was not required to file a federal estate tax return because the gross value of her estate was less than $5.45 million.

While they were technically correct, they did not realize that the failure to file a federal estate tax return on behalf of the wife's estate could cost them millions in the long run. You see, the husband had a large estate of his own. He owned property in New Orleans, Shreveport, Alexandria, and near Monroe. He also owned a significant IRA. His total estate was about $7 million and likely to grow.

I explained to the family that while the wife's estate was not required to file a federal estate tax return with the IRS, they should do so and make the "portability election." Filing a U.S. Form 706 on behalf of the wife's estate, and making the appropriate portability election would allow the surviving husband's estate to use $3 million unused estate tax exemption that they wife's estate failed to use.

Had the wife's estate not filed an estate tax return, then the husband's estate would only be able to shield $5.45 million from the 40% estate tax. But since we are filing the return and electing portability (even though it is not required to file a return since her estate was less than the $5.45 million exemption), the husband will be able to shield at least $8.45 million from estate tax when he dies. The portability election allows his estate to use his full exemption plus use the amount of her exemption that her estate did not use.

Future appreciation of an estate after the first spouse dies, or a future change in the law which reduces the estate tax exemption, could cause families to incur estate tax when they did not think they would. Careful consideration should go into whether an estate tax return should be filed with the IRS after the first spouse dies, even if it is not required.

If you are concerned about the possibility of your survivors incurring a 40% federal estate tax when you pass, shoot me an email at paul@rabalaisestateplanning.com, and perhaps we can discuss the simplest ways to preserve your estate from the government and for your family.


A Situation Where Life Insurance DOES Go Through Probate

Example. Kirk and Lisa wanted to make their estate settlement simple for each other and for their three children. Knowing that assets in a revocable trust avoid probate, they created a trust and transferred their stock, home, LLCs into their trust. Kirk and Lisa "heard" that life insurance avoid probate because it's paid to the beneficiary. Kirk died. The insurance company immediately tells Lisa that the insurance company needs a probate court order. Why?

Many years ago, insurance agents would sell life insurance to a married couple. Because the insurance agent believed there would be some estate tax savings, the insurance agent wrote the insurance applications in a way that the husband would "own" the life insurance policy on the life of the wife, and the wife would "own" the policy on the life of the husband.

So, when Kirk died, it was determined that Kirk "owned" the policy on Lisa's life. When Lisa dies, the death benefit will be payable to Kirk (or Kirk's estate). In either case, Kirk's probate is necessary to collect the death benefit when Lisa dies. In addition, if the policy that Kirk owns has cash value, Lisa will not be able to access this cash value into the policy ownership gets transferred in a court proceeding.

Had they transferred their life insurance policy to their trust during Kirk's lifetime, the probate would not have been necessary. After Kirk died, Lisa, as the sole trustee, would be able to access cash value or change the beneficiary. But since they "assumed" that life insurance avoided probate, they ended up being required to complete Kirk's probate to "fix" the life insurance problem, even though all of their remaining assets avoided probate.

Divorced Business Owner Sets Up Estate Legal Program For Minor Children

I was working with a divorced business owner recently. His financial advisor recommended that he come see me. The business owner had been very successful in business, but he knew little and had no previous exposure to estate planning.

It was kind of funny when he said he wasn't sure what he needed from me, but he knew he needed to do something to protect his estate. I started a conversation by letting him know what would happen if he died with no legal plan in place.

I told him, "If you die with no legal program in place, then all of your assets will be frozen immediately. Your ex-wife will hire an attorney to start the probate proceeding. Your ex-wife will kick your fiancé out of your house. After several months or years of court proceedings, your ex-wife will start to gain control over all of your assets, including your businesses. Your business partners will have to co-own your businesses with your ex-wife. Your ex-wife will have the right to hire another set of business attorneys to search and review all of your business records. One of our local elected judges will be in charge of over-seeing how your ex-wife is handling everything on behalf of your four minor children. Ultimately, if the court proceedings ever end, your ex-wife will gain complete control over your estate. If she does not pay the $1.5 million estate tax bill within nine months after you die, interest and penalties will accrue against your estate. Then, as your children reach their 18th birthday, they will sue your ex-wife who will be forced to dump roughly $2 million into your childrens' laps, likely spoiling any desire they may have to get a good college education."

