By: John Farrell
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17 Pro Tips for Marietta Estate Planning in 2020
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High-net worth Georgia families, high-liability professionals and Georgia business owners face some significant challenges when it comes to protecting their assets from creditors, lawsuits and estate taxes.
What’s their secret? How do some families extend their fortunes for generations – avoiding estate taxes, safeguarding assets from lawsuits and maintaining businesses that generate income for loved ones long after owners pass away?
No matter where you are in your estate planning journey, every Marietta family can benefit from the limitless array of estate planning tools used by the experts. It’s just a matter of understanding which tools fit your family best, and how to properly apply them.
Here, we present 17 estate planning tips that can help you reduce or avoid estate taxes and protect your hard-earned assets from liability.
Note: If you want to brush up on the basics of Georgia estate planning (Wills, Probate, Power of Attorney, Revocable Trusts, Irrevocable Trusts and Advanced Healthcare Directives) take a look at these free ebooks.
3 Essential Tips to Reduce Estate Taxes
Estate planning for Marietta households with assets of $10 million-plus can present some significant challenges, and a lack of solid estate planning can mean devastating losses for you and future generations.
Even with some level of estate planning in place, studies show that 70% of high net worth family assets won’t last beyond the third generation. Some loss of fortune may be attributed to financial carelessness or bad investments, but much of it is lost to estate taxes.
Up to 50% or more of your net-worth can be lost to estate taxes per generation.
Those high net worth families whose fortunes hold up for six generations and beyond often have a team of financial and estate planning specialists who know how to generate a plan that takes the amount lost to taxes to the absolute minimum.
In order to minimize taxes, it is critical that you first understand what access the government has to your estate. For Marietta residents, this includes federal estate and gift taxes.
The federal government charges estate taxes to transfer your property when you die. Federal estate taxes use the fair market value of your assets (cash, real estate, securities, insurance, annuities, trusts, business interests, etc.) at the time of your death – minus certain deductions.
As of January 2019, estates with assets and prior taxable gifts exceeding $11,400,000 must file federal estate taxes. And this exemption is generous. In 2017 and prior, the exemption has been $5.6 million (note that the current $11.4 million exemption is set to go back to $5.6 million on January 1, 2026).
Currently, an individual could transfer up to $11.4 million in assets during their life or at death and avoid federal estate and gift taxes. Anything over $11.4 million ($22.8 million for married couples filing jointly) may be taxed up to 40%.
Federal estate taxes must be paid within nine months of death. If no cash is available, your heirs or beneficiaries will have to liquidate assets to pay.
In addition, some states require a state estate tax, meaning the estate could be taxed a total of 50% or more. As of July 1, 2014, Georgia has eliminated state estate taxes.
High net worth individuals and families will also want to take advantage of the annual gift tax exclusion that allows tax-free asset transfers of up to $15,000 per year ($30,000 per beneficiary for married couples filing jointly).
Maximizing estate tax exclusions and controlling gift taxes is key to preserving your fortune for generations. There are several ways high net worth households can accomplish this. A clever combination of any number of these tactics works best.
Obviously, you will want to maximize your estate tax exemptions. Affluent Georgia households who can avoid estate taxes may be able to provide support for an additional two to three generations.
In 2013, Congress permanently added portability to estate tax law, allowing a surviving spouse to use both their own estate tax exemption and the deceased spouse’s exemption, as long as estate tax returns are filed promptly after the first spouse’s death.
So when the first spouse dies, they can leave all their assets to the surviving spouse. Because of unlimited marital deductions, the government won’t tax the surviving spouse’s estate. Then, upon the second spouse’s death, portability allows the entire estate to pass tax-free to heirs and beneficiaries upon the second spouse’s death – as long as the couple’s estate is under $22.8 million (though any asset appreciation will be taxed).
But what about married couples with estates that exceed $22.8 million?
