June 2004 On-line Tax Planning
Maintaining Control of Your Estate
The fact is, you work hard all your life and, when
you die, you have to pay for the privilege of dying. Of
course, it’s not really you who will pay, but your heirs. And,
don’t believe the estate tax is going away anytime soon. There
may be changes, but the bottom line is it’s a source of revenue the government
needs.
What are your choices in today’s environment?
As it turns out, you have quite a few choices.
A Few Preliminaries
First, you need to know that the law essentially makes a portion of your estate
assets tax-free. Right now, that amount is $1.5
million and will gradually increase to $3 million by 2009. After
that, the estate tax is repealed, but then reinstated in 2011.
So about the best bit of advice we can give you
is to plan. Plan that you will be facing estate
taxes in the future if your estate is large enough, and when you plan, think
about your state inheritance or transfer taxes as well.
The Most Basic Plan
If you have a will and have left your entire estate to your spouse, at least you
have planned to take care of your spouse in his or her lifetime.
The beauty of such a plan is the will is easy to
write and there won’t be much interpretation. Unfortunately,
if you have children or heirs that you wish to benefit after your spouse’s
death, this won’t do the trick.
If you have an estate of less than $1.5 million, you
won’t pay federal estate tax. This means that a
husband and wife can have a combined estate of $3 million, assuming one-half is
attributable to each spouse.
But what happens if you have a combined estate of $2 million and you die.
If you left everything to your spouse, there
won’t be any tax on your death. If, however,
your spouse later dies, the combined estate of $2 million will carry tax on
$500,000 if the exemption amount is $1.5 million. To
avoid this, most planners now incorporate a trust commonly known as a "bypass
trust." Such a trust takes the amount of the
estate that can pass tax-free and places it into a trust where the spouse is
entitled to the income, but the principle goes to the heir. The
principal can be distributed for the benefit of the spouse in certain instances.
Let’s Get Beyond Basics
If you really don’t want the government getting your money, you could give it
away in its entirety on your death. Gifts to
charitable institutions are deducted from your gross estate, so there is
effectively no estate.
There are a few other things you can do.
First, using a life insurance trust or outright
gifts, you could establish an insurance policy owned by your heirs that would
replace any charitable bequests. The gifts to
the trust or your children would be used to pay for the life insurance premiums.
On your death, your favorite charity gets your
money and your heirs receive the insurance proceeds. This
can work nicely if the insurance premiums aren’t too large, but at some point
these techniques can become cost prohibitive.
You could give the assets to your favorite charity or charities in your lifetime
and take a deduction on your tax return, while leaving principle to your heirs.
Using a charitable lead trust, you could place
whatever you want into the trust and name the charity as the income beneficiary
while naming your heirs as principle beneficiaries. You
would get a charitable deduction of the value of the expected income to be paid
to the charity based on your life expectancy. Your
children, in turn, would receive the principle at your death.
If your concern is not for your children, but for income during your lifetime,
you could put the assets you wish to leave to charity into a charitable
remainder trust. This is the opposite of a
charitable lead trust. You will receive the
income, as defined in the trust instrument, over your lifetime and on your
death, the charity will receive the principle.
Life Gets More Complicated All the Time...
...and so do tax planning techniques. Believe it
or not, we haven’t even scratched the surface of planning around the estate tax
code. Terms like private annuities, grantor
retained annuity trusts and grantor retained income trusts and a whole raft of
other options may be available to you, but you won’t know if you don’t ask.
While there are a number of decisions dependent
solely on the dollar value of your estate, some decisions depend on other
circumstances like providing for a disabled child or other relative.
Give us a call today and let’s discuss your
particular situation. We know how to help you
keep control of your estate, maximize its value for your beneficiaries and
minimize any tax bite.
Tax
Planning Archives
For More Information Contact:
Bucheri McCarty & Metz LLP
2366 W. Boulevard
P.O. Box 2147
Kokomo, IN 46904-2147
Telephone: (765) 236-2300
FAX: (765) 236-2333
Internet:
info@bmmcpas.com