He said, "That would not be good for my four kids, my fiancé, my business partners, or my ex-wife. I don't think my ex-wife would be the best person to handle my children's inheritance." 

About an hour later, after much discussion about his family, he was anxious to put in place an estate legal program so that, when he dies, the right people will be put in charge of managing his estate. Probate will be avoided so the courts and judges and lawyers would be kept out of his estate. He designated a trusted and responsible colleague to handle the trusts for his four children so nothing would be dumped into their laps at age 18. His children would have money available to them for their college education, and they would receive their inheritance in stages at later ages. Plus, we set up the trusts for his four kids so that if they get married and divorced, they will not have to split the inheritance with their spouse.

We also had a discussion about the estate and gift tax. He was surprised to learn that if he stayed single, then only $5.45 million of his estate would escape the 40% estate tax. But if he gets married, then through the appropriate use of the marital deduction and portability, he could protect $10.9 million from the 40% estate tax.

Bottom Line: If you are divorced with children, and you don't want your ex-spouse to control everything when you die, and if you'd prefer that what you've worked for doesn't get dumped into your kids' laps at age 18 (after being overseen by judge until then), then perhaps you should give us a call at 866-491-3884 so we can start a conversation so that you can sleep well at night knowing all of your estate legal affairs are in order.


Basic Gifting Concepts To Avoid Estate and Gift Tax

Gifting may only be necessary for people who have large estates. With the estate tax exemption for deaths occurring in 2016 at $5.45 million, it may not be appropriate for most Louisianians to make gifts annually.

However, if an individual has or will have an estate exceeding these thresholds, it may make sense to do some gifting if one of the primary objectives is to preserve the estate for the family and minimize or avoid estate tax at death.

Individuals can donate up to $14,000 annually to as many people as they want to without incurring gift and estate tax consequences. If an annual gift exceeds this annual exclusion amount, then typically, no tax is due, but the donor will begin using his or her $5.45 million gift and estate tax exemption.

A person can donate cash, stock, property, an interest in a business, or any other asset having value. People should be careful, however, when they donate appreciated assets because it may result in extra capital gains tax when the asset is later sold or disposed of. When appreciated assets are donated, the done/recipient receives the assets at a "carry-over" basis. But when an individual inherits appreciated assets, the heir/recipient enjoys a "step-up" in basis.

Gifts can be either outright or in trust. Gifts are often made in trust when the donor does not want the donee to have complete control of the gifted asset. But if you donate in trust, you have to make sure the gift in trust meets the requirements of the "present interest annual exclusion," so that the beneficiary of the trust has a "present interest" in the gift.

Gifting to avoid estate tax can be complicated. Rabalais Estate Planning, LLC, has attorneys and office locations all around south Louisiana, including Baton Rouge, Metairie, Lafayette, Mandeville, Lake Charles, and Houma. Our website is www.RabalaisEstatePlanning.com. Our phone number is 866-491-3884. You can also email me at paul@rabalaisestateplanning.com.

Louisiana Irrevocable Life Insurance Trust Doesn't Avoid Estate Tax But Just Might Provide The Funds To Pay The Estate Tax

I was talking to a gentleman I've been working with for a few years. He has built a successful business in Baton Rouge and a New Orleans financial advisor is suggesting that he purchase a life insurance policy inside of an irrevocable life insurance trust (ILIT) to pay the taxes when he dies. Here's how that scenario typically works:

Example. Leon built a successful construction company. He has four children. Leon's estate is valued at $14 million. Since his estate is valued at more than $5.45 million, Leon's estate faces a significant estate tax bill when he dies. A quick calculation shows that the estate tax at this death would be about $3.5 million - more if his estate continues to appreciate before he dies. The financial advisor is suggesting that form an ILIT and have the ILIT purchase a $3.5 million life insurance policy on his life. He explains to Leon, "The policy will avoid tax because the life insurance is tax free and your children will inherit your estate." The financial advisor tells Leon that the policy will cost $56,000 per year. Leon is not sure what to do. Leon is the kind of guy that generally "doesn't like" insurance and he reluctantly asks his financial advisor for all of the reasons why he should NOT create the ILIT and purchase the insurance.

