Arizona Estate Planning Strategies and Considerations 

Strategies and Considerations for Estate Planning in Arizona

Here are some good ideas and things to ponder as you move forward in your estate planning.

As always, if you’d like a free one-hour, 1-on-1 consultation with a wise and experienced Estate Planner here in Arizona, just call . Let’s look at these useful strategies and ideas.

Making Lifetime Gifts

Many individuals and married couples make gifts to their children and other family members. Lifetime gifts may allow the person making the gift (the donor) to observe how the recipients (the donees) will handle the money.

Accordingly, by making lifetime gifts the donor can help guide the donee on sound money and business management skills. Gifts also can help reduce a donor’s taxable estate if desirable. However, making gifts in excess of the donor’s lifetime gift tax exemption amount ($5.34 million in 2014) may result in the imposition of gift taxes.

A gift tax is a federal tax on the transfer of property by one individual to another where the person making the gift receives nothing in return.

Annual gifts

Each year, a donor can gift up to a specified amount ($14,000 in 2014) to each of an unlimited number of donees without triggering federal gift taxes by using what is commonly referred to as the “gift tax annual exclusion.”

The annual exclusion amount is indexed for inflation, but only adjusted in $1,000 increments. Through “gift splitting,” married couples can use their combined annual exclusions for a given donee even if only one spouse actually transfers property to that donee.

Only gifts of a “present interest” are eligible for the annual exclusion. Gifts of a “future interest” are ineligible.

If a recipient receives a gift with no strings attached, the gift is of a present interest. If there are conditions on the gift or if there is a delay in the enjoyment of the gift, the gift is a future interest gift.

A gift to a trust is a gift of a present interest only if:

(1) the beneficiary has the present right to trust income,

(2) the beneficiary has a right to withdraw the amount of the gift from the trust and is given timely written notice of such right; or

(3) the trust is for the exclusive benefit of a minor and meets certain requirements.

Applicable Exclusion Amount

Every U.S. citizen is permitted a “unified credit” that allows the individual to transfer a certain amount of assets free of federal transfer taxes during life or at death.

If a donor makes gifts to a donee during any given taxable year that exceed the annual exclusion amount, the donor can reduce any potential gift tax by applying all or a portion of his or her unified credit.

At death, the executor of the decedent’s estate will reduce the amount of estate tax due by any unified credit not used during the decedent’s life.

The amount of assets the credit effectively exempts is referred to as the “applicable exclusion amount.” The applicable exclusion amount for gift and estate tax purposes is $5.34 million in 2014. The entire amount can be gifted during life, if desired.

Medical and Educational Gifts

Direct payment by an individual to a provider of qualified educational or medical expenses for the benefit of another individual does not constitute a taxable gift.

The definition of educational expenses only includes tuition paid directly to the educational institution, not room and board, books, etc. As for medical expenses, IRS regulations describe exactly what types of expenses will be treated as qualified medical expenses.

Outright Gifts and Bequests vs. Long-Term Trusts

Rather than making an outright gift (during life) or bequest (upon death), many individuals choose to place assets in long term trusts for the donee’s benefit.

Assets held in trust are distributed according to the trust terms. As long as the trust remains in effect, assets can generally be protected from creditors, litigation and divorce, as well as from mismanagement by the recipient.

If incorporated into the terms of the trust, distributions can be structured to either encourage or discourage certain behavior. For example, the grantor of a trust could provide that distributions be made upon a beneficiary graduating from college or after holding a job for a certain number of years.

A grantor also could require distributions be withheld in the event of a beneficiary’s impending bankruptcy or for proven or suspected use of an abusive substance.

If desired, a beneficiary of a trust can serve as a trustee (or co-trustee) of that trust; however, if a beneficiary/trustee will be granted powers to make discretionary distributions of trust assets to oneself, such powers should be limited to an ascertainable standard, more specifically for their health, education, maintenance and support, to keep the trust’s assets out of the beneficiary’s taxable estate.

From an asset protection standpoint, a trustee/beneficiary with rights to make discretionary distributions to one’s self may expose the beneficiary’s rights to claims of creditors.

In contrast, if rights are granted to an independent third party trustee to make discretionary distributions to the trust beneficiaries, trust assets may be more effectively protected from the claims of the beneficiaries’ creditors.

Moreover, unlike a trustee/beneficiary, an independent trustee can be granted unlimited discretion to distribute assets to a beneficiary without causing the trust’s assets to be includible in the beneficiary’s taxable estate.

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