These households can still preserve the first spouse’s estate tax exemption by establishing a tax-advantage trust containing the first spouse’s assets. The surviving spouse can access these assets, and even act as trustee, but the contained assets AND any appreciation (until the second spouse’s death) aren’t included in the taxable estate (even if the appreciation is over the exemption amount).
With a tax-advantage trust, you can avoid taxation on appreciation, you can avoid estate taxes on estates over $22.8 million, and it can even help you avoid estate taxes when the exemption drops back down to $5.6 million ($11.2 million for married couples) in 2026.
Of course, you could include a similar tax-planning provision in your Will, but your beneficiaries would then have to go through probate expenses and wait months to years for access to their inheritance.
Tip #2: Purchase Life Insurance
Life insurance policies are another good way to pass wealth to your loved ones or to charities you care about. If you buy your life insurance policy at the right time, it can effectively replace any estate taxes or gifted assets.
But upon your death, the proceeds from your life insurance policy are included in your estate value. To avoid paying estate taxes on your policy, it is best to set up an Irrevocable Life Insurance Trust (ILIT). With an ILIT, you can name a trustee and have that trustee purchase the life insurance policy on your behalf. This eliminates the policy proceeds from your taxable estate.
You can even name the ILIT as a beneficiary and set it up to distribute portions of the trust to family members for years to come, keeping the bulk of the trust safe from overspending or creditors. Note that for an ILIT to work, you have to survive at least three-years after initiating the trust.
Because estate taxes apply only to those assets you own directly, transferring ownership of your assets outside of your estate can reduce estate taxes significantly. You can do this using:
- Family Incorporation
- Charitable Trusts
- IRA Qualified Charitable Donations (QCD)
- Generation Skipping Trusts
- Tax-Free Gifts
- Buildup Equity Retirement Trusts
- Qualified Personal Residence Trusts (QPRT)
- Grantor Retained Trusts
- Intentionally Defective Grantor Trusts (IDGT)
Setting up a Family Limited Partnership (FLP) or Family Limited Liability Company (FLLC) can help reduce estate taxes. In an FLP, family members pool money to operate a business. They serve as general and limited partners and can buy shares of the business and profit from those shares. FLLCs are similar to FLPs except they are a corporate entity for which family members may act as managers.
You transfer assets into the FLP or FLLC, act as general partner or manager, and collect ownership interest. Typically, older family members will gift limited partner interest to younger family members, thereby reducing estate tax.
Charitable trusts allow you to reduce estate taxes while benefiting any charities you are passionate about. Charitable trusts are very popular, and a number of variations are available.
Charitable Remainder Trusts (CRT) can reduce your income and estate taxes by transferring income-producing assets into an irrevocable trust and taking advantage of charitable income tax deductions.
Upon your death, the assets go to the charity of your choice. During your life, the trust reinvests in income-producing assets, you collect ongoing income, the assets sell at market value, and no capital gains tax applies – meaning you often collect more than you would selling the asset yourself.
Charitable Remainder Annuity Trusts (CRAT) transfer assets into a trust that pays a fixed amount each year until the grantor’s death, when they go to the designated charity. Charitable Remainder Unitrusts (CRUT) distribute a fixed percentage of assets to a beneficiary over a fixed term, after which the assets go to the charity.
As opposed to CRTs, Charitable Lead Trusts (CLT) are also a great way to reduce estate taxes but don’t pay income to the grantor. Instead, the income goes to the charity for a fixed term or until your death, after which the assets go to your heirs or beneficiaries.
Charitable Lead Annuity Trusts (CLAT) give a part of the income interest to a charitable organization and another part of the interest to the grantor or a beneficiary. Charitable Lead Unitrusts (CLUT) allow the grantor to give a variable annual amount of the trust to a charity for a certain number of years. After the term ends, trust assets go to the grantor or a beneficiary.
“Shark Fin” Charitable Lead Annuity Trusts transfer small payments into a CLAT for a few years, then transfer a large lump sum payment into the CLAT toward the end of the term (creating a “shark fin” shaped curve of payments). By increasing the amount paid to charity over time, assets in the trust have more time to grow.
