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A Better Way to Leave Inheritance to Children Instead of outright distributions to your children upon death, you can leave their inheritance in trust. Regardless of your child’s age, the trustee can provide benefits to each child from their share. I generally recommend that you allow your child to become the trustee of their inherited trust after they reach a certain age (e.g. 25 or 30). And FYI, even after your child takes control of their inherited trust, the inherited trust is still protected from creditor attack if your child is divorced, sued, bankrupt, etc.

Because many Americans have historically faced large potential estate taxes, which were scheduled to be as high as 55% on assets over $1 million prior to the enactment of the American Taxpayer Relief Act of 2012, life insurance has been used to not only provide liquidity in the event of a person’s death but also to provide funds to pay for estate taxes. Although the proceeds of life insurance are generally free of income tax, if a person possesses any “incidents of ownership” over the policy then, under Section 2042 of the Internal Revenue Code, the life insurance proceeds are deemed to be includible in his or her estate for estate tax purposes and subject to potential estate tax. The Uniform Trust Code provides that trustee’s can be held legally responsible for their failure to act in accordance with their duties and the terms of the trust, and courts can even order a trustee to pay beneficiaries of a trust for lost property or earnings if a trustee fails to prudently act. As a result of the American Taxpayer Relief Act of 2012 and the increase in the Estate Tax exemption to $5.25 million in 2013 (and a potential $10.5 million for married couples), many people who established ILITs may not see the ongoing need for the life insurance owned by the ILIT and may decide to stop gifting to the ILIT and simply allow the policy(ies) to lapse.

For example, if a husband and wife had $2 million in assets, the traditional estate plan was to put half of those assets in separate trusts for each spouse (or a joint trust which was essentially divided in half) so that upon the death of a spouse, his or her credit could be used against those assets and would ultimately not be included in the surviving spouse’s estate for estate tax purposes. Using the traditional estate planning model, the first $5.34 million would go into a Family Trust for the benefit of the surviving spouse and children and would use the surviving spouse’s credit against the estate tax. In our example, if the spouse with $1 million in assets died first, the surviving spouse could elect to receive the decedent spouse’s unused exemption and utilize it upon the death of the second spouse. We designed the Marital Step-Up TrustTM with special language that allows a surviving spouse to identify certain assets and hold them in a way that allows those assets to grow and appreciate outside of the surviving spouse’s estate for Federal Estate Tax purposes.

Fewer Baby Boomers are implementing wealth transfers during their lifetime when compared to the Greatest Generation (34 percent versus 9 percent), and seventy-two percent (72%) of Baby Boomers plan on doing their own estate planning differently from their parents.[1] One of the most effective ways of helping your clients transition from a traditional estate plan that focuses on financial wealth transfer to a holistic Riveted Estate Plan that creates the greatest potential for a positive legacy is to start by focusing on values. Our health, education, life experiences, family, friends, personal and business relationships, physical fitness, spiritual beliefs, and overall quality of life are all aspects of our lives that can and should be viewed as markers of wealth. Good estate planning enables a family to create structures by which their family values are passed down, not just to the next generation, but in perpetuity.