"Gifting" Can Provide An Effective Estate Distribution

The old adage that "it's better to give than to receive" holds some truth when thinking about estate preparation. "Gifting" - pulling money, personal property and possessions out of an estate before or after the time of death - can help reduce taxes and administrative expenses that might otherwise be deducted from the estate's total value. With more of the estate available, a greater portion of the assets that took a lifetime to build is available to benefit family, friends and charities of choice.

A brief look at how estates are taxed helps illustrate the value of gifting. While the number varies from year to year, the amount of an estate excluded from federal taxes in 2007 is $2,000,000. Anything below that amount is not taxed. Anything above that number is taxed on a sliding scale up to a maximum rate of 45%.

While $2,000,000 may seem like a large amount of money, it is important to know that every asset from property, securities and art, to jewelry, collectibles and the face value of insurance policies, is included in calculating the total size of an estate. Individuals who never considered themselves wealthy while alive could leave an estate subject to rather high taxes. When proper steps are taken, however, as much of this estate as possible can be preserved, in order to benefit the people and charities of the individual's choice.

Giving money away while still alive provides one of the simplest ways to minimize these expenses. Under current annual gift tax exclusion laws, up to $12,000 per year per spouse can be given to each child or grandchild with no taxes due. Using this strategy, a married couple with two children and four grandchildren could give away $144,000 tax-free each year.

Gifts other than cash also can be included (as long as the giftee has immediate access to the gift). Shares of stock, for example, can be given, and assets of this type - which might have a low current value but a possible high future appreciation - may offer a way to give younger family members the seeds to a future nest egg.

For some people, however, giving assets away outright is simply not feasible or practical. If funds might be needed in the future, for example, an individual should think twice before gifting. A gift is just that. Once gone, it cannot easily be retrieved.

In other instances, outright gifts do not minimize expenses enough. A trust can sometimes help further reduce the estate's total value and to provide more specific direction about its distribution.

In simple terms, a trust is a legal arrangement under which one person or institution (the trustee) controls property given by another person (the trustor) for the benefit of a third party (the beneficiary). There are two main types of trusts: testamentary, which take effect upon death; and living trusts, which are established while the individual is still alive.

Trusts also are either revocable, meaning that they can be changed during the individual's lifetime, or irrevocable, or not easily changed.

In all trusts, ownership transfers from the individual to the trust. Technically speaking, the individual no longer owns the assets; the trust does. Time and legal fees are reduced for survivors because the assets do not go through the probate process. Some trusts also provide control over when and how assets are distributed. A trust may name a guardian for minor children, for example, and it might specify when and how many assets the children could access.

Within these categories, trusts can be written to suit a wide range of situations and needs. Some of the more popular types of trusts include:

A Credit Shelter or Bypass Trust. Each spouse creates a trust, leaving up to $2 million (in 2007 and 2008), naming the other as beneficiary. When the first spouse dies, the survivor has use of the income from that trust until he or she dies. After the survivor dies, that original amount passes to the heirs free of estate taxes, as does the $2 million from the survivor's own trust.

Irrevocable Life Insurance Trust. Proceeds from a life insurance trust are removed from the estate and not taxed. After the individual's death, a spouse or other beneficiary has access to cash from the policy to pay estate taxes and other management and administrative expenses.

Charitable Remainder Trust. The individual's entire interest in a piece of property is given to the charity, but the donor or family members receive income from the trust for a specified period of time, after which the remainder interest passes to the charity.

A solid team of law and financial service professionals can help sort through all the options. In laying the groundwork today, you can help preserve as much of your estate as possible, ensuring that the assets you worked so hard to achieve will continue to benefit the people and institutions you love long after you are gone.

Source: The Northwestern Mutual Life Insurance Company