Although California has eliminated the death tax for descendants of those died after 2014, you need to know how to protect your estate from being drastically reduced by federal estate taxes. This means you still need to take steps to properly protect your estate from estate taxes.
After working so hard to build your estate, you do not want to have it lost to taxes. There are simple things you can to do to protect your financial legacy. Following these legitimate estate planning techniques is the key to effectively minimizing estate taxes. In addition to these techniques, there are other methods which your estate tax attorney can advise you of depending on which are the best for you and your situation.
Irrevocable Life Insurance Trusts
By transferring small amounts, which are equal to a life insurance premium, to an irrevocable life insurance trust, the size of the taxable estate is reduced. This method also creates a larger asset outside of the estate. The life insurance proceeds are not taxable in most situations.
The federal law formerly only acknowledged heterosexual marriages in regards to estate tax laws. Recent changes in the law now recognize homosexual marriages, if the state the couples were married in legally acknowledges their union. This applies to those who may reside in a different state from that which they were married in. Those who have been affected by these changes in the law need to consult with a tax attorney as soon as possible to ensure they are making changes to properly handle their estate.
Lifetime gifts and bequest at death to one’s spouse are not subject to estate taxes. It is important to note that this tool can be used to defer estate taxes; it does not eliminate them completely.
The law regarding martial transfers to spouses does not apply if either spouse is not a legal citizen of the United States.
Lifetime Gifts to Children and Grandchildren
Children and grandchildren are typically the individuals people are seeking to have benefit from the proceeds from their estate. Annual gifts of $12,000 can be made to any number of persons without being penalized with a gift tax. A married couple who both engaged in gifting can collectively give $24,000 annually per recipient without incurring a gift tax. This method of transferring funds can greatly reduce the size of the taxable estate. This is another effective tool for reducing estate taxes.
This form of gifting is used when the recipients are still minors. The gift is legally given to an assigned custodian for the benefit of the minor. The gift is then distributed when the minor is the age of majority. The annual exclusion of lifetime gifts applies to this approach.
A way to protect your estate is to front-load 529 college savings plan accounts for children or grandchildren. The accounts can be loaded with 5 years’ worth of annual exclusion gifts at one time without incurring a gift tax. This method removes these funds and income taxes on them from your estate. Earnings from these accounts will grow while being deferred from taxes. The distributions which are provided by these accounts are used to qualify for higher education expenses.
Family Limited Partnership
A valuable estate planning tool is a family limited partnership. It allows families to transfer ownership of a family-owned business to the next generation. This protects family assets from creditors and allows taxation of partnership income at the children’s lower tax rates.
Qualified Family-Owned Business Interest
The Internal Revenue Service, or IRS, has included in its code the ability for “qualified family-owned business interest” to be deducted from a gross estate. There are certain requirements to qualify for this deduction. Qualifications include the descendant or family members have participated in or owned the business for 5 of the past 8 years. They must have owned 50% of the business and the business interest must compromise at least 50% of the decedent’s adjusted gross estate. The decedent must be a legal citizen of the United States and the business must be located in the United States.
Selling an asset to a younger generation in exchange for an unsecured promise to pay to the seller for their lifetime is referred to as private annuity. This method removes the sold asset from the seller’s estate. The amounts paid to the seller will be a part of the seller’s estate unless they are unspent.
Special Use Real Estate Valuation
Real estate is usually valued at its highest and best value for the purposes of federal estate tax. In some cases this can produce results which are unfair. To address this situation the IRS code permits some forms of real estate to be valued at its “actual use” value. The details of this special provision can be detailed by a tax attorney.
The size of an estate can be reduced through lifetime gifts to charities. This in turn reduces the amount of taxes to be paid on an estate. Lifetime charitable gifts also offer the additional benefit of being an income tax deduction. Gifts distributed in this method can be made in a manner which allows for the donor to retain the right to use the asset to be gifted until the time of their death.
These methods of reducing estate taxes can be used in party of a comprehensive estate plan. To start creating your own plan, you need to make time to speak with a professional estate planning attorney. An experienced attorney can evaluate the impact of various taxes and how they affect your personal situation. It is a wise idea to contact an attorney sooner than later to put your personal plan into place. It is the best way to protect the money you have worked so hard to earn. Let the 23 years experience of attorney Dwight Edward Tompkins work for you. Make an appointment today by calling 1-714-385-0044.