16th Sep 2013

Like income tax, estate tax generally increases in a bracketed manner. With the former, the higher the income, the higher the percentage to be paid in income tax.  The same goes through with estate tax. For California estate tax, the exemption amount in 2013 is $5,000,000.  This means that, for a person who died in 2013 in California, his estate will be levied estate tax for amount in excess of  $5,000,000.  If Robert Samuels died in 2013 leaving an estate worth $7,000,000, then his heirs would have to pay taxes for $2,000,000 – or the amount in excess of $5,000,000. (This is only for the state of California; there is a separate federal estate tax.)

Whether on the state or federal level, the tax bite can be expensive. In California, the top rate for estate tax is 40%; the top rate for federal estate tax is 55%.  Of course, it will be the heirs and not the decedent who will have to pay the estate tax.  They do not have to pay it out of their own pocket; but they have to pay it from the estate. This will result in having to liquidate some assets just so they can pay the estate tax within the prescribed period.
The good news is that the estate owner can actually make plans in order for him to lower or even eliminate his estate tax.  This is all part of estate planning.   This is where an experienced estate planning attorney can be your invaluable partner in your estate panning. He will not only help you in drafting a Will or Living Trust; he will also advise you as to how to maintain your assets’ worth so that you can be below the exemption threshold. 
Some popular strategies and options include:               
Buy an Irrevocable Life Insurance Trust (ILIT).  An ILIT is a life policy in which the trust is the policy owner of the plan. Thus when the estate owner passes away, the proceeds of the insurance are not added to the total valuation of the estate.   
Designate your life insurance beneficiaries as “irrevocable.”  The estate owner is still the owner of the life policy.  However, by designating his beneficiaries as “irrevocable,” he makes his beneficiaries co-owners of the policy. When the estate owner passes away, the proceeds of the policy will go directly to the beneficiaries and will not be subject to estate tax.    
Intentionally decrease the size of your estate.   You read it correctly.  You can lower the valuation of your estate. You can do this by giving away tax-free gifts to your loved ones.  The federal limit for tax-free gifts in 2013 is $13,000 per recipient per year per giver.  You may want to gift your daughter with $13,000 this year.  Your wife can also gift  her with $13,000.  You can then repeat the process the following year.  If you have several recipients, then you can dispose off your assets quickly while you are still alive.    

The exemption limits may vary from year to year. Thus, you have to confer with your lawyer whenever you do your gift-giving or other activities meant to preserve the value of your estate when you die. Trying to lower or minimize the estate tax involves a lifetime of planning and coordinating with your estate planning attorney. 

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