3 Estate Tax Planning Mistakes Niswanger Law can Help You Avoid

There is a common misconception that tax planning is limited to creating a will and a trust. Estate planning is much broader than most assume. Though few know it, strategic estate planning can save you and your loved ones tens of thousands of dollars in taxes. Our Monroe, LA estate planning attorneys can help you avoid those taxes with comprehensive estate planning focused on the subtle details that others often overlook.

Mistake #1: Ignoring Trust Swap Powers

3 Estate Tax Planning Mistakes Niswanger Law can Help You Avoid in Monroe LA. Image of middle aged black couple sitting down with middle aged brunette caucasian female lawyer with laptop and papers planning

If your estate plan has an irrevocable trust to safeguard property and provide for your loved ones, you should be aware of the swap powers.  Irrevocable trusts help decrease the tax consequences for beneficiaries and the state itself.  Yet swap powers can pose problems in the context of taxation.  Irrevocable trusts primarily do not allow the grantor to alter the trust terms, including removing the property from the trust after the transfer occurs. 

Certain trusts agreements have grantor swap powers.  Swap powers empower the grantor to exchange personal assets for those within the trust.  This means an asset in one’s name can be transferred to the trust for a trust asset of the same value.  The logic in using swap powers in an irrevocable trust is it makes it easier for grantors to retain control over the assets within the trust. 

The problem with swap powers is that they can lead to tax issues for the grantor.  If the grantor overlooks the details of the matter, they might be subjected to a considerable tax obligation when swapping personal property with that of the trust.  The grantor is to report trust income on their tax return.  The grantor pays taxes on income instead of the trust paying taxes on trust income. 

The moral of this story is it is in your interest to consult with Niswanger Law’s estate planning attorneys in Monroe, LA, before swapping property in an irrevocable trust.  Discuss this matter with us, and we will help you navigate the taxation maze to minimize your tax liability.

Mistake #2: Selecting the Wrong Trust for an IRA

IRA trusts can be used to hold title to an IRA or function as the IRA’s beneficiary after death.  Though there are certainly benefits to using an IRA trust within an overarching estate plan, the details of the trust can increase the IRA’s tax burden.  Our Monroe, LA estate planning attorneys are here to review the terms of your trust agreement to get a sense of whether the tax deferral benefits will remain intact after the IRA moves to the trust.  A trust agreement lacking language that ensures the trust is of the “see-through” variety will lead to a loss of benefits available through investing funds within the IRA.

Mistake #3: Overlooking Life Insurance

Families and individuals often create estate plans to reduce or sidestep gift taxes and estate taxes entirely.  This approach is faulty if it does not consider life insurance proceeds within the estate plan.  If life insurance proceeds are not included in the plan, the estate and the beneficiaries will take a financial hit.  Shift ownership of the life insurance policy to the trust and the estate’s value will not increase, meaning the tax burden will be reduced. 

Life insurance policy death benefits are not considered beneficiary taxable income.  Life insurance policy proceeds can be included within the state tax calculation as long as the insured party has an ownership interest in that policy upon the time of death.  You can avoid the ownership interest hurdle by transferring the life insurance policy to an ILIT, short for Irrevocable Life Insurance Trust.  The ILIT is used to buy the life insurance policy.  The ILIT is also helpful in that it makes it easier to prevent additional life insurance proceeds from being taxed at the point in time when the beneficiary passes, as those proceeds will not be considered to be a component of their estate.

Niswanger Law in Monroe, LA is on Your Side

If you haven’t started estate planning or would like more information regarding how estate planning can help you sidestep unnecessary taxes, our team can help.  Contact us today to schedule a consultation.  You can reach our Monroe, LA estate planning attorney by dialing 318.953.0071 or completing our contact form.