Tax Strategies

Estate Taxes are levied by both Federal and State governments and thus vary from State to State. In addition to probate expenses, final income taxes, and other “death taxes”, Uncle Sam has a way of following you to you grave.  Federal Estate Taxes are a political football and usually vary depending on which political party is in power.  They are usually between 45-55% and are usually submitted in cash, generally within nine months after death.  Since few Estates have sufficient cash on hand to satisfy the tax burden, it often becomes necessary to liquidate assets to pay these taxes. This is an area in which proper Estate Planning can help you mitigate, delay, and avoid these so called “death taxes”.

Your estate will pay federal estate taxes if its net value when you die is more than the exempt amount set by Congress.

To evaluate the current value of your assets, you need to add your assets and then subtract your debts. During this evaluation, you must include your home, business interests, bank accounts, investments and investment accounts, personal property, IRAs, retirement plans and death benefits from your life insurance.

The simplest way to reduce Estate Taxes is;

• If a person is married, it is best to use all available marital estate tax exemptions.
• Eliminate assets from your estate before you die by using a lawful vehicle such as a Trust.
• Buy life insurance to replace assets given to charity or pay any remaining estate taxes.

If a married person dies with an Estate in which the value does not exceed the federally-set ceiling at the time of death, the surviving spouse is entitled to receive the deceased spouse’s estate tax-free. The current marital deduction amount is $11.4 million as of this writing, and this amount changes because it’s adjusted yearly to account for inflation. If a married person dies with an estate that is valued at less than the federally-set limit, the federal government gives the surviving spouse a free pass, tax wise. The surviving spouse will not have to pay any estate taxes. If the deceased spouse has not used his estate tax exemptions, the surviving spouse can take the advantage of the unused exemption and hence he or she will pay less tax and may eliminate them.

The law of the Land allows you to give about $13,000 to as many people as you wish per year. But if you are married then as per the Federal Laws, you can give up to $26,000. State laws may also differ for different scenarios. If you give more than this, the excess will be considered a taxable gift and will be applied to your $5 million ($10 million if married) “unified” gift and estate tax exemption. Charitable gifts are still unlimited.

A person can remove the value of your estate insurance by making an ILIT. But the limitation of this scheme is that if you live for three years after the transfer of an existing policy, the death benefits will not be included in your estate. ILIT is a beneficiary policy which gives you the option of keeping the proceeds in the Trust for years, with periodic distributions to your spouse, children and grandchildren. Proceeds kept in the Trust are protected from irresponsible spending, creditors and spouses.

A QPRT removes your home, usually a substantial asset in the estate, from your estate while you are still living.  The QPRT allows a living person to transfer their home to a QPRT for a limited period such as 10-15 years. When the Trust term is up, the home transfers to the Trust beneficiaries. Suppose you wish to stay in your home for a longer period of time?  One way to lawfully do this is to make arrangements to pay rent to continue living in your home. If you die before the Trust term ends, your home will be included in your estate, just as it would without a QPRT.  QPRT “leverages” your estate tax exemption. Since your children will not receive the house until the Trust ends, thus, its value as a gift upon your death is reduced.

LLCs and other entities let you reduce estate taxes by transferring assets like a family business, farm, real estate or stocks to your children now. Still, you will keep some control. They can also protect your assets from future lawsuits and creditors.

Leaving a part of your estate to charity is a superb tax strategy, and it allows you to leave behind an enduring legacy. It also can be effective in reducing your estate taxes. You may also create a charitable remainder trust (CRT) which will provide for both your family and your favorite cause.  But rather than paying the income to you, the Trust pays it to a charity for a number of years or until you pass away. Once the Trust ends, the Trust assets may be for your spouse, children or other beneficiaries.