A suggestion: put assets in trust, with a trustee (possibly you) to administer and manage the trust’s assets. Trusts have many features and variations: e.g., they can be established before or after you die. If you set up a trust now and make it irrevocable, the assets you donate to it are out of your estate. Assets transferred into a trust after you die may be subject to probate. Investigate these matters before you make a move.
Trusts often used in estate planning include:
- By-pass trusts — These are commonly used by couples but, in a year with no estate tax, check that the wordingof your trust doesn’t create other problems.
- Child trusts let you control children’s spending of what you leave to them.
- QTIPS — Under a QTIP (Qualified Terminable Interest Property), the income from the assets goes to the surviving spouse until his or her death, then the assets can pass to the children. A QTIP must give the surviving spouse a non-transferable income interest for life in all its assets, which will be included in the survivor’s estate but could be distributed to others as the original donor directs. A QTIP is a way to provide income to a new spouse while making sure your assets eventually go to your kids from an earlier marriage.
- Living trusts let assets in the trust avoid probate and go directly to the heirs. But don’t confuse estate tax and probate. Living trusts bypass probate but don’t affect estate tax liability.
- “Wealth-replacement trusts” consist of a charitable remainder trust and an irrevocable trust holding a life insurance policy. The charitable trust can sell low-dividend stock you donate to it, without paying tax on the appreciation,as you would if you sold it. The trust can reinvest the proceeds and generate a larger income stream for the beneficiary. The income could also pay premiums on an insurance policy on your life. When you die, the assets in the trust go to charity while the insurance proceeds go to your heirs free of income tax.
Instead of putting money in trust for a child, you may have your estate buy the child an annuity. Instead of setting up a life-insurance trust, you could have one of your children buy a policy on your life, or you could transfer an existing policy to one of them – so long as you don’t die in the next three years. As a gift, the transfer will eat up some of your $1 million lifetime gift tax exemption. You can give your child enough money each year to pay the premiums (which possibly won’t exceed the tax-free gift limit).