Estate Planning for Persons with Less than $5 Million

Abstract

Financial concerns may preclude people of modest wealth (defined for purposes of this article as those having a net worth between $1 million and $5 million) from making significant lifetime transfers to achieve estate planning goals. Yet lifetime transfers are among the most effective ways to reduce estate taxes. Individuals of modest wealth may experience a tension between the desire to take advantage of opportunities to reduce taxes and protect assets from other claims which may arise, on the one hand, and the need to preserve an adequate base of wealth to ensure the maintenance of a current standard of living, on the other. The advisor to these individuals carefully should consider what estate planning steps are most appropriate and what level of transfers, if any, the individual reasonably can afford to make. This article details and evaluates eleven strategies that may apply to clients in the modest wealth category: (1) inter vivos transfers of life insurance and other non-income producing assets; (2) estate building and income tax sheltering with life insurance; (3) qualified personal residence trusts; (4) effective use of annual exclusions; (5) self-settled trusts; (6) potential use of the gift tax exemption and the GST exemption; (7) assessing income tax-free states; (8) using a charitable remainder trust to build wealth and generate income; (9) medical care and tuition payments; (10) limited liability entities for asset protection and tax planning; and (11) special care in handling interests in qualified plans, IRAs and other IRD.

Keywords: estate tax, gift tax, estate planning, life insurance, qualified personal residence trust, asset protection, charitable remainder trust, limited liability companies, IRD

JEL Classification: K34, K40