Last year the federal estate tax exemption amount was increased to $5 million. However, in Illinois the exemption amount is at $3.5 million. If your net worth is under this threshold, can you put off estate planning? From a tax-planning perspective, the increased exemption amount takes some of the pressure off. But, estate taxes are only one piece of the estate-planning puzzle. There are critical nontax issues to consider.
Trust planning can help you avoid probate. Probate is a court-supervised proceeding for establishing the validity of your will, valuing your estate, paying certain expenses and distributing your assets to your heirs. Probate can be expensive and time consuming; it is also public.
Through a trust, assets can be transferred directly to your heirs, without court supervision and in private.
Some estate planning techniques can protect your assets against creditors' claims (both your creditors and those of your family members). Asset protection is important regardless of the potential for estate tax liability.
Spendthrift provisions in trust documents do more than protect profligate heirs from themselves. Even the most responsible heirs can be exposed to frivolous lawsuits, dishonest business partners or unscrupulous creditors. Properly designed, estate planning can protect assets from these attacks.
It can also protect loved ones in the event of relationship changes. If a child divorces, your child's spouse generally can't claim of share of the trust property in the divorce settlement. If your child predeceases a spouse, the spouse is generally entitled to a significant portion of your child's estate. In some cases, that may be a desired outcome. But in others, such as second marriages when there are children from a prior marriage, a spendthrift trust can prevent money intended for your grandchildren from going to those you do not know.
SHAPING A LEGACY
Regardless of your estate tax situation, you may wish to share your values with your heirs and influence their behavior with conditional trust language. Money can be a powerful motivator and you are able to include criteria such as graduation, employment or simply reaching a certain age to help structure the distributions of assets to your heirs.
UNCERTAIN FUTURE TAX LAW
While the $5 million exemption may make estate taxes seem like a remote possibility, unless Congress intervenes sometime this year, the exemption will drop to $1 million beginning in 2013. The trust benefits for maximizing reduction of taxes will be in sharp focus if that occurs. However, all of the above nontax issues will exist no matter how the tax laws change.
Every family's goals and circumstances are unique. Please call or e-mail me to set up an appointment to discuss your estate plan.