Tips To Curtail Your Estate Taxes
Keywords: Sacramento CPA, Estate Tax Planning
If a person dies possessed of property, the law imposed estate tax if the property has a fair market value above $2 million. Property valued less than that is not subject to estate tax. Estate tax is levied both at the federal and state levels. The high rate of taxation takes away nearly forty-five percent of the estate of the deceased. Most people suffer such high taxes because they are unaware of the ways and tax planning techniques that can avoid or help to considerably reduce the estate tax burden.
There are no federal estate tax structure of two million dollars in 2007 will rise to 3.5 million in 2009 and will be totally eliminated in 2010. 2011 may find estate tax back with an exemption limit of $1000000 if the Congress does not pass a law for a full repeal.
At present, there are some steps that a person can take to effectively reduce estate taxes that may be applicable to his estate after his demise.
a) Take advantage of the estate tax exemption twice- If married, each spouse is entitled to an exemption of $2 million dollars on estate tax. This means that the total exemption available to a couple is $4 million. Usually people do not take any steps before the death of one partner and all assets automatically pass on to the other at the first death by virtue of the provision of marital deduction. Since there is no limit on marital deduction, there is no estate tax payable whatever be the size of the estate. However, the exemption of $2 million is wasted .
On the death of the surviving spouse, the entire estate is taxed, allowing an exemption of just the $2million attributable to the last dying spouse. With due planning, one can form a family trust which will allow availing the benefit of the $2 million exemption available to the spouse who died first giving a total exemption of $4 million.
b) Form a life insurance trust- Proceeds from a life insurance policy are subject to estate tax. By establishing a life insurance trust, a person other than the insured is made the owner of the policy. Usually it is the spouse or child or any other beneficiary. When the insured dies, this owner/beneficiary/trustee invests the trust funds i.e. the insurance proceeds and manages the trust for the benefit of other beneficiaries. Forming an insurance trust can cost below $1000 but can save substantially on estate tax, which can take away nearly half the proceeds if the size of the estate is above the exemption limit.
c) Gift part of your estate- If you are in an advanced age and have lifestyle and expenditure that is within your means, it may be sensible make gifts out of your estate to the people you intend leaving your estate to when you are no more. This would greatly reduce the size of the estate and may bring it within the limits of exemption. This technique may not be proper if you are still young would like your kids to benefit from inheritance in other ways.
d) Form a family liability company- This technique can be combined with the exemptions on gifts to effectively provide a solution to avoid paying estate taxes. If you have a business or property valued at say one million dollars, you can create a Family Limited Liability company where you contribute the property exchanging it for limited liability ownership units. If you break it into one hundred and fifty membership units each is valued at about $6667. These units would be eligible for marketability and/or minority discounts. When you gift these units, you can bring down the value of annual gifts within the exclusion limits by applying these discounts.
For example, when you gift two units to a child, the child would come to have a minority interest in the company. In addition, unlike publicly traded shares there is no real market for the units. Therefore discounts can be applied to the gift to bring their value within the exemption limit of $12000 even though the total value of the gifted units would appear be (6667 x 2) $13,333. These are advanced techniques and should be considered only in consultation with an expert in estate taxes.
These are just some of the ways to save estate taxes. Your estate lawyer would be able to provide you with more/apt solutions that may be suitable to your situation.
Sacramento CPA firms offers Estate Tax Planning to individuals and businesses. We have former IRS auditors who know the system to make sure you only get the best advice. Discover a bevy or articles at : www.april15.com.
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