One of the goals of estate planning is to minimize the burden of your passing on your loved ones. For some families, one burden that needs to be addressed is estate taxes. While the 2011 Federal tax exemption was recently set at $5,000,000, this amount is set to expire at the end of 2012, when the exemption is lowered to $1,000,000 for 2013.
While this may sound generous, considering the contents of an estate including your home, investments, retirement accounts and more, there is still a need to minimize your estate’s tax burden. Some popular estate planning tools to do this:
1. Unlimited marital deductions
Federal tax law permits you to transfer assets to your spouse without incurring gift or estate taxes, regardless of the amount. This is not always the best course of action, however, as these deductions may increase the total combined federal estate tax liability of the spouses upon the death of the surviving spouse. To avoid this problem, many couples choose to establish a bypass trust.
2. Bypass trusts
Bypass trusts, also known as credit shelter trusts, allow married couples to take advantage of the marital deduction, while using the federal estate tax exemption to its fullest.
With a bypass or credit shelter trust, the first spouse to die can leave the amount shielded by the federal exemption to the trust. The trust can provide income to the surviving spouse for life, then upon the death of the surviving spouse, the assets are distributed to trust’s beneficiaries.
3. ILIT’s – Irrevocable life insurance trusts
Life insurance trusts may be designed to keep the proceeds of a life insurance policy out of your estate and give your estate the liquidity it needs. To avoid inclusion in your estate, such trusts must be irrevocable, meaning that you cannot dissolve the trust, or change the terms. With proper planning, the proceeds from the policy held by the trust may pass to trust beneficiaries without estate taxes.
4. Lifetime gifting
Federal tax law generally allows each individual to give up to $13,000 annually to another individual without paying gift taxes, subject to certain IRS restrictions, of course. This allows you to transfer some of your wealth during your lifetime to reduce your taxable estate.
5. Charitable donations
Charitable gifts are not taxed as long as the contribution is made to an organization that operates for religious, charitable or educational purposes. Make sure the organization you want to give money to is an eligible charity according to the IRS. You or your estate may be entitled to a tax deduction for contributions to a qualifying charity.
Work with an estate planning attorney to determine the best tools to meet your family’s specific needs.