Update Estate Planning After Sale of Business

Q. My wife and I recently sold our business. The sale netted us a good sum for retirement but it put the two of us into taxable estates as we now have more than two times the credit against estate tax. Long ago we set up living trusts, so we have that in place, but we’re hunting for something else to help save on estate taxes. Do you think we should consider a separate trust for my life insurance? The policies are worth about $400,000.

A. You and your wife need to update all of your estate planning. Whenever a major financial change occurs in your life, such as the sale of your business, you need to get your plan out and review it with your estate planning attorney and your accountant. It’s best to do the review before a family business is sold, but better now than never.

I suggest you do at least three things to update your planning:

First, make sure that your current plan operates the way you and your wife want it to work. The plan needs to work from a tax perspective and the personal perspective.

For estate taxes, make sure that your living trust agreements provide the necessary language to make good use of the credit you each have against estate tax, called the “unified credit.” If your trusts are old, they may need to be revised for tax planning as well as changes in the law since the time you created the trusts.

From the personal perspective, you need to be sure the trusts provide for your family’s needs today.

Second, a special type of trust for your life insurance may be a good idea. You would transfer ownership of your policies to the trust, which would be irrevocable.

Then, as long as you live at least three years after the transfer of the policies, the death proceeds of your life insurance can be fully excluded from your taxable estate.

The proceeds can even be excluded from your wife’s taxable estate even though she can be the beneficiary of the trust for as long as she lives, if she survives you. But the trust must be properly prepared and administered, so be sure you work with Palm Desert estate planning company which is familiar with irrevocable insurance trusts.

Third, you and your wife may need to consider other estate taxplanning techniques. There are other methods for reducing estate taxes if your assets, after excluding your life insurance, are greater than the amount of unified credit the two of you have remaining.

One simple technique to consider is outright gifts to children and grandchildren. Or you may want to use trusts for gifts.

More complex planning with trusts or partnerships may help you make gifts at reduced gift tax costs.

Talk with your planners about the basic techniques as well as more sophisticated methods.