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Money Management
MINIMIZING ESTATE TAXES
November 29, 1999
Most of us wouldn't dream of just handling the U.S. government an extra few thousand dollars in taxes. Yet, that's what many people end up doing when they don't take action to minimize their estate taxes. The New Jersey Society of Certified Public Accountants (NJSCPA) warns that estate taxes can take a huge bite our of the assets you have spent a lifetime accumulating. that's why it's important to familiarize yourself with the basics of estate tax law and some of the strategies that can help you transfer your wealth without incurring unnecessary estate tax liability. Here is some information to help you get started.
A QUICK WORD ON THE UNIFIED TAX CREDIT
The government allows you a unified tax credit
line that, for 1999, lets $650,000 in effect pass to your heirs tax free. (This amount is increased each year until
2006, when it reaches a maximum of $1 million.) If your estate exceeds the allowed amount, you may be subject to
federal estate taxes that range from 37 percent to 55 percent based on your level of assets. Depending on the applicable
state law, you also may be subject to state inheritance or estate taxes. If your estate is worth more than $650,000,
there are tax-saving strategies you can utilize to ensure that more of your wealth end up in your loved ones' pockets.
THE UNLIMITED MARITAL DEDUCTION
You can transfer unlimited assets to your spouse
during your lifetime and upon your death without incurring any federal tax. Keep in mind, though, that if your
assets boost your spouse's estate to more that the threshold, your spouse's estate will be subject to federal estate
tax upon his or her death. In other words, unless other steps are taken to distribute part of the estate prior
to your spouse's death, you are simply postponing the tax liability until he or she dies.
DONATING TO CHARITY
Donating money are property to charity - either
while you are alive or through bequests in your will - is another way to reduce the size of your taxable estate.
When you give to charity during your lifetime, you double your tax benefits. You not only remove the property from
your estate, but also create an income tax deduction for your charitable contribution.
THE ANNUAL GIFT TAX EXCLUSION
Each year, the law allows you to give as a
gift up to $10,000 per person free of gift tax. If you're married, and your spouse is feeling similarly generous,
the amount you're allowed to gift jointly doubles to $20,000 per donee. In addition, gifts may be made without
limit if they are made to pay school tuition to a qualifying educational institution or to defray medical expenses,
as long as the money goes directly to the school or health-care provider.
ESTABLISH TRUSTS
Trusts are another way to minimize your overall
estate tax burden. They come in several varieties.
A testamentary trust is established in a will and goes into effect upon death. A trustee - an individual, bank, or corporation that you designate - essentially manages the trust assets.
Living trusts go into effect during your lifetime, and can be irrevocable or revocable. An irrevocable trust enables you to transfer assets and give income to a beneficiary during your lifetime. However, keep in mind that while estate and income tax savings can be realized with an irrevocable trust, you should consider one only after proper advice and counsel since you will be required to give up benefits, along with control, of the property.
The assets of a revocable trust you create, unlike those of an irrevocable trust, are considered part of your estate for estate tax purposes. Also, during your lifetime you will be taxed on the trust's income. What, then, is the advantage? Not only does it enable you to control how the assets of the trust will be distributed to your beneficiaries, but it also allows you to manage the distribution, particularly advantageous if the beneficiaries do not have the time or expertise to do so. In addition, it allows you the added flexibility of being able to change your plans if life circumstances change, say a second marriage or the addition of a child or grandchild. Finally, a revocable trust allows the transfer of the property in the trust without the costs, delays, and publicity of probate.
The bypass trust may enable married couples to leave assets to their heirs tax free. For 1999, the allowed amount increases from $650,000 to $1.3 million.
With an irrevocable life insurance trust, you can protect insurance proceeds from estate tax liability. You also can gift money to the trust each year to cover the premium payments of the policy. Something, important to remember, though is that if you are transferring an existing policy to the trust, for the first three years the policy will not be out of your estate.
A charitable remainder trust gives you a three-way break through the donation of appreciated securities to a charity. You'll gain an immediate income tax deduction, along with a stream of income based on the full value of the assets you contribute. In addition, those assets will be out of your taxable estate, with no gift tax or capital gains tax due.
Be ware that estate tax planning can be a complicated process that warrants the advice of experts; so, speak with your attorney and your CPA to determine which kind of trust works best for your needs.
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Money Management is a weekly column on personal finance distributed by the NJSCPA.
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