The estate tax exemption for 2003 is $1,000,000 and, while that may sound extremely large for a lot of individuals, many others
are stunned to realize that their estates easily exceed that amount when they include life
insurance proceeds, retirement accounts and their personal home.
The value of your estate is probably much greater than you realize, and the
resulting state and federal taxes which will have to be paid by your descendants can be
staggeringly high. If your estate consists of non-cash assets such as a home, family
farm or business, it may have to be sold in order to pay the taxes which can exceed 50%
depending on the state in which you live and the value of your assets.
Although you cannot completely eliminate estate and inheritance taxes, there
are steps you can take to reduce the impact somewhat. Most of these options can be
quite complicated, so we will just briefly touch on them in this discussion.
Irrevocable Trust
This may be the most popular method of avoiding or
lowering estate taxes for extremely large estates. By transferring your assets into
an irrevocable trust, you can defer estate taxes until your descendants liquidate the
assets of the trust. It is also possible that your descendents could pass the trust
on to their descendants without paying estate taxes if they maintain the assets untouched.
Of course, one potential problem with irrevocable trusts is that you must transfer
your assets out of your name and into the trust. This may not be an attractive
option if you are still relatively young or in good health and plan to live for many more
years.
AB Trust
An AB Trust can be an excellent option to lower
estate taxes for married couples. Generally, if one spouse dies and leaves the bulk
of his or her estate to the other spouse, the estate tax exemption
($1,000,000) dies with
the decedent. When the other spouse dies and leaves all of the assets (we'll use
$3,000,000 for this example) to the children, they will be left with a tax bill of
$1,000,000 (assuming a taxable estate of $3,000,000 less the $1,000,000 exemption times an
estimated 50% state and federal tax rate).
With an AB Trust, each spouse could establish a
trust and place $1,000,000 of their assets into part A and the remainder of their assets
into part B. When spouse number one passes away, his or her trust is willed to the
heirs with part A being exempt from taxes. The trust can remain intact until spouse
two passes on. At that time, both trusts can be liquidated by the heirs and the
$1,000,000 exemption is doubled to $2,000,000 and the resulting estate tax using the same
assumptions above is reduced to $500,000 -- a savings of $500,000.
Second To Die Life Insurance
Another popular option for married couples with
non-cash assets is the second to die insurance policy. It really offers no tax
savings, but it can prevent your heirs from having to sell the family farm or business to
pay the estate taxes. A second to die policy is simply a life insurance policy that
is held in your descendants' names (or an irrevocable life insurance trust) and pays them
cash after both spouses have passed on. Of course, the premiums on the
policy could be more than your heirs save on their taxes, so it is wise to be careful when
considering this option.
There are, as always, many other options you can
consider to decrease or defer estate and inheritance taxes. Please give us a call if you
have concerns about your own estate or that of your parents. The rules are
considerably more complicated than what we have presented above. . The tax
savings that can be gained, however will often be in the tens or hundreds of thousands of
dollars and is well worth the small amount of time and expense it will take now to prepare
for the inevitable.
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