IRA Qualified Charitable Donations (QCD)
If you are at least 70.5 years old and own an IRA, you can donate a certain amount ($100,000 per individual) of your IRA each year directly to a non-profit organization to reduce the size of your estate.
Generation Skipping Trusts
If you are concerned about your child’s inheritance adding to the value of the estate, you can set up a Generation Skipping Trust. This type of trust avoids generation-skipping taxes by transferring assets directly to your grandchildren, bypassing your children.
The Generation Skipping Trust transfers assets to any beneficiary other than a spouse or ex-spouse who is at least 37.5 years younger than the grantor. Generation-skipping trusts can still benefit the grantor’s children since they are able to access any income generated by the trust’s assets.
Transferring gifts out of your estate before you pass (preferably appreciating gifts) is one way to reduce estate taxes. The recipient will have to pay capital gains tax when they sell the gift and at cost basis. But, the capital gains tax could be less than what the estate tax would be if you held onto the asset.
Gifts to charities, and educational and medical institutions are always tax-free. You can also give up to $15,000 in tax-free gifts each year per beneficiary. If you have three kids and six grandchildren, you could give them each $15,000 and reduce your estate by $135,000 per year.
Buildup Equity Retirement Trusts
Under Internal Revenue Code §2056, an individual can transfer an unlimited amount of assets to their spouse at any time (during life or death), tax free. The problem with this is that any asset transferred to a surviving spouse (plus appreciation) can be included in the spouse’s taxable estate.
Instead of using the unlimited marital deduction, you can set up a Buildup Equity Retirement Trust and use the annual gift tax exclusion to grant gifts to your spouse – eliminating the gift assets from gift and estate taxes.
Also known as a Spousal Limited Access Trust (SLAT), the grantor creates this trust to transfer assets from their estate into a trust that benefits their spouse. The grantor’s spouse has indirect access to the trust, and assets are excluded from the taxable estates of both spouses. When the grantor’s spouse dies, the assets pass to designated beneficiaries without incurring gift or estate taxes.
You can grow earnings tax free as long as you draft the trust so the grantor pays income taxes. In this trust, remember to limit your annual gifts to $5,000 or 5% of trust balance up to the annual gift tax exclusion to avoid estate and gift tax.
Qualified Personal Residence Trusts (QPRT)
You can eliminate your residence from your estate value and reduce its value as a gift with a QPRT. Transferring the house to the trust over a term of several years means you can remain in the home with retained interest until the end of the trust, when ownership transfers to your beneficiaries as remainder interest (at which point you could arrange to still live there).
Because the owner retains part of the property’s value, the gift value is less than the fair market value, and so is incurred gift tax.
Of course, the longer the term, the smaller the remainder interest given to beneficiaries and lower the gift tax. But keep in mind that if the grantor passes away before the term is up, the assets go back into the grantor’s estate.
Grantor Retained Trusts
Similar to QPRTs, you can avoid estate and gift taxes by setting up irrevocable Grantor Retained Annuity Trusts (GRAT) and Grantor Retained Unitrusts (GRUT) to transfer income-producing assets into the trust over several years.
While the assets are no longer included in your estate, you still collect the income. These trusts also reduce the value of the gift for your beneficiaries. What the assets produce will pass to your beneficiaries estate tax-free.
- GRAT: Grantor collects an annual payment for a fixed term, after which the remaining assets are gifted to the beneficiary
- GRUT: Grantor collects a fluctuating income for a fixed term (or for the grantor’s lifetime).
Intentionally Defective Grantor Trusts (IDGT)
Intentionally Defective Grantor Trusts (IDGT) are irrevocable trusts that allow you to reduce the value of your estate by freezing certain assets while continuing to pay income taxes.
All of these strategies can help high net worth individuals and families expand their fortunes across numerous generations. An experienced Atlanta estate planning attorney will have an arsenal of successful programs that can minimize your tax liability and help ensure that your legacy lives on for generations to come.
