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Kentucky Estate Planning and Taxes

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Planning for your future is a difficult task and no one understands this more than the attorneys at Bunch and Brock Law. We've created this power-point presentation in order to demonstrate what estate planning is, how taxes affect your estate planning process and how you can best care for your future finances.

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Kentucky Estate Planning and Taxes

  2. 2. DEATH & TAXES We hear a lot of talk about death taxes from politicians, pundits and armchair economists. It’s a popular talking point, but what does it really mean for those planning their estates? Let’s take a look at estate planning, taxes and how it impacts most of us.
  3. 3. ESTATE PLANNING TERMS First, let’s define a few basic terms…  Estate - This refers to all of the property and assets that a person owns or controls, including land, houses, cars, furniture, etc. It also includes businesses, business interests, insurance, pension benefits, debts, obligations and any legal claims a person has against others.  Estate Tax - This is a tax on the net value of a deceased person’s estate.  Estate Planning - Estate planning means designating who will receive your property after you pass, and how you will be cared for if you are no longer self-sufficient. This is accomplished through a number of legal documents and actions. The most widely used estate planning tool is a will, which sets forth who will inherit your property.
  4. 4. THE TOOLS OF ESTATE PLANNING  Assisted living and advanced health care directives  Financial powers of attorney  Medical powers of attorney  Wills, living wills, and testamentary trusts  Revocable and irrevocable trusts  Family limited partnerships and limited liability companies  Insurance planning and life insurance trusts  Business succession planning.
  5. 5. ESTATE, INHERITANCE AND DEATH TAXES It is important to know the difference between inheritance and estate taxes.  Estate taxes are placed on the net value of the deceased’s property.  Inheritance taxes are placed by the state on the person receiving the property. Inheritance taxes are based on the beneficiary’s relationship to the deceased.  “Death tax” is a general term that can apply to both estate and inheritances taxes.
  6. 6. WHO PAYS DEATH TAXES IN KENTUCKY? Kentucky has no estate taxes, though federal rates still apply. Inheritance taxes in Kentucky fall into three categories:  Class A - Immediate family members, such as spouses, parents, children and siblings. These beneficiaries are exempt from inheritance taxes in Kentucky.  Class B - Extended family members, including cousins, nieces, nephews, uncles, aunts, grandchildren, in-laws, etc. - these people pay an inheritance tax on amounts over $1,000.  Class C - This applies to any other beneficiaries. Class C beneficiaries pay inheritance taxes on amounts over $500.
  7. 7. WHAT ABOUT FEDERAL ESTATE TAXES?  Federal estate taxes apply mostly to large estates. In 2016, for example, exemptions are made on estate values up to $5.45 million (per person).  Approximately two out of every 1,000 estates were taxed in 2015.  Taxed estates pay roughly one- sixth of their value in taxes.  There exist a number of ways to make sure that heirs don’t face large tax rates on an estate.
  8. 8. EASING TAXES ON ESTATES Through sound estate planning, you can greatly reduce the amount of money that heirs will have to pay through estate and inheritances taxes. While there are many different methods, a common goal is often to remove holdings from your own estate to reduce the amount of taxes owed after you pass. This can be done through trusts, gifts, business entities, insurance and joint bank accounts.
  9. 9. USE OF TRUSTS IN ESTATE PLANNING A trust is an arrangement in which a person transfers property to someone else who holds and manages that property for a third party. Here some examples of trusts that estate planners sometimes use as devices to ease tax burdens:  Testamentary Trusts versus Living Trusts - A testamentary trust is done through your will or other legal devices after you pass. You form a living trust or an “inter vivos” trust that will take effect during your lifetime.  Grantor Retained Annuity Trusts - Through a GRAT, you set up annual payments to the beneficiary for a designated period of time.  Spendthrift Trust - In a spendthrift trust, you designate an independent trustee (for example, a bank) to hold the trust for the beneficiary. This form of trust often protects the assets from any creditors the beneficiary might be indebted to.  Qualified Personal Residence Trust - This is similar to a GRAT, but puts your home into a trust.  Charitable Remainder Trust - Through CRT, you put income into a trust that reduces capital gains, income and estate. You also get a charitable tax deduction, while donating to a favored charity.  Charitable Lead Trust - In a CLT, the money goes directly to a charity during your lifetime but goes to your beneficiaries after you pass.
  10. 10. OTHER FINANCIAL INSTRUMENTS FOR REDUCING TAXES There are many other devices you can use, many of which utilize trusts, to ease the tax burden on your estate. Each comes with certain stipulations, advantages and disadvantages. They include:  Joint bank accounts - Depending on how you set up bank accounts (i.e., an account with rights of survivorship) and the stipulations of your will, a joint bank account can be an effective method of estate planning.  Gifts - Though there is a cap on how much you can give as a direct gift without taxes, you can spread out the gifts to multiple recipients or use trusts as a vehicle to gift portions of your estate to loved ones.  Businesses - Different business structures, like LLC’s or FLP’s, allow you to direct income or holdings into a business, which can then be accessed by other stakeholders.  Insurance - One example would be an Irrevocable Life Insurance Trust, which, if properly established, will not be considered part of your estate upon your passing. They can be complex but effective methods of providing your family the ability to pay other estate taxes or leave money behind for your heirs.
  11. 11. PLANNING AHEAD FOR END-OF-LIFE CARE While planning your estate, you’ll also want to make certain decisions that protect you, your assets and your family should you become unable to do so for yourself.  Powers of Attorney - Through a POA, you designate someone to act on your behalf. There are medical powers of attorney and financial powers of attorney.  Living Wills - This designates your wishes regarding your end-of-life care. You can specify whether you want to be kept alive by feeding tubes or ventilators and whether you want to donate your organs after you pass, for example.
  12. 12. ARE YOU PLANNING FOR THE FUTURE? As you can see, there are many devices you have at your disposal to plan your estate to reduce the amount of inheritance and estate taxes that will be owed after you pass. At Bunch & Brock, we have helped many clients plan for the future of their estate and their families. We can tell you that planning ahead is a wise move with great benefits for you and your loved ones. For help with estate planning in Kentucky, contact Bunch & Brock to learn more. http://www.bunchandbrocklaw.com