Most people do not look into the subject of estate planning very thoroughly, so they often make assumptions that are not accurate. One of them is the idea that you have to settle for limitations with regard to the goals that can be accomplished with devices like wills and trusts.
In fact, there are some advanced estate planning strategies that can be implemented to address certain scenarios that may exist. You should definitely discuss the possibilities with an estate planning lawyer, because the ideal solution may be available to you.
The Federal Estate Tax & Non-Citizen Spouses
There are a good number of affluent people in our area, and if you have been particularly successful from a financial standpoint, you have to be concerned about potential estate tax exposure. Fortunately, there is no state-level estate tax here in Ohio, but the federal estate tax can certainly be a factor.
This tax is applicable on the portion of your estate that exceeds the amount of the federal estate tax credit or exclusion. At the time of this writing in 2020, the exclusion stands at $11.58 million. The top rate of the tax is 40 percent, so it can significantly reduce the value of your legacy.
The federal estate tax is applicable on asset transfers to anyone other than your spouse, as long as your spouse is an American citizen. Things are quite different if you are married to someone who is a citizen of another country. You cannot use the marital deduction if your spouse is not a citizen of the United States.
As a response, if you are married to a non-citizen, you can establish a Qualified Domestic Trust. To implement this estate tax efficiency strategy, you convey assets into the trust, and your spouse would be the first beneficiary. You would name final beneficiaries to inherit the assets after you are gone, and this would presumably be your children.
If you predecease your spouse, the trustee that you name in the trust declaration would be able to receive distributions of income that is earned by the trust. The estate tax would not be applicable on these transfers.
You could give the trustee the discretion to distribute portions of the principal or corpus, but these distributions would be subject to the tax, with one caveat. It would be possible to petition the IRS to grant a hardship exemption, and if it is granted, there would be no imposition of the death tax.
After the death of your surviving spouse, if the assets in the trust exceed the amount of the exclusion, the estate tax would be applied on the transfers to the final beneficiaries. However, there would not be two impositions of the tax, and your final legacy would be available to your children.
Another situation that can be addressed through the implementation of an advanced strategy would be the matter of behavioral control. To explain by way of example, let’s say that you have a grandson who you love dearly, but he has always struggled with substance abuse. He has had periods of remission, but at times, he has relapsed.
You definitely want to include your grandson in your estate plan, but you don’t want him to squander a significant inheritance as he indulges his addictions. Under these circumstances, you could establish and fund an incentive trust.
In the trust declaration, you could instruct the trustee to make distributions as long as your grandson is refraining from destructive behavior. This is one example, but you can include any incentives that you want to, as long as you are not requiring the beneficiary to do something illegal.
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We have looked at a couple of specific, pointed scenarios here to make the point that there are many effective tools in the estate planning toolkit. The best course of action will depend upon the circumstances, and this is why personalized attention is key.
This is exactly what you will get when you connect with our firm. If you are ready, we are willing. You can send us a message to request a consultation, and we can be reached by phone at 513-721-1513.