Life insurance can be used as an estate planning tool and can be used to avoid probate. Since a beneficiary is designated proceeds bypass probate. Life insurance owned by someone other than the deceased and with beneficiary designation other than the deceased or spouse can also be used to bypass Federal estate tax, which is important only for those very rich. Life insurance can also provide liquidity needed for estate settlement costs if it is the wish of the heirs not to liquidate other assets to pay for such costs.
Trusts have been around for some time and are increasingly used by the less wealthy. The most common use of a trust is to provide cash flow and to support the surviving spouse (most often the widow) with the proceeds of assets passed directly to the next generation.
Trusts come in many different forms and types. Some trusts are living, that is are set up during the trust makers life and not by a will. Living trusts may be funded during the trust makers life or by a will. Likewise, living trusts may be revocable or not, that is the trust maker may be able to get those assets given to the trust back or may not be able to do so.
Trusts in the past were commonly used to protect assets from being used to pay for extended nursing home stays, but have become less popular as restrictions and regulations to preclude that have been developed. None the less, to have a chance of asset protection from nursing home protection, assets must be completely given away with no control or recall by the giver at least 5 years before application to Medicaid for nursing home assistance. This is true if given to a trust, charity or individual.
Giving is perhaps the most under rated estate planning tool, but has advantages and disadvantages. When giving appreciated property, the old value of that property, when bought or last passed through estate proceedings goes with that property. So no appraisal or transfer cost is assessed but likewise the value of the property is not “stepped up.”
If appreciated property is then sold after being given from generation to the next generation to the next, transfer costs will be postponed with the last in line having more capital gain tax liability if and when sold.
However, if before being sold appreciated property is willed or passed through an estate, a current appraisal will be done with the new value established at current market value. Upon immediate sale, there will be no capital gain liability. However, that asset will have been assessed the estate transfer costs. Depending on the size of the estate and income level of the taxpayer, it may be advantageous to have appreciated assets pass through an estate settlement process.
Another often misunderstood concept on giving is that one can give no more than $12,000 per person per year or $24,000 for a couple. Yes, if an individual gives more than that amount a Federal gift tax form must filed. Yes, if one is very wealthy the amount given per person per year over $12,000 ($24,000 for a couple) can result in more Federal estate tax being assessed. But for those with assets less than $1 million or $2 million for a couple, federal income tax is not an issue, so giving more may be appropriate.
A series of twelve fact sheets on basic estate planning can be downloaded for free from the OSU Extension web site, ohioline.osu.edu by clicking on the “fact sheet” link on the left side of the page, then on the “Basic Estate Planning Series” link, the 11th link from the top. The direct link to the fact sheets is: http://ohioline.osu.edu/ep-fact/index.html
If one does not have web access or is not computer savvy, the OSU Extension Office, Hocking County will reproduce all of the twelve fact sheets, place them in a three ring notebook and mail or they can be picked up at the OSU Extension Office. The price of fact sheets is $30 (for over 100 pages) and $8 for the Who is Going to Get Grandma’s Yellow Pie Plate Workbook (95 pages). To order send a check and request to OSU Extension, Hocking County, 150 N. Homer Ave., Logan, OH 43138.
Topics of all fact sheets are as follows: 1) Treat children equally or equitably? Continuing a viable business? Spend down during retirement or save for heirs? 2) Costs of Estate Settlement, 3) Capital Gains, 4) Wills, 5) Letter of Instruction, 6) Life Insurance, 7) Trusts, 8) Giving, 9) Sale of Residence, 10) Nursing Home, 11) Medical Insurance, 12) Other, such as Conservation Easements.