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Estate & Tax Planning
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Understanding Federal Estate Taxes You have many important goals when embarking on the task of estate planning. Making sure your spouse and children are financially secure, choosing an executor who will follow your wishes and giving specific articles of sentiment value to certain people are just a few of the objectives you may address in your estate plan. However, for those of you with estates valued at over $675,000.00, reducing or eliminating federal estate taxes is also an important goal. Estate taxes are different from, and in addition to, probate expenses, federal income tax and state inheritance tax. In fact, if your beneficiaries have to pay a federal estate tax, many of the above goals can not be achieved! Who has to pay Federal Estate Taxes? Your estate will have to pay estate taxes if the "not" value of your estate is over the lifetime exemption. The lifetime exemption is as follows:
The federal estate tax rate starts at 37% and quickly goes up to 55%. This tax must be paid within 9 months after death. If the tax is not paid, interest and harsh penalties begin to accrue. Since most estates do not have the cash to pay this tax, assets often have to be liquidated, many times at "fire sale" prices. However, with advance planning, federal estate taxes can be substantially reduced or even eliminated. In addition, family-owned farms and businesses that qualify can deduct an addition amount making a total of $1.3 million exempt from estate taxes. What does the Federal Estate Tax Apply To? Your "estate" includes everything you own, either by yourself or with someone else including personal property, bank accounts, investments such as stocks, bonds mutual funds, real estate, automobiles, art work, retirement accounts (i.e., 401(K) and IRA'S) and death benefits from your life insurance. Federal estate taxes are levied on your "net" estate after deducting any debts or mortgages you owe. How Can Federal Estate Taxes be Reduced or Eliminated? Basically, there are 3 ways to minimize the amount of estate tax against your estate:
1. Using Both Lifetime Exemptions You may leave your spouse an unlimited amount of property when you die with no estate tax due, as long as that spouse is a U.S. citizen. This is called the unlimited marital deduction. However, this is a tax trap for those who have not planned and one that many married couples fall into. You know, the will may read "I leave everything to my spouse, and if she (he) dies then everything to my children." For example, let's say that Frank and Louise Smith have a joint estate of $1,350,000.00 and they both die in the year 2000. Louise dies first - she leaves everything to Frank. No estate taxes are due because of the unlimited marital deduction. But, when Frank dies, his estate of S 1. 3 5 million uses his $675,000. 00 exemption, the tax bill on the remaining $675,000.00 will be approximately $270,000.00! And remember, this tax is in addition to state inheritance tax, estate administration fees and federal income tax!! Instead, if Frank and Louise had planned ahead by setting up wills containing credit bypass trusts and disclaimer provisions and dividing their assets using the tenants-in-common form of ownership, which would allow them to fully utilize their lifetime exemptions, then NO estate tax would be due! This planning can be done both in a will or in a living trust. 2. Removing Assets From the Estate The best estate plan is to spend and use up all of your assets before you die - i.e., "I'm spending my kids' inheritance." If this isn't possible, a great way to reduce estate taxes is to reduce the size of your estate before you die. You probably know where you want your estate to go when you die. If you can afford it, why not pass along some of those assets now and save estate taxes? Wouldn't it be nice to see someone enjoying those gifts today? Usually, it is best to give assets that are appreciating because this future appreciation will be out of your estate. Also, make sure that you don't give away assets if you may need them later on. Someone with an estate of $300,000.00 should not be gifting money for estate tax purposes. One with an estate of $3 million should. Keep in mind that assets you give away keep the Donor's cost basis (what you paid), so the recipients may have to pay capital gains tax when they sell. But the top capital gains rate is only 20% while the top estate tax rate is 55%. In later articles on this web page I will discuss some of most popular methods of removing assets from your estate. These methods include the $10,000.00 per person per year tax free gift, the irrevocable life insurance trust, the Qualified Personal Residence Trust (QPRT), the Grantor Retained Annuity Trust (GRAT), the Granter Retained Unitrust (GRUT), the Family Limited Partnership, the Charitable remainder Trust and the Charitable Lead Trust. In some cases, it is inevitable that Federal Estate Taxes are going to be paid. Depending on your age and health, buying life insurance can be an inexpensive way to pay these taxes. As I discussed earlier, life insurance is considered part of your taxable estate. However, an easy way to remove life insurance from your estate is to make an Irrevocable Life Insurance Trust (ILIT) the owner of your life insurance policies. There are two ways that an I]LIT will own your policies. First, if the policy is transferred into the ILII', and you - as the policy owner - die within 3 years, the life insurance policy will be part of your estate. This is an expensive way to pay for estate taxes. However, if you live for 3 years of more after transferring the policy OR the ILIT owns the life insurance policy from the beginning, then the policy will not be in your estate at all! The best strategy to protect your family and your assets from Uncle Sam is to "Got Your House In Order" by getting your estate planning documents drawn up and your estate plan implemented NOW! Depending on the size of your estate, your age, your marital status and your choice of beneficiaries, the cost to prepare and implement your complete estate plan will run anywhere between $350.00 to $2,500.00 (for estates under $3 million.) Most estate plans on estates over $675,000.00 average around $1,250.00. However, this small initial investment will save your children and your estate thousands to hundreds of thousands of dollars in federal estate tax savings. The trick is not to wait
until it's too late! Keep in mind that if you don't do your estate plan,
our state and federal governments have an estate plan for you. And I
guarantee that your children aren't going to like it! Please give me at
call |
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