subject: The Voluntary Tax That You Don't Have To Pay [print this page] Estate taxes can ambush familiesEstate taxes can ambush families. Many unsuspecting, middle-class folks get shot from behind with estate taxes. Knowing the tips and tricks of estate taxes is like giving you a bazooka against the tax man.
You can plan to avoid estate taxes, and chances are your family won't pay a dime to the IRS in estate taxes. After all, they often call estate tax the "voluntary tax." Rich families don't lose a dime when somebody in the family dies. Why should you lose a dime? You can attack the estate tax issue from a number of different angles. You don't have to crack the full nut all at once. You can protect your estate step by step. This is particularly important if you have a big estate.
Estate planning attorneys and all their books always start by discussing "gifting." If you have a billion dollar estate you can gift all day long. But, for Mom and Pop American, charity and gifting starts at home. If you're not in the billion dollar category, then you're not going to worry much about estate planning.
The first thing you need to do is create a living revocable trust that has estate tax avoidance built into it. Your trust is going to have to have special provisions that let you get twice (2X) as much estate value to your family without paying any estate tax. You can have one trust that divides into two pieces when the first spouse to die actually dies, or you can have two separate trusts with two separate trust documents. If you have the two trust with two documents, then you had better pay attention to what asset value each trust holds. The assets should be roughly equalized between the two trusts. If you are a single person, you can't do the two trust trick and get the double estate tax value down to your family.
It's a surprise, but life insurance often forms the major value in an estate that will be taxed. Yes, life insurance is taxed in the estate of the "owner" of the policy. Life insurance is easy to remove from the estate tax problem; just use an irrevocable life insurance trust or ILIT. You will have to change ownership of the policy to make the ILIT the owner. If you buy a new policy directly in the trust, you are home free. If you transfer an existing policy into the trust's ownership, there is a 3 year waiting rule until the policy is "out of the estate."
Once you have established the living trust and removed the life insurance from the estate, and you still have an estate tax problem, then gifting does come into play. A lot of estate planning techniques allow you to "give the property away" and still basically control it while you are capable. If you can control an asset, you can often retain a lot of the benefits (the income) from the asset and still remove it from your estate for estate tax considerations. Corporations, limited liability companies (LLCs), and family limited partnerships are often used to achieve the gifting and still give you benefits derived from the asset.
by: Lee Simon
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