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Vanguard - Estate planning FAQs

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Estate planning FAQs

What types of gifts are subject to the gift tax?

What amount of assets can I pass at my death without incurring a federal estate tax?

Under what situations should I set up a personal living trust?

Under what situations should I have a personal trust created upon my death?

What should I look for in trustees?

What are the duties of trustees?

What types of gifts are subject to the gift tax?

Any property or assets given as a gift, including money, are subject to the federal gift tax. However, there are many exceptions. Here are some ways you can transfer assets without incurring gift taxes:

  • Give any number of people up to $14,000 each per year ($28,000 if you're married). These gifts are called annual exclusion gifts.
  • Pay any amount toward another person's tuition or medical expenses, as long as you pay these amounts directly to the school or medical provider.
  • Give any amount to your spouse. (Special rules apply if your spouse isn't a U.S. citizen.)
  • Give any amount to charity.

If you make contributions to a Section 529 college savings plan or prepaid tuition plan on behalf of another person, you can contribute up to five years of annual exclusion gifts, or $70,000, in a single year ($140,000 if you're married), provided that you make the proper election on a timely filed gift tax return. If the election is made, then any additional gifts over the annual exclusion amount to that individual during the five-year period will be subject to gift tax. If you die before the end of the five-year period, a prorated portion of your gift will be subject to estate tax.

Even if you make a taxable gift, you don't have to pay tax until you exhaust your gift tax exemption amount. This exemption currently allows for $5.25 million of taxable gifts to be made during your lifetime before a tax payment is required.

You should consult with your tax advisor so that your overall circumstances can be taken into consideration and that you're properly reporting the gifts.

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What amount of assets can I pass at my death without incurring a federal estate tax?

Under current law, the amount of assets you can pass after your death without incurring estate tax (known as the estate tax exemption amount) varies depending upon the year of your death.

Estate tax exemption amounts

 Calendar year  Estate tax exemption
2005 $1,500,000
2006 $2,000,000
2007 $2,000,000
2008 $2,000,000
2009 $3,500,000
2010 $5,000,000*
2011 $5,000,000**
2012 $5,120,000**
2013 $5,250,000**

* Executors of estates for decedents who died in 2010 could elect out of the new estate tax regime so that no estate tax was due, but the modified carry-over basis rules as originally enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA") would apply.

** This amount will be adjusted for inflation annually.

The estate tax exemption amount is reduced dollar-for-dollar if you've used all or part of the $5.25 million gift tax exemption during your lifetime.

Keep in mind that many states also impose estate and inheritance taxes.

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Under what situations should I set up a personal living trust?

There are many good reasons, unrelated to taxes, for setting up a trust while you're alive. Such trusts are commonly referred to as living trusts or revocable trusts.

  • You want to ensure more seamless management of your assets in the event you become incapacitated or otherwise unable to manage your financial care.
  • You own property in more than one state, so that your will would have to be probated in each of those states.
  • You want to avoid your state's probate process.
  • You'd like to better ensure that your estate plan is kept private and not made a matter of public record.

Under what situations should I have a personal trust created upon my death?

There are many good reasons, not all related to taxes, for having a trust created upon your death. These trusts may be created through a will or a living trust.

  • You have a minor child or children with special needs or other diabilities who can't financially care for themselves.
  • You have concerns that your beneficiary may not be able to effectively manage the inherited assets.
  • You'd like to protect the assets from any future creditors a beneficiary may have.
  • You want to provide a structure around when, under what circumstances, and for what purposes your beneficiary should receive assets.
  • You'd like to minimize the amount of estate taxes that might have to be paid at the death of the beneficiary through generational tax planning.
  • You want to ensure that the trust assets eventually go to specified beneficiaries, whether those are individuals or charities.

A trust can be designed in many ways. Please be sure to consult with a qualified estate planning attorney to help ensure that your trusts are properly designed and that your goals are being accomplished.

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What should I look for in trustees?

Trustees generally will be responsible for, among other things, investing and managing the trust's assets, distributing the assets in accordance with the terms of the trust, keeping accurate records, and filing all necessary tax returns. Your trustees should be individuals or financial institutions that you trust. Keep in mind that you could have co-trustees serving, and if necessary, your trustees can hire expertise (e.g. investment, legal, and/or tax advice) to assist them in performing their fiduciary duties.

Prioritize your goals and objectives when thinking about who your trustees should be. For example, is it important that your trustee understand you and your family members/beneficiaries in a personal way? If so, having a close family member or friend serve as an individual trustee may be important. Is an objective trustee important when decisions are made about how and when assets are to be distributed? If so, a corporate trustee or an independent individual trustee may be appropriate.

Choosing trustees isn't always easy. If you're naming individuals, be sure to speak with them ahead of time to help ensure that they're comfortable with the responsibilities you are asking them to undertake. If you're using an independent trustee, especially in the case of corporate trustees, make sure you understand their investment philosophy, fee structures, and method for reviewing and deciding upon distribution requests from a beneficiary.

What are the duties of trustees?

The following are some of the responsibilities required of a trustee:

  • Manage the assets in your trust. This typically involves objectively evaluating and managing the trust investments to ensure that they're meeting the needs of the trust beneficiaries and are appropriate based upon the terms of the trust and the governing law of the trust.
  • Properly account for trust transactions.The principal and income of a trust generally must be handled and accounted for separately. Both receipts and distributions should be accounted for in this manner.
  • Follow all terms of the trust document and administer your trust to comply with all federal and state law requirements. One of the primary responsibilities of a trustee is to follow the terms of the trust document and carry out the trust creator’s wishes. In addition, the trustee may have reporting requirements to the trust beneficiaries or the court, as well as federal and state tax-filing responsibilities.

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