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A Tax Guide To Manage Your Estate Taxes Effectively

Aug 18, 2007
Estate taxes eat away a substantial portion of your estate if you are not careful to take necessary steps in time. It is absolutely essential for you to start planning at once if you have property valued above two million dollars. This is the current limit up to which no estate tax is applicable. Your heirs/beneficiaries will have to cough up 45 cents on every dollar that is over $2million dollars of your estate value. The good news is that this limit will rise to $3.5 million in 2009.

Even though it may at first appear that your estate is not big enough to land under the estate tax net, you may be surprised how many people like you can have property above the exemption limit when you take into account life insurance death benefits and savings in 401(K) accounts. If this is indeed your case also, you can make sure that your loved ones get the maximum of the outcome of your lifetime labor just by implementing some simple estate tax planning strategies now. Dont let the fruits of your hard labor go needlessly in government coffers.

Estate tax is proposed to be totally abolished from 2010. However, it is a sunset provision and needs legislative confirmation in 2011 otherwise the tax returns. As you can never be sure of political promises in view of perpetual economic and political changes, it is advisable to take proper steps to reduce the size of your taxable estate now.

Since your life insurance proceeds are subject to estate tax, set up an irrevocable life insurance trust which can own your policies. This can help avoid payment of estate tax. However, any existing policy transferred to the trust would still be counted in your estate till three years from the date of transfer.

Marital deduction allows you to transfer unlimited assets to your spouse without any tax implications to your estate. This leaves you free to move up to $1million to your grandchildren or to others through gifts without paying gift tax. Or you can bequest them up to $2million taking advantage of the estate tax exemption limit.

You are also individually entitled to give away any amount during your lifetime to pay for tuition or for medical expenses not covered by insurance. The payment has to go directly to an educational institution or a medical service provider. For example, you can pay say $20000 to a private college directly to cover only tuition expenses of your grandchild. This attracts no tax and does not affect your $1million gift tax exemption. You can additionally gift another $12000 towards his board, room, books, and other expenses without paying any gift tax. If your spouse is also a tax payer, the same entitlement would be available for him/her. So together, both can gift up to $24000 in a calendar year without paying gift tax.

Taxpaying married couples are entitled to estate tax exemption of $2million individually, which is $4 million together.

Many people fail to understand and take advantage of the full estate tax exemption. Since marital deduction lets property without any value limits to be transferred on death from one spouse to the other, they take no steps and lose the $2million exemption available on the first death. Even though the property passes without estate tax on the first death, it is taxable in the estate of the other spouse who dies at a later date. At that time, only one $2million exemption is available.

This position can be avoided if a bypass trust is formed on the death of one spouse. Through similar stipulations in separate wills of each spouse it can be ensured that the trust would come into existence on the death of any spouse who dies first.

The first death will lead to the creation of the bypass trust and transfer of assets up to the estate duty exemption limit of $2million to the trust. The corpus is to be distributed among kids who are to be the ultimate beneficiaries. The surviving spouse would have full access to the benefits/income from the trust during his/her lifetime and can even withdraw principle up to a certain limit each year. On the second death, the assets of the bypass trust are not counted in the assets of the second to die spouse and are not taxed. This way both exemptions are availed through a bypass trust.

Any residual property above the exemption limit can escape estate taxes by forming a Qualified Terminal Interest Property Trust(Q-TIP). This is formed along with the bypass trust and the whole thing is generally referred to as an A-B trust.
About the Author
Sacramento CPA firms offers Estate Tax Planning to individuals and businesses. We have former IRS auditors who know the system to make sure you only get the best advice. Discover a bevy or articles at : http://www.april15.com.
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