Here are a few issues that Leon and his estate will face:

  • Gifting. If Leon goes through with the plan, he will use the present interest gift tax annual exclusion to shield the $56,000 from having gift tax consequences. The ILIT will be a "Crummey" trust, which means that Leon must give his children an opportunity to take the $14,000 now, as opposed to have it used to purchase life insurance. In order to avoid gift tax consequences, the gift must be a gift of apresent interest instead of a gift of a future interest. While the "tax-free" gifting sounds like a good idea, Leon will have to make this gift/insurance payment every year, so Leon may never be able to give his children money again without gift tax consequences. Some parents like give money to their kids during the parent's lifetime, so the parent can see the children enjoy the gift.
  • Life Insurance Policy. In years past, many life insurance policies have "expired" because the insured lived too long, and the policy ran out of cash value to pay for the insurance. In the early years, Leon will be making $56,000 annual premium payments but the insurance cost will not be that much. As Leon ages, the annual insurance cost (if he lives long enough) will be more than $56,000 so there is a risk that Leon will have to pay more than $56,000 annually to maintain the policy, even if he has no more gifting limits to make those payments.
  • Tax Not Reduced. Some people who create ILITs do so because they want to avoid tax. But creating an ILIT does not reduce your estate tax. The tax will still exist but if the insurance pays out at your death, there will be funds in the trust that can be used to pay the tax and your children will inherit your estate.
  • Is $2.6 million for each child enough? If Leon dies with a $14 million estate, and his estate owes $3.5 million in estate tax, then there will be $10.5 million in assets remaining, and his children will each inherit about $2.6 million. Perhaps Leon feels that $2.6 million for each child is enough - heck, Leon never received an inheritance so why should he spend $56k per year so that his children might inherit more than $2.6 million each.

So, Leon's got some decisions to make. Hopefully Leon will have the kind of advisors who are able to show him all the reasons for and against certain actions so that when Leon decides to move forward with the planning, he does so fully informed and feeling confident that he did what was best for his family.

The Two Secrets to Bill Gates Completely Avoiding Estate Tax

It's no secret that Bill Gates is one of the wealthiest people on the planet. You would think that the IRS will mop up when he dies, collecting billions in estate tax to be redistributed in whatever way our government distributes it - that's another story.

While Mr. Gates has not yet contacted me to customize his estate legal documents, there is little doubt that he will take advantage of two "often little known" tax rules to minimize or completely avoid federal estate tax. While I'm sure Bill has several trusts to avoid probate and make things simple, here are the two tax rules that Bill will take advantage of:

1.    The Unlimited Marital Deduction. If Bill dies before his wife, Melinda, he will leave his estate in a way so that $0 estate tax will be paid when Bill dies. You can leave an unlimited amount of assets to your surviving spouse when you die, and no estate tax will be due (the idea is that the tax is due after the surviving spouse dies);

2.    The Estate Tax Charitable Deduction. After both Bill and Melinda die, they will leave the bulk of their estate to the Bill & Melinda Gates Foundation. Anything you leave at your death to a charity escapes the federal estate tax.

Voila! No estate tax. The richest man in the world will take advantage of two often misunderstood tax principles to avoid a tax that is specifically designed to tax the rich.

When Bill calls, I'm sure we'll have a discussion about this. Moral of this story? Make sure you take the necessary actions to protect your estate from the government. Be like Bill!