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ESTATE TAXES
You cannot take it with you, but
failing to plan for your estate can mean that the government, rather than your
heirs, may get the major portion of your hard-earned money.
Why? Because the top estate
tax rate is a whopping 55%!
Most people are aware of the exclusion
of a certain amount of assets from state taxes.
For years, this amount has been $600,000; that figure will now increase
gradually until it reaches $1,000,000 in 2006.
This seems like a significant amount.
Yet, when you consider the value of retirement benefits, life insurance,
the value of your home and other assets, you may be surprised at how much you
are worth.
It is not effective estate planning to
simply put everything you won in joint title or to draw up a will leaving
everything to your spouse. You need
to review your total financial position and estimate what estate taxes you would
pay if you changed nothing. Then
consider options available to cut estate taxes while still accomplishing your
wishes concerning the disposition of your assets.
Good estate planning may result in
savings of at least 37% and perhaps as much as 55%, depending on the size of
your estate.
Even if you have no concern for
reducing estate taxes, you may want to consider some estate planning techniques
that can be used to reduce your current income taxes.
Some possibilities
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Give away property that you do
not use. Current tax law allows you to give away up to $10,000 per
year (indexed for inflation), per recipient, free of gift taxes. |
Making annual gifts over several
years can remove substantial amounts from your estate. If you give away more
than the amount covered by the annual gift tax exclusion, you may not owe
taxes for the gift, but you can start to tap into your “unified tax
credit.”
The “unified tax credit” allows
you to transfer a certain amount of assets tax-free.
If the credit is fully used for gifts you make during your lifetime,
you will have no credit left to reduce your estate taxes.
The tax-free transfer allowed by the
unified tax credit is in addition to the tax-free gifting of $10,000 per year
(adjusted for inflation), per recipient.
When undertaking a gifting program,
consider the tax effect of various gifts.
If you give away stock, which generates dividend income, you will shift
income to the donee (often your children), thereby reducing your current
income tax bill. You will also
reduce your estate by the value of the gifted property, and any future
appreciation of the property will escape taxation in your estate.
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Gifts of
tuition and medical bills If paid directly to the school or doctor,
are also tax-free. |
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Make
charitable gifts. If
you are charitable inclined, you can reduce both your current income tax
bill and your estate tax by making gifts to qualified charitable or
educational organizations. Gifts
to charities are tax-free. |
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Property can
be transferred to a spouse, either during your life or upon your
death, tax-free. However, if
you leave everything to your spouse, your state could lose out on the;
unified tax credit. If your
combined estates are large, the second estate could pay thousands more in
tax than necessary. Consider
estate planning that allows both you and your spouse to use your
exemptions. |
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Protect your
life insurance from taxes in your estate by having your policy owned
by someone else. The owner
will have to pay the premiums. You
forfeit the right to change beneficiaries or borrow against the policy. |
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Trusts can be
an effective way to remove assets from your estate.
There are many kinds of trusts; each designed to accomplish certain
objectives. Trusts vary
considerably in complexity, and they are under no circumstances a
do-it-yourself affair. Seek
professional advice. |
Living Trusts: The
Pros and Cons
Living trusts have become a popular way
to reduce the probate and administrative costs in an estate, though they do not
necessarily change the estate taxes that might be due on your estate.
A living trust on one you crate while
you are alive as opposed to a testamentary trust crested by your will and taking
effect upon your death.
A living trust can be either revocable
o r irrevocable. If you create a revocable trust, you can change it or revoke
it at any time. If you create an
irrevocable trust, you give up control of the assets transferred to the trust,
and you cannot change the provisions of the trust.
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Advantages.
A major advantage of using a living trust is that you eliminate
probate on the assets in the trust when you die.
You specify in the trust document how your assets are to be managed,
and if the trust is to end at your death, how the assets are to be
distributed. Terms of the trust
are usually private whereas probate proceedings are a matter of public
record. Generally, a living
trust is less easily contested than a will.
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Disadvantages.
One of the disadvantages to a living trust is that you must actually
transfer the titles of your assets to the trust, with whatever resulting
complication of our affairs this might entail.
A living trust does not completely eliminate the need for a will
because the trust will not take care of the distribution of any property not
included in it.
Your will can direct that any assets
inadvertently left out of the trust “pour over” into the trust.
Though these assets will be subject to probate, the trust provisions will
govern how they are to be distributed.
Certain
property automatically bypasses probate without having to put it in a trust.
This generally includes property held in joint tenancy with right of
survivorship, IRA and pension benefits with named beneficiaries, and insurance
proceeds payable to specific beneficiaries.
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