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Tax and Estate Planning in Canton Ohio

Tax and Estate Planning in Canton Ohio
Chapter 1

Estate planning basics for Canton OH residents

One of the pillars of comprehensive financial planning is estate planning. While, for obvious reasons, it may be tempting to avoid or delay this aspect of the planning process, failing to address these issues can be costly. A quick scan of the horror stories found in the press from time to time about wealthy or famous individuals whose poor estate planning has resulted in the depletion or misdirection of their assets after they pass makes clear why it is an important part of a holistic planning approach. 

The same estate planning issues which turn up in the press can occur to anyone who has assets they plan to leave to their beneficiaries. If care isn’t taken in the planning process to ensure that those assets are properly distributed, the value of a lifetime’s worth of assets and savings can be significantly eroded by fees and taxes.

Additionally, besides the issues of expense and time traditionally associated with the probate process for estates, there is also the issue of privacy. Estates which end up in probate court expose your financial affairs and assets to public scrutiny. With careful estate planning, this can be avoided through the use of trusts. 

Estate planning encompasses a variety of planning elements. A major focus is making sure that your assets are delivered as efficiently as possible to your chosen beneficiaries after you are gone. The process should take into account all relevant factors including taxes, beneficiary age and capability, privacy considerations, etc. 

Estate planning also encompasses the issue of incapacity during your lifetime. If you should become unable to attend to your affairs for any reason, the planning process provides the opportunity to establish healthcare directives to guide your care and to appoint a guardian or trustee for your assets if necessary. Long-term care needs are also often part of the estate planning process, including how this will affect the custody and use of your residence.

Tax considerations are another major focus of estate planning. Ensuring that the maximum amount of asset value is transferred to your beneficiaries requires careful preparation and analysis of the tax code as it pertains to your financial circumstances.

Read our blog for more information on estate planning in Ohio

Read our blog article about how Covid-19 has impacted estate planning in Ohio

Chapter 2

Estate Planning Steps to Take and When to Take Them

Draw up an estate plan:

Because the various aspects of estate planning often impact each other, it is important to first draw up an overall plan before taking the steps necessary to implement that plan, whether creating a will or trust, purchasing insurance, etc. This should be done as soon as possible, because the issues covered involve potential incapacitation, which can occur at any time, as well as estate asset distributions. 

Create a will or living trust:

To ensure that your wishes are followed after you pass, it is essential to draw up a will or create a trust. Even if you have very few assets, a simple will ensures that your assets will be distributed according to your wishes. A living trust allows for more complicated asset distribution arrangements and also can enable you to avoid probate.

While it may be tempting to wait until you have amassed more assets to create a will or trust, setting up at least one of these instruments is important, even for young adults, to make sure that any assets you have accumulated are distributed according to your wishes in case it becomes necessary. 

Evaluate life insurance coverage requirements and draw up and implement an insurance coverage plan as needed: 

While each individual must determine whether life insurance coverage is necessary for their unique situation, in many cases this type of insurance serves as a cornerstone of the estate planning process.

Because life insurance typically enables you to purchase a large amount of coverage, or death benefit, for relatively small premium payments, it can be an effective means of providing your beneficiaries with significant financial support in the event of your passing.

Life insurance often plays a major role in the worst-case scenario, as well as estate planning. If something should happen to you before you have had time to build up significant assets that can support your beneficiaries when you are gone, buying life insurance can provide the funding needed to support them. 

As a result, drawing up and implementing a life insurance plan should generally be done as soon as you have dependents who rely on your income. As time goes by and your asset base increases, life insurance becomes less necessary for this purpose. For many people who purchase life insurance later in life – or who buy permanent life insurance earlier in life – a primary objective is its value as an estate planning tool.

Place assets into a trust

Because the probate process exposes a decedent’s assets to public scrutiny, many people, especially those with significant wealth, prefer to use a trust to transfer assets to their beneficiaries out of the public eye. Establishing a trust can also have tax benefits in some cases.

Dealing with assets in a trust can involve jumping through a few more hurdles than holding those assets individually or with another person. As a result, it may be optimal to wait until you have built up a certain amount of asset value to set up a trust. Trusts serve other uses than just avoiding probate, of course, and this should be considered when determining when they should be established. 

For instance, a trust leaving assets to a minor can be designed to provide certain restrictions on the use of the trust’s assets for the minor’s benefit. As a result, these assets would typically be placed into a trust as soon as they were set aside for the minor’s benefit.

Chapter 3

Estate Planning Milestones

An estate plan should be monitored over time so that changes can be made when needed. The estate plan you draw up in your 20s may be far different than the one that works best for you in your 50s or 60s. It is especially important to review your estate plan as you encounter major milestones in life to ensure that it takes into account any changes in your situation.

