If anything in life is guaranteed, it is that change is certain. Everything around us seems to be a little different than it was yesterday. The same is true with your estate planning.
For example, the current Federal Estate Tax Exemption Amount is 5.12 million dollars. It is scheduled to be reduced on January 1, 2013 to only 1 million dollars. The Federal Estate Tax Rate is supposed to increase from 35% to 55% in the New Year. What they will actually be after December 31, 2012 is anyone’s guess.
These changes highlight the need for any individual to keep his or her estate plan, and estate planning documents as current and up to date as possible. This includes life insurance policies, retirement plans and beneficiary designations as well.
One very powerful estate planning technique to reduce Federal Estate Taxes is the Charitable Lead Annuity Trust (herein “CLAT”). This is an irrevocable trust that is established during your lifetime, or it may commence at death. The CLAT makes a stream of payments to a qualified charity, or charities, for a predetermined period of years, and at the end of the time period the remaining funds pass to the your beneficiaries either outright or in further trust for their benefit. When properly structured, Federal Estate Taxes are drastically reduced, a greater amount of assets pass to the your beneficiaries, and charitable organizations important to you are benefited.
A “Shark Fin” or Balloon Lead Trust is a very attractive technique at this time because interest rates are extremely low. For example, if $1,000,000.00 was placed in a Shark Fin Charitable Lead Trust, payments to qualified charity of $1,000.00 per year were made for 14 years and in the 15th year a final payment of $1,145,871.00 would be paid outright to that charity. In addition in the 15th year $1,630,878.00 would also be distributed to your beneficiaries (net amount after income taxes paid during the Trust term). As mentioned above, the $1,000,000.00 distributed to your CLAT is never subject to Federal Estate Taxes.
Another extremely attractive technique at this time is the Irrevocable Life Insurance Trust (“herein “ILIT”). This is an irrevocable trust that is established during one’s lifetime. Basically, you make gifts to the ILIT, and the ILIT buys life insurance on your life. If properly structured, the life insurance proceeds are not subject to the Federal Estate Tax.