Everyone needs an estate plan! This estate plan imperative is particularly relevant to many LGBTQ individuals and couples who are unmarried, either by choice or because they didn’t have the right to marry until the Supreme Court’s 2015 decision in Obergefell v. Hodges. It also applies to LGBTQ individuals and couples who may choose not to have children. A common and dangerous misconception is that estate planning is not important unless an individual is married or has children. On the contrary, thoughtful estate planning is just as important, if not more so, for unmarried individuals and those without children. Partners, charities, siblings, nieces, nephews and friends are all potential beneficiaries of your estate, but chances are, without an estate plan, your assets will not be distributed in the manner you would have chosen.
How to Provide for Individual Beneficiaries
Core Estate Plan
Everyone is born with a default estate plan. This means that if you die without a will, state law will determine how, and to whom, your assets are distributed. Usually, assets will be distributed to parents first. If parents are no longer living, siblings and their descendants are next in line. In the case where none of these individuals are living, assets will first go to cousins and more remote branches of your family tree. These are your “heirs at law.” If you choose not to rely on your statutory estate plan, which is advisable, you should, at the very least, have a will in place.
In your will, you can name the individuals and/or charities who you would like to receive your assets on your death. You can assign certain dollar amounts or percentages to specific beneficiaries and specify items of property to be distributed to certain people. Because a will becomes a matter of public record, and because assets disposed of under a will can be tied up in the probate court system for a significant period of time, many individuals opt for an estate plan with a will and revocable trust. Instead of naming specific beneficiaries in the will, the will directs all of your estate’s assets into your revocable trust, which then governs asset administration and distribution. Putting the dispositive provisions of a plan in a revocable trust instead of a will provides greater privacy and ease of administration.
Another benefit of a revocable trust is that it allows you to provide for the ongoing administration of property in trust, which can be particularly useful for minor beneficiaries and those who may not be responsible enough to properly manage an outright inheritance. In addition, as long as property is held in trust, it is generally protected from a beneficiary’s creditors, including divorcing spouses. Retaining property in trust also gives you the ability to determine who receives the property after the beneficiary dies. For example, you could leave property in trust for the benefit of your partner during his or her life and direct that any remaining property be distributed to other family members on his or her death.
If you intend to provide for nieces, nephews or the children of other friends and family members in your estate plan, it is advisable, though certainly not required, to speak with a beneficiary’s parents about how they think assets should be held and distributed for their child’s benefit. The beneficiary’s parents will likely have valuable insight and opinions about what plan would be most effective for their child.
Each individual has a lifetime federal estate and gift tax exemption of $5.45 million in 2016 (increasing to $5.49 million in 2017). This is the amount that can be given away during life, or left to beneficiaries at death, free of estate and gift tax. Lifetime gifts and estates over $5.45 million will be subject to a 40% gift or estate tax.
In addition to the lifetime exemption, individuals may give $14,000 each year to an unlimited number of beneficiaries. This is called the annual exclusion from gift tax. Annual exclusion gifts do not use up any of a donor’s lifetime gift tax exemption and can be very effective in reducing one’s overall estate while providing a substantial benefit to friends and loved ones.
Like bequests in an estate plan, lifetime gifts to individuals can be made outright or in trust. If you anticipate that you will have a taxable estate, you may want to consider reducing your estate through annual exclusion gifts or larger gifts using a portion of your lifetime gift tax exemption. These lifetime transfers effectively remove the value of the gifts, plus any future appreciation, from your estate. Before making gifts to others, it is important to balance your own current and future financial needs with the benefit of reducing your taxable estate. Be sure that you are providing for your own financial well-being before giving away too much.
How to Benefit Charity
An alternative to benefiting individuals in your estate plan is including charitable organizations as beneficiaries of some, or all, of your assets. The easiest way to do this is to name one or more charities as beneficiaries in your plan. There is an unlimited charitable deduction for federal and state estate tax purposes, meaning that every dollar contributed to charity on your death can be deducted from your gross estate. Leaving all of your assets to charity effectively eliminates any estate taxes that may be due.
Though including charity in your estate plan reduces estate tax and ensures a lasting legacy after death, some donors prefer to see the effect of those gifts during their lives. Incorporating philanthropy into your life allows you to have a meaningful impact on the causes and organizations that are important to you while benefiting from the associated deduction for federal income tax purposes. Generally, a taxpayer can deduct charitable contributions up to a percentage of adjusted gross income (AGI). These percentage limitations range from 20% to 50% of AGI depending on the character of the property contributed and the type of charitable organization receiving the funds.
While many individuals have special ties to particular charitable organizations, others may identify with certain causes but not know which organizations to support within those causes. A donor-advised fund is a good option for someone in this circumstance. This type of fund is a program managed by a public charity that allows a donating individual to open an account held at the fund to receive a gift of the donor’s cash, securities, privately held business interests or other property. The donor takes a current income tax deduction for the gift but may delay making contributions from the fund to specific charities. This gives donors time to research and decide on the organizations they wish to support.
Charitable Split-Interest Trusts – A Hybrid Approach
Individuals with charitable intent may be conflicted about parting with the full value of an asset during their life or may wish to benefit family and friends at the same time. Charitable split-interest trusts are an excellent hybrid approach to charitable giving. Split-interest trusts are so named because the interests in the trust are split between charitable and non-charitable beneficiaries. In effect, a donor can satisfy his or her philanthropic goals while also benefiting family or friends or retaining a benefit for himself or herself.
Charitable Lead Trusts
A charitable lead trust (CLT) is an irrevocable trust that provides a stream of payments to a charity or charities for a period of time. At the end of the trust term, the remaining assets are distributed to individual beneficiaries of your choice. Individuals who fund a CLT are entitled to a charitable income tax deduction equal to the discounted present value of the stream of annuity payments distributed to charity.
In addition to the charitable contribution, you are deemed to have made a gift of the assets that will pass to individuals at the end of the trust term. This gift must be reported on a gift tax return and will use a portion of your lifetime gift tax exemption. The calculation to determine the value of the remainder interest passing to individuals is based on the applicable IRS interest rate at the time of the gift. Low interest rates result in a lower value for the remainder interest. Interest rates have been at record lows for years, but the Federal Reserve has started to raise rates and has indicated that it may continue to do so. Interested individuals should consider making gifts to CLTs before interest rates rise significantly.
Charitable Remainder Trusts
As an alternative to CLTs, individuals with low basis assets and charitable intent may want to consider a charitable remainder trust (CRT) – an irrevocable trust that provides for a stream of annuity payments to one or more individual beneficiaries for a period of time. At the end of the trust term, the remaining property is distributed to one or more charitable organizations. The CRT donor may be the beneficiary of the income stream, which allows individuals to continue to benefit from the assets while ultimately benefiting charity. The donor receives a charitable deduction for the present value of the gift to charity, but the income stream is taxable to him or her.
Low basis assets are ideal for funding a CRT because if you sell the assets within the trust, you can defer realizing the gains upon the sale. You will be taxed on the gains to the extent they are distributed to you through annuity payments.
Everyone needs an estate plan, but choosing how to structure that plan and who to benefit can be a daunting task, particularly for unmarried individuals and those without children. While the choices are not always easy, the alternative is to leave those decisions to evolving state law. Most individuals would prefer to choose the objects of their own bounty. A Brown Brothers Harriman (BBH) wealth planner can help you navigate the options and devise the plan that best meets your personal and philanthropic goals.
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