The following are major life milestones which should trigger an estate plan review: 

Getting Married

Couples should discuss, preferably in advance of the wedding, how they intend to handle their finances. This extends to issues of estate planning with regard to inheritance of jointly or individually held assets. When all assets are held jointly, planning is made easier as the surviving spouse typically inherits all or the vast majority of a couple’s assets when one spouse passes. 

Things can get more complicated when one or both spouses hold separate assets, sometimes as specified in a prenuptial agreement. In this case, careful estate planning is required to ensure that a couple’s assets are distributed according to their wishes after they pass. The couple’s wills or trust will generally be the document used to direct how specific assets are handled if a spouse passes away after divorce.

Starting and Raising a Family

When an individual or couple have children, as guardians they are responsible for the welfare of each child under their care until they reach the age of majority. Once children become adults, they are eligible to inherit in their own right without the need for a trustee. This means you should review your estate plan and make any changes necessary to account for this. This is often a good point to consider establishing a family trust.

Some things to consider:

  • Do you want to impose restrictions on the use of funds or assets granted to adult children?
  • Will inherited assets be disbursed immediately or in increments?
  • Are any funds to be specifically designated for purposes such as paying for a college education. 
  • For children, who will be designated as the legal guardian in case both parents pass away before they reach adulthood?

Divorce

In today’s world, divorce is unfortunately a fairly common occurrence. If you are involved in a divorce, it is important to review your estate plan so that you can make any changes necessary as a result of your new circumstances. Often, a divorce settlement will determine how a couple’s assets are separated. Once this occurs, there may need to be changes to beneficiary designations and other adjustments such as changes to trust language to reflect your updated marital status.

Retirement 

When your employment status changes from working full time to working only when you feel like it, or retiring completely, it is wise to once again review your estate planning. One area to look at is insurance coverage – if you have built up significant assets and any children are now adults, you may have little or no need for life insurance for income replacement, although there can still be a role for this type of insurance in many estate planning scenarios. 

At this point in life, options such as assisted living arrangements and living wills become important to look into if you haven’t done so already. It is also a good idea to check the beneficiaries you have listed on trusts, life insurance policies and retirement accounts such as IRAs and 401ks to make sure they are current.

This is also a good time to consider any arrangements for grandchildren’s education in the form of trusts or college savings accounts. Another issue that often sees additional attention at this time is philanthropic activities such as charitable giving or establishing a trust for charitable purposes.

Chapter 4

How Taxes Play a Part in Estate Planning

Especially for large estates, taxes play an important part in estate planning. Even for estates below the estate tax threshold of $11.7 million per individual, there are important tax considerations to keep in mind when engaging in estate planning.

The two types of taxes to consider are estate taxes paid by your estate to the federal, and in some cases state, government, and inheritance taxes paid by the beneficiaries of your estate and retirement, life insurance and annuity accounts. 

Factors to consider from a tax standpoint when estate planning include:

  • Taking steps to reduce estate, gift and GST taxes. These could include discounting assets to reduce their value or setting up a Grantor Retained Annuity Trust (GRAT).
  • Gifting amounts up to the annual gift tax exclusion ($15,000 in 2021) is another strategy to consider.
  • Income taxes: When taking assets out of an estate to lower estate taxes, one thing to think about is that the asset will no longer receive a step-up in basis. 
  • Property taxes: Evaluate how estate planning approaches may impact any property taxes, including local taxes.  

For beneficiaries, there are a different set of tax considerations:

  • Estate, gift and GST taxes: Estate planning can keep assets out of the beneficiary’s estate, while at the same time enabling the beneficiary to make use and have control over the money. For people with a large GST exemption, setting up a lifetime trust for a beneficiary can be used for this purpose.
  • Income Taxes: Roth IRAs are typically better for beneficiaries in high tax brackets, while a beneficiary in a lower tax bracket would be a better match to inherit a traditional IRA where taxes are owed on withdrawals. 
  • Property taxes: In some states, the value of property of certain types may be frozen for the computation of local property taxes. Some states allow for children to inherit a parent’s tax basis, resulting in lower property taxes over the time they own the property. 
Chapter 5

Avoiding/Mitigating taxes

As mentioned previously, estate tax planning should take into account both the potential for estate taxes on estates valued above $11.7 million, and the inheritance taxes those receiving funds from an estate may have to pay. These taxes can in some cases be paid by the estate itself and will vary depending on the type of assets received and the state in which they are received. 

