Estate taxes can ambush families. Many unsuspecting, middle-class folks get shot from behind with estate taxes. Knowing the tips and tricks of estate taxes is like giving you a bazooka against the tax man.
The estate tax is often called the “voluntary tax,” because if you plan for it the chances are good you will never pay a dime in estate taxes. The rich don’t lose all their money when a family member dies. Why should your family lose a dime? There is a number of ways you can attack the estate tax problem. Your attack will be progressive, depending upon how large your estate tax is.
Estate planning attorneys and all their books always start by discussing “gifting.” If you have a billion dollar estate you can gift all day long. But, for Mom and Pop American, charity and gifting starts at home. If you’re not in the billion dollar category, then you’re not going to worry much about estate planning.
The first thing you need to do is create a living revocable trust that has estate tax avoidance built into it. Your trust is going to have to have special provisions that let you get twice (2X) as much estate value to your family without paying any estate tax. You can have one trust that divides into two pieces when the first spouse to die actually dies, or you can have two separate trusts with two separate trust documents. If you have the two trust with two documents, then you had better pay attention to what asset value each trust holds. The assets should be roughly equalized between the two trusts. If you are a single person, you can’t do the two trust trick and get the double estate tax value down to your family.
If there is an insurance policy purchased by the trust for the estate, it can easily be taken out using an ILIT (Irrevocable Life Insurance Trust). If a policy was purchased and transferred to the trust, the insured must live for three years before it can be completely and effectively remove from the estate. The value of the deceases life insurance is calculated into the value of the estate, which is why it’s smart to take it out.
Even if you have set up the revocable living trust property, and have removed the life insurance policy from the living trust, you might still see some problems in the amount of money stilled owed through the estate tax. If this is the case, you might benefit from gifting. Many estate planning experts will set up the trust so that you can give away your property yet still maintain full contro over it. By retaining control of the property you also retain the benefits of that property, ie: the income. Limited Liability Companies (LLCs), family limited partnerships, and corporations can all achieve such estate tax benefits from gifting.
Looking for a estates and trusts or living revocable trust forms and information? Learn the 6 mistakes people make in their estate planning.
