Monday, 4 May 2015

The federal tax laws that control estate taxes—that is, how much the government collects when someone dies—have undergone some significant changes in recent years.

In 2001, estates valued at or under $675,000 were exempt from federal taxes while those estates over that threshold were taxed at 55 percent. Since then, the exemption amount has climbed while the federal tax rate has dropped. This shift, part of the Bush administration's push to reduce taxes, was scheduled to end by 2013. Instead, the changes have been made permanent as part of a deal between Congress and the Obama administration. For the 2014 tax year, the exemption stands at $5.34 million with a tax rate of 40 percent.

It might seem that unless you have an estate worth more than the established threshold to pass on, there's no reason to be concerned that your heirs will owe estate taxes. But it's not quite that simple. For one thing, many states have exclusion levels far below the federal amount. Also, even though that $5 million-plus exemption is described as "permanent," Congress still retains the right to change the exemption level.

Here are some ways to lower the potential tax amount your estate would owe if any of those conditions apply to you.

Annual gifts

Your heirs can benefit from your estate while you're alive if you give them a gift each year. For the 2014 tax year, the maximum annual exclusion amount allowable by federal law is $14,000. This yearly gift reduces the amount of your estate without forcing the recipient to pay any federal taxes on it. You can give as many separate gifts as you like as long as they go to different people. For example, if you provide gifts to your three children and seven of your grandchildren, you can give away $140,000 in 2014.


A trust is a legally binding financial arrangement that designates a third-party trustee (an individual, foundation, or corporate entity) to hold assets for the benefit of one or more beneficiaries. You can be a trustee for a trust you establish. For instance, if you want your child to inherit your home, you could sign it over to a trust you establish and continue to live in it until you pass away. Trusts may provide certain benefits like reducing your taxable estate and avoiding the delays and costs of probate. Common types of trusts include:

  • Credit shelter trust:  Also known as a bypass trust or family trust, it allows a surviving spouse to have limited rights to the combined marital estate without paying taxes up to a threshold established each year. For the 2014 tax year, the threshold is $5.34 million. This type of trust is often paired with a separate "marital trust" that shields the marital assets in excess of the federal exemption.
  • Charitable remainder trust: You donate assets to benefit a charity, reduce your estate's value, and get a tax donation. The charity sells the assets and converts them into an income-producing investment, paying you regularly with that income. Upon your death, the charity keeps the principal.
  • Irrevocable life insurance trust: You take a life insurance policy out on yourself and place that policy into a trust. The trust owns the policy and pays its premiums with amounts you put into the trust. Your assigned beneficiaries receive the policy's benefits when you pass.
  • Special needs trust: This provides support for a dependent with mental or physical disabilities.
  • Spendthrift trust:  This type of trust is created to protect the beneficiary's interest in the trust property from the beneficiary's own actions and prohibits the beneficiary from transferring his or her interest in certain trust assets. It is commonly used if the beneficiary has poor money management skills or if the donor is concerned creditors will seize the assets. It can also be a clause in another type of trust.

Trusts are either revocable or irrevocable. This simply indicates if the person setting up the trust can or cannot change his or her mind. Revocable means you can back out of it and irrevocable means you can't. If your goal is to reduce estate taxes, you'll want irrevocable trusts. The government isn't as eager to give your estate a tax break when you can say you didn't mean it after all.

Consult with a specialist in estate issues

Estate planning  is extremely complicated. The methods described here are only intended to illustrate common ways that may limit the amount of taxes you potentially would owe. If you believe that any of these techniques would be beneficial, you should strongly consider contacting a financial professional, an accountant, and/or an attorney who specializes in estate planning.



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