Some techniques for reducing the tax burden associated with inheritances include:

Gifting Assets

$15,000 per year ($30,000 for married couples filing jointly) can be given as a gift each year with no impact on the estate tax exemption. It should be noted that a person receiving a gift generally must pay taxes (using form 709) on the gift. 

Spending Down Assets

While spending down assets will certainly reduce an estate’s value, this option should be used carefully so that those using it retain sufficient assets to pay for their living expenses over the course of their lives.

Setting up a Living Trust

Married couples can set up AB and ABC trusts to reduce federal and state estate taxes. After the estate tax exemption was raised to its current level these trusts saw less demand. Changes to the federal estate tax exemption in 2011 made the exemption freely transferable among a married couple, enabling a surviving spouse to benefit from the unused estate tax exclusion of a deceased spouse.

Marriage

Due to the “portability” of the estate tax exemption between spouses, a married couple can shelter a total of $23.4 million in assets from federal estate taxes. 

Other estate planning tax reduction approaches include:

  • Family Limited Liability Company: These LLCs provide estate tax reduction along with asset protection. 
  • Spousal Lifetime Income Trusts (SLATs): These help married couples benefit from annual exclusion gifts as well as lifetime gift tax exemptions.
  • Family Limited Partnership: If your family owns assets such as a business or real estate properties that you would like to leave to your children, a family limited partnership can be useful. Generally, this is established as a general partnership with your heir and family members serving as limited partners. You retain control of the assets as the general partner, but the limited partners will own a portion of the business or assets, thus reducing the size of your estate. 
  • Qualified Personal Residence Trust: This type of trust allows you to reside in your own home for a given number of years, with the home being transferred to your heirs at a reduced value once that time period ends.  Setting up a trust of this type can reduce the number of assets on which estate tax must be paid. By funding a qualified personal residence trust (QPRT) you transfer ownership of your home to the trust. Over the time period of the trust, you are able to reside in your home with no need to pay rent. Once the trust’s term ends, your beneficiaries are entitled to take possession of the property. A QPRT enables you to freeze the value of your primary residence and/or vacation home and avoid gift tax on the property, assuming you have not already gone over the lifetime limit applied to taxable gifts. It also has the impact of immediately lowering the value of your estate. However, if you pass away prior to the trust’s end date, your home will be included in your estate. Additionally, it should be noted that while QPRT’s can be established for your home including its mortgage, they are generally easier to use with rental property.
  • Charitable trusts: These trusts enable you to reduce your taxable estate by transferring assets to a trust devoted to charitable causes. Charitable Lead Trusts (CLTs) pass on some of the assets in the trust to a tax-exempt charity, lowering your estate value and providing an extra tax break. Any remaining assets in the trust are distributed to your beneficiaries. A charitable remainder trust enables you to move stock or other assets expected to rise in value to the trust and provides a charitable income tax deduction upon the funding of the trust, as well as granting your estate a tax deduction upon your passing. During your lifetime, you can earn money off the assets in the trust and upon your death the investment income is donated to charity. This avoids capital gains taxes and lowers your estate tax total as well as gaining the tax deduction.
  • Irrevocable Life Insurance Trust:  Even though life insurance proceeds typically aren’t taxed, they could be counted as part of your estate, making them subject to taxation. Setting up an irrevocable life insurance trust transfers the ownership of the insurance to another individual. Any changes to the policy would have to be approved by the beneficiary of the trust. Taking this step means that your death benefits will not be counted as part of your estate. However, if you pass away within three years of transferring the insurance to the trust, the proceeds from the life insurance policy would be treated as a part of your taxable estate.
Chapter 6

Finding a Comprehensive Financial Planner Who Can Help with Tax/Estate Planning

A comprehensive financial planner can help you incorporate tax/estate planning into your overall plan. A financial advisor who understands how your financial plan as a whole fits together is well positioned to help you analyze how your estate planning impacts the rest of your plan. In conjunction with your lawyer and other financial professionals, a financial planner can help you analyze tax implications and other consequences of your estate planning.

When looking for a comprehensive financial planner, it’s important to find one with both the experience and training to help you navigate the complex tax issues associated with the process. 

A comprehensive financial planner can make complex issues simple, while providing you with customized planning advice suitable for your unique financial circumstances. Look for a planner who is fee-only and classified as fiduciary. Fiduciary planner must put their clients’ best interests first at all times, ensuring that your planner and you are on the same side of the table when it comes to designing financial plans and selecting financial products to implement those plans. 

Focusing on goal identification, plan development and strategy selection while emphasizing transparent communication throughout the process are important topics to discuss with a qualified estate planner.