Georgia Probate Law for Small Estates
But, what if you find yourself on the other end of the spectrum? Does Georgia have a less formal procedure to handle a probate if it involves a small estate? Unfortunately, probate law in Georgia does not allow for informal probate procedures for small estates. There is one exception however:
If a person dies without a Last Will and Testament while residing in Georgia and has $10,000.00 or less in a bank account, the bank can pay the $10,000 directly to the surviving spouse without the spouse having to go through probate. If there is no surviving spouse, the children of the person can receive the money from the bank without having to go through probate.
So, in Georgia, the probate law for small estates does not allow for informal probate procedures unless there happens to be $10,000 or less in a bank account and the person died without a Last Will and Testament. In those situations, the family can typically receive the money without having to go through probate.
5 Smart Tips to Protect Assets from Lawsuits
All families are at some risk of losing their assets to creditors or a lawsuit. An unexpected injury on your property, defaulting on a loan, even divorce can quickly bring losses in the millions of dollars.
But some people work in professions that are particularly vulnerable to lawsuits. Of course doctors and lawyers are at high risk for malpractice lawsuits, but other professionals are also at high risk for liability, including:
- Finance professionals
- Food industry professionals
- IT professionals
These hard-working professionals must shield their estates from judgment creditors if they want to provide for their loved ones for generations. Smart estate planning is a must for high-risk professionals, and asset protection is paramount.
There are a couple of things to remember about protecting your assets from liability.
First, you must understand the concept of fraudulent conveyance. Because state and federal laws void asset transfers that attempt to avoid debt, high-risk professionals must act preemptively and transfer their assets well before any lawsuit arises.
A claim is considered reasonably foreseeable when you “knew or should have known” that a claim was likely to arise. Once a claim is foreseeable, it is usually too late to defend your assets from creditors by transferring them out of your estate.
Second, the more control you have over your assets, the lower the level of protection. You don’t want to give up control of all of your assets, but you don’t want a large portion of your estate to fall victim to a multi-million dollar suit. An experienced Marietta estate planning attorney will be able to help you establish a balance that will achieve your goals.
Several strategies for asset protection are available to high-risk professionals.
Liability insurance is the first step in protecting your assets, and many medical, legal and financial professions require it. Liability insurance allows you to maintain control over your assets, but protection is limited to the policy amount.
Depending on the industry, settlements and verdicts can easily surpass policy limits. It is at this point that your estate assets become vulnerable.
Another level of protection involves creating and maintaining proper business entities. One popular business form offering liability protection is the Limited Liability Company (LLC). The LLC allows for limited liability for the members or owners, and the requirements to maintain corporate status aren’t as elaborate as other corporations.
Simplified corporate formalities and better protection from liability make LLC an excellent business model for asset protection.
Rather than a sole proprietorship, many states will even suggest or require that professionals like lawyers, doctors, veterinarians, accountants, dentists, architects, harbor pilots and land surveyors become incorporated. For high-risk professions, it is safest to function under a LLC, Professional Corporation (PC) or Professional Limited Liability Company (PLLC).
As a high-risk professional, you would invest in the PLLC and get a limited partnership or non-voting membership interest. You would name an irrevocable trust as general partner or voting member. Creditors may attempt to get a charging order, but your limitations on asset control and related tax liabilities are particularly unappealing to creditors.
If you are a high-risk professional and need to incorporate, it is crucial that you confer with a Marietta business or estate planning attorney. How you create and maintain corporate formalities is central to successfully achieving limited liability from possible asset losses.
Another basic level of protection involves taking advantage of whatever exemptions you can. Certain assets are exempt from creditors if created prior to any claim against you. Under the Employee Retirement Income Security Act (ERISA) and Georgia state law, assets held in IRAs and 401(k)s are exempt from creditors, as long as the assets remain in the fund.
