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Estate Planning -Part Two

Updated: Mar 18, 2021

In Part One of the estate planning article, I discussed the Israeli Inheritance Law and how to prepare wills according to Israeli law. Part Two of the article will focus on further estate planning options, and discuss issues relating to testators with dual citizenships (Israeli and American), and how this can affect their estate planning. Estate planning is something to consider for various reasons, for example, as a tool to mitigate estate tax. Estate Tax At the moment Israel does not apply estate tax upon death, this means that the testator’s inheritors do not have to pay tax on any Israeli assets they inherit. This is not the case when one is considered a U.S. citizen. U.S. citizens are subject to U.S. estate and gift tax, whether they reside either in the United States or abroad, or whether their property is located in the United States or elsewhere. For years 2018 through 2025, a federal estate tax of 40% applies to any U.S. individual’s estate above $11.2 million U.S. dollars (USD). For a married couple, who are both U.S. citizens, this amount is doubled to $22.4 million USD. In addition, if the first spouse dies and the value of the estate does not require the use of the deceased spouse’s entire federal exemption amount, then the amount of the unused exemption may be transferred to the surviving spouse. This enables the surviving spouse to use the deceased spouse’s unused exemption plus his or her own exemption when the surviving spouse dies at a later date. Apart from Federal estate tax, many U.S. states levy their own estate and inheritance taxes. While estate taxes are charged against the estate regardless of who inherits the assets, inheritance taxes are levied on the transfer of assets to heirs, based on the relationship of the inheritor to the deceased. Currently, fifteen states and the District of Columbia have an estate tax, and six states have an inheritance tax. Maryland and New Jersey have both. In addition, when one owns U.S. situated assets, even if they are not a U.S. citizen, their estate will have to pay the United States Tax Authorities (IRS) a 40% estate tax if the fair market value at death of the decedent's U.S. situated assets exceeds $60,000. U.S. situated assets include American real estate, tangible personal property, and securities of U.S. companies. A non resident’s stock holdings in American companies are subject to estate taxation even though the non resident held the certificates abroad or registered the certificates in the name of a nominee. Assets that are exempt from U.S. estate tax include securities that generate portfolio interest, bank accounts not used in connection with a trade or business in the U.S., and insurance proceeds. Mitigating Estate Tax Some of the basic options in which one can mitigate U.S. estate tax are as follows:

  • Transfer of Gifts

Gifts made during one’s lifetime, can be a good way to lower your estate value thus lowering the amount of estate tax owed above the exclusion mentioned above. A U.S. citizen can gift any family member (not including his spouse) an annual amount of $15,000 (in 2018) excluded from gift tax. The annual gift tax exclusion is available to each U.S. taxpayer. Consequently, married couples that are both U.S. citizens can jointly gift an annual amount of $30,000 per recipient, excluded from gift tax. Gifts made between spouses- there is an unlimited amount that one can gift another, if both spouses are U.S. citizens. This is not the case when one of the spouses is not a U.S. citizen. For 2018, there is an annual exclusion of $152,000 for gifts to non U.S. spouses. Transferring wealth to your family typically calls for long-term planning. To maximize the tax benefits, one should engage in a systematic series of gifts over several years, in order to lower the estate value for U.S. estate tax.

  • Trusts

A trust is traditionally used for minimizing estate taxes and can offer other benefits as part of a well-crafted estate plan. A trust is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf of a beneficiary or beneficiaries. Once assets are put into a trust, it is outside of your estate and as such, it is not subject to estate tax or to probate. You can establish a trust that takes effect during your lifetime or upon your death. Either way, trusts can be used to accomplish a number of estate planning goals:

  1. If you have young children, or children who have a poor sense of judgment when it comes to making financial decisions, you may want to leave your assets to them in a trust, with instructions for gradual distribution, rather than bequeathing it to them outright.

  2. Assets in a trust are also protected from the beneficiary’s creditors. If you have potential creditor problems or work in an industry that is often subject to litigation, putting assets into a trust can isolate them and thus protect them from future creditors.

  3. If structured properly, the assets are not subject to division in the event the beneficiary gets a divorce.

  4. By leaving your assets to your spouse in a trust with specific distribution instructions, instead of outright, you can be sure that the assets will eventually pass to your children and grandchildren, as opposed to being used for your spouse’s new husband or wife.

  • Life Insurance

Life insurance has many uses in an estate plan, including estate liquidity, debt repayment, income replacement and wealth accumulation. There are many different types of policies to consider, at different price levels. Proceeds from life insurance that are received by the beneficiaries upon the death of the insured are generally income tax-free. The proceeds of the policy can then be used to cover estate taxes, to provide for heirs or to make a charitable contribution. When one designates an individual as the beneficiary of their life insurance policy, the proceeds are paid directly to the beneficiary and are not subject to probate proceedings. This gives the beneficiary immediate access to a source of funds that may be used for costs, such as lawyer's fees, associated with settling the estate. If the policy is payable to the estate instead, the proceeds are subject to probate the same as any other asset. Many families use life insurance proceeds as a tool for managing an estate that includes ownership of a business. For example, an entrepreneur may find himself in the situation in which his two adult children who are his heirs, one who works in his business and one who does not. Many entrepreneurs in this situation will bequeath the business to the heir involved in the business and designate the other heir, as the beneficiary of a life insurance policy whose value equals that of the business.

Conclusion Estate planning is used for various reasons, but the bottom line is that it is all about giving oneself some piece of mind before they pass away. Although in some cases, estate planning might be onerous, once completed, one can feel an enormous sense of accomplishment knowing that they have provided for their loved ones in the best way they can, which will hopefully help avoid future disputes between family members and potential successors. The content of this article is intended to provide a general guide to the subject matter and is not a substitute for legal consultation. Specific legal advice should be sought in accordance with the particular circumstances. #death #USfiling #dualcitizen #wills #inheritance #estateplanning #children #trust #lifeinsurance

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