How an estate plan can minimize taxes, avoid probate and ensure a smooth transition Featured

7:02pm EDT December 31, 2011
How an estate plan can minimize taxes, avoid probate and ensure a smooth transition

Estate planning generally has three purposes: to reduce estate taxes, to avoid probate and to protect beneficiaries.

Failing to plan can result in unnecessary expenses and leave your executor with the task of sorting through your estate. But creating a plan isn’t enough; you have to revisit it to ensure it remains relevant, says Steven C. Hartstein, CPA, JD, a partner in the Tax Planning & Preparation Department at Skoda Minotti.

“When it comes to estate planning to protect your business, your family and your assets, you need a good estate plan that is flexible, allowing you to take advantage of what the rules are now and what they will be in the future,” says Hartstein.

Smart Business spoke with Hartstein about how to plan your estate to minimize taxes and ensure a smooth transition to the next generation.

What are the current estate tax rules?

In 2010, if you passed away, there was no estate tax. Late in 2010, President Barack Obama signed the Tax Relief Act which said that, in 2011 and 2012, you can exclude up to $5 million from your estate while anything above $5 million is taxed at 35 percent. The rules in place now say that in 2013, the exclusion will be $1 million adjusted for inflation, and the highest tax rate could go to 55 percent.

Sitting here in 2011, no one thinks that’s actually going to happen, but in 2001, no one thought there would be an unlimited amount of untaxed estate in 2010. Although it is a guessing game, there are steps you can take to protect your estate.

How can you use the current rules to help limit your liability?

For 2011 and 2012, there is portability. That means that, since both the husband and wife get to pass along $5 million without tax, when the second spouse dies, that person can use the remaining amount of the first deceased spouse’s $5 million exclusion, providing that an election is made on the first deceased spouse’s tax return.

Technically, if the husband had zero assets in his name and died first, and the wife had $10 million, she could use all $10 million of the combined exclusion between them.

However, the executor has to have made an election on the husband’s estate tax return. You have nine months after the date of death to file that document, and if you don’t, you lose that portability.

How can you make gifts as part of your estate plan?

That $5 million exclusion applies during your lifetime or when you are deceased. So you can give away $5 million today, or $5 million when you die.

One of the best things you can do is give away appreciating assets now. If you have an asset worth $1 million today, but in 10 years, it will be worth $5 million, you are better off giving it away today at that $1 million value than if you die in 10 years and give it away at that $5 million value.

You may not want to give up stock in your business, because you lose that control, but you may have other assets you can give away.

How can a grantor trust benefit an estate?

With a grantor retained annuity trust, you put your assets into the trust, and you, as the donor, get back a stream of annuity revenue for a number of years. When you pass away, the assets then go to the beneficiary at little or no gift tax cost. This is because the present value of the annuity is close to the fair market value of the property, thus, the remainder gift is small.

How can having an estate plan help avoid probate?

No one wants to go through probate. Probate is public, so anyone can know what you have, and there are time and monetary costs involved. In addition, it usually takes a long time to go through probate. But it is very easy to avoid.

The purpose of probate is for the court to determine what should happen to your assets when you die. But if you have a trust document that dictates what happens to those assets, there is no need for probate.

How can having an estate plan benefit your family after you pass away?

Being the executor of an estate is very time consuming and messy. The children may not know where the parents had the insurance policy, or what their brokerage accounts are. The great thing about an estate plan is that it marshals assets and gathers them in one place. If everything is in a trust, it makes it much easier.

An estate plan also protects your beneficiaries. If you have minor children, you may not want them to have $1 million in their bank account. If you have older children, you may want to protect them from creditors. By placing those assets in a trust, if they are sued by creditors, or go through a divorce, those assets will be protected.

How often should the plan be reviewed?

In today’s uncertain tax world, it should be reviewed at least every couple of years. Things change, relationships change and tax laws change, and the plan should be addressed frequently. I’ve seen wills and trusts that have not been updated since the 1970s, from before someone had children and grandchildren. That does you no good whatsoever. Rules that were in place even 10 years ago don’t exist any more, so you need to have something drafted that takes advantage of rules that are in place now and be flexible enough to take advantage of the future.

Steven C. Hartstein, CPA, JD, is a partner in the Tax Planning & Preparation Department at Skoda Minotti. Reach him at (440) 449-6800 or