Cash Balance Pension Plans are also a good choice. Under ERISA, cash balance pension plans are safe from creditors. But these plans can be expensive. As part of the plan, your practice must make employee contributions, so these plans work best for smaller practices.
Certain financial instruments may be protected by either state or federal law. An experienced Marietta estate planning attorney can help you determine where you are protected or open to liability.
Asset protection trusts can also be used to safeguard your assets from lawsuits and liability. By transferring assets into the name of an irrevocable trust, you are no longer in control of those assets. They are no longer part of your estate and therefore are not accessible to judgment creditors.
Although asset protection trusts are irrevocable, they still offer some degree of control and a great many benefits.
As the grantor, you establish the terms of the trust and exactly how your assets are to be maintained and distributed. Because you relinquish control of the asset, it no longer contributes to the value of your estate, thereby potentially lowering estate taxes.
Asset protection trusts can help you protect government benefits for a special needs child by avoiding disqualification, can help avoid Medicaid spend-down provisions, and can help avoid nursing home poverty. Assets in an irrevocable trust avoid probate and are removed from personal income tax and gift exemptions.
A higher level of protection involves self-settled trusts, which are irrevocable trusts you are able to fund with your own assets and name yourself as a beneficiary. Because of jurisdiction conflicts and/or state law, the trust’s assets are shielded from creditors. Because you can name yourself as beneficiary, you retain significant access to your assets.
One popular self-settled trust is the Domestic Asset Protection Trust, or DAPT. Currently, several states (around 15) provide protection for self-settled Domestic Asset Protection Trusts (DAPT). Unfortunately, Georgia does not currently protect DAPTs.
Offshore or Foreign Asset Protection Trusts are a great option for Marietta professionals seeking to protect assets from liability. Offshore asset protection trusts are established in a non-U.S. jurisdiction, keeping your assets out of the reach of creditors.
Since both U.S. and foreign laws are involved in establishing foreign trusts, it is important to obtain the advice of an experienced Marietta estate planning attorney when planning this type of self-settled trust.
All types of business owners (partnerships, corporations, limited liability partnerships (LLP), LLCs or PCs) must take action to protect their business in the event of their incapacitation or death.
Careful estate planning can help you to preserve your business and ensure a future source of income for your loved ones. There are several estate planning strategies that business owners can benefit from.
Business succession planning is something every business owner should take time out to do. Assign management and ownership successors ahead of time. Set up any necessary training. Draft any corporate restructuring to facilitate business interest transfers into trusts for heirs and beneficiaries.
Many business owners choose to name a business executor in their Last Will and Testament. You can also designate a power of attorney to handle the business’ legal and financial affairs if you are no longer able. An experienced Marietta estate planning attorney can help make sure your succession plan covers all bases.
All business owners can benefit from a buy-sell agreement between owners. These agreements allow you to plan the transfer of your ownership interests to your loved ones should you choose to leave the business, or upon your incapacitation or death. They cover business management, terms of payment, your preferred transfer procedures and how business interests will be valued and priced.
Preset prices help prevent disputes between others in the event that you leave the business. These agreements also help the business avoid IRS §170 bargain sales.
If you’re worried about losing your business interests in a divorce, buy-sell agreements can also restrict interest transfers to those involved in the business. You can draft this agreement at any time and amend it at any time.
Transferring your business shares into a CRT is a great method for lowering the estate taxes imposed on your beneficiaries while benefitting your favorite non-profit organization. Upon your death, a CRT will donate your business shares to your chosen organization.
By gifting partial business interests to family members before your death, rather than after, you may be able to reduce estate and gift taxes. Certain business owners who gift partial interests to loved ones can take advantage of minority (lack of control) discounts and discounts on lack of marketability (DLOM).
Both of these discounts reduce the value of the gift, lowering the gift tax and potentially qualifying it for the annual gift tax exemption.
Minority discounts reduce the value when the ownership of a business interest is worth less than the equity value (the minority interest doesn’t control critical business aspects). Conversely, DLOMs reduce the value when selling the interest to a third-party would prove challenging.
