17th Dec 2014
The average individual will work their entire life trying to save and make good financial decisions so that when it comes time for retirement, there will hopefully be enough saved up to live out the golden years free of labor. Tax planning, however, isn’t entirely about planning for retirement. Tax planning is essential all throughout your life in ensuring that your tax liability is exactly what it should be; no more, no less. This is important in ensuring you stay compliant with tax laws while also ensuring you are putting as much money back in your pocket as you deserve. Let’s start by discussing some different options when it comes to estate tax planning and how you can prepare yourself adequately.
Introduction to Managing Estate Tax Liability
A key element in tax planning is managing your estate tax liability effectively. There are many strategies by which you can act that are determined by your unique situation. Often times, there are several ways of reducing your tax liability. One way is through deductions, which fall into four categories when it comes to estate planning. These categories are through annual gift exclusions, use of both lifetime exemptions for married couples, removing assets from your taxable estate through irrevocable trusts, and properly using life insurance to cover part your estate tax liability.
Annual Gift Exclusions
One of the simplest ways to minimize your tax liability is through annual gift exclusions. This allows you to give annual gifts up to $14,000.00 during your lifetime to your beneficiaries. This amount is per beneficiary per year; so the potential tax break off of your tax liability could be quite large as it may drastically lower the value of your estate. To qualify for this annual exclusion, each recipient must have a “present interest” in the gift, meaning they must legally be able to use it immediately.
There is an option to use this exclusion without giving control of the gifted assets to younger recipients immediately. To do this, you would need to place the gift in a Crummey Trust. This allows donors to meet the present interest requirement and take advantage of the federal annual gift exclusion, even though this transfer is typically considered transfer of a future trust.
Use Both Lifetime Exemptions in a Marriage
Every person is allowed to give away a maximum of one million dollars in their lifetime without paying estate taxes on it. If anymore is given away than that, than the additional amount is taxable.
While it is possible for the surviving spouse in the event of a death to be transferred the assets of the passing spouse tax free through the unlimited marital deduction, it is still important for married couples to plan for estate taxes. If the amount is over one million dollars, for instance, this results in the loss of a future one million dollar deduction which will only cause the surviving spouse to suffer from a missing deduction down the line.
To take advantage of both exemptions, a married couple can create a Tax Advantage Trust. This essentially allows transfer of the estate between spouses during the first spouse’s passing, and later following the second spouse’s passing, transfer to the designated beneficiaries with minimal tax liability throughout.
Removing Assets From Your Estate
Another effective way to reduce estate taxes is to make your estate smaller. One of the most common ways of accomplishing this task is the Family Limited Partnership (FLP). This allows formation of a business organization owned by family members. It is usually setup so that there are the parents, being general partners having full control and risk, and the children, being limited partners with no control and limited risk. The general partners control where the investment funds are distributed. By giving shares of limited partnership to your children, you can reduce up to 99% of the assets value from your estate.
With proper life insurance planning, part of your estate tax liability can be reduced as well. While the advantages may not reach as great as some of the other options mentioned previously, it is still something worth considering as life insurance offers many benefits when planning for your beneficiaries, and any additional tax deduction you can take advantage of is worth considering.
Some life insurance companies qualify for certain tax deductions, but insurance company representatives are usually not qualified to explain how specifically you can take advantage of a tax deduction. This is something you may want to consult specifically with an attorney or a qualified tax professional.
As you can see, there are many ways to reduce your estate tax liability. It’s important to understand that reducing your estate tax liability is a full time job, especially if you manage a large estate and choose to take advantage of several deductions. You have every right to take advantage of the deductions you deserve, and often times a great option in navigating the maze that is tax planning involves consulting with an attorney that can answer your questions thoroughly and accurately. A good estate planning attorney will walk you through a long, complicated process with a sense of comfort and clarity about what needs to be done and options for different solutions that might fit in with your unique situation.
Attorney Dwight Tompkins is an expert in estate tax planning and is happy to consult with you regarding your unique situation. To schedule an appointment to learn more about what you can do to lower your estate tax liability, give Attorney Dwight Tompkins a call. You can reach the office at 714 385 0044.
Take charge of your financial future and don’t go it alone through the maze that is tax planning. Help is here, and it’s just a phone call away. Give Attorney Dwight Tompkins a call today!