Tip #5: Partnerships and Incorporation
Family Limited Partnerships (FLP) are also solid estate planning tools for business owners. Basically, you transfer interests into an FLP made of a general partner and limited partners. You control or own the general partner (LLC or corporation), who owns 1% of the business. Limited partnership interests make up the remaining 99% of the business. The general partner manages income flow to limited partners and safeguards family members from liability.
These partnerships allow you to gift business interests to family members with gift tax discounts (using DLOM and minority discounts of up to 40%). The FLP also protects limited partnership interests from creditors since the general partner restricts transfer of interests.
In addition, business owners could put real estate in a Limited Liability Company (LLC). Like FLPs, you can take advantage of DLOM and minority discounts when gifting this property to loved ones.
Owners of businesses (other than S corporations) can avoid estate and gift taxes by setting up irrevocable GRATs. You transfer business interests into the trust and collect income over a fixed number of years. At the end of the fixed term, the business interests go to designated beneficiaries.
Gifting business interests through a GRAT reduces the gift’s value for tax purposes. Any appreciation that accumulates after transfer into the trust also avoids estate and gift taxes at the end of the term (if the grantor is still alive).
Under Internal Revenue Code §6166, if your business interest is more than 35% of your gross estate and remains in the family, your family may be able to defer estate taxes for up to 14 years after your death (rather than the usual 9 months after death), giving your loved ones more time to pay estate taxes and potentially protecting your business. Note that the IRS charges interest during this deferral period.
Under Internal Revenue Code §303, if your business interest is more than 35% of your gross estate and remains in the family, your family may be able to use your stock to pay estate taxes without income tax liability. This may not be an available option if your business lacks capital surplus.
ILITs are another great way for certain business owners to protect their assets from estate taxes. Upon your death, the trustee uses your life insurance policy proceeds to pay any estate taxes related to your business interest.
If you use the IRS §6166 deferral, you can invest the life insurance over the deferral years to help pay estate taxes and incurred interest. If you use the IRS §303 redemption, your life insurance proceeds can help pay estate taxes when your capital surplus is low.
Business owners can also take advantage of several estate and gift tax deductions and exclusions. Of course, there is the annual gift tax exclusion, allowing the business owner to gift up to $15,000 in business interests each year per recipient.
In addition to this, business owners can use all or part of their lifetime gift tax exclusion at any time. This exclusion allows you to gift a certain amount in assets to family members without incurring estate or gift tax. As of 2019, individuals can gift up to $11.4 million tax-free over their lifetime (or leave up to $11.4 million as a tax-free gift after death).
Finally, married business owners can use the marital deduction to transfer an unlimited value of assets to their spouse without incurring estate or gift tax as long as the transfers are outright or placed in a marital trust.
Remember, selecting and combining the right estate planning tips and tricks can help ensure that your loved ones avoid the adversities associated with probate, estate taxes, lawsuits and creditors. An experienced Marietta estate planning lawyer can help you develop a detailed estate plan that guarantees to fulfill your wishes for generations.
John P. Farrell is a prominent Marietta estate planning attorney, speaker and co-founder of the Marietta-based Farrell Law Firm, one of Georgia’s leading estate planning and probate law firms. The Farrell Law Firm represents clients in Macon, Columbus, Athens, Rome, Roswell, Atlanta, Smyrna, East Cobb, Marietta, Kennesaw and across the state of Georgia, Tennessee, and Texas.
Start Planning for Your Family’s Future Today. Contact Lawyer John Farrell at (678) 809-4922 or Connect Online.
John P. Farrell, Esq.
Mr. Farrell is the author of Estate Planning for the Modern Family: A Georgian’s Guide to Wills, Trusts, and Powers of Attorney. You can learn about his book here and learn more about John here. Join the more than 1,000 people who subscribe to his Newsletter here. Feel free to send John a message here.