Reducing estate tax liability is an integral aspect of estate planning, and an especially important task for clients with large estates. But tax planning isn’t exclusively for those with estates exceeding the estate tax exemption amount. Those with smaller estates shouldn’t assume they will not be affected by estate taxes, since tax law tends not to stay put for very long.
Not only will the current $5 million estate tax exemption amount not necessarily be around in 2013, there are also state estate taxes to consider. In New Jersey, the exemption amount is only $675,000, which is considerably less than at the federal level.
There are a number of wealth preservation strategies to take advantage of when approaching estate planning. Which ones are selected must fit your particular situation and goals. That said, the following are some examples of the types of approaches one can take.
Yearly gifting. This is an excellent way to slowly reduce the size of your estate over time. Federal law allows individuals to give $13,000 per individual per year, free of tax. Spouses can take advantage of “gift splitting,” which allows them to combine their yearly exemption amount and give up to $26,000 per individual.
Intra-family loans. These allows parents to give assets to their children without giving them up, while allowing them to appreciate over time. In order to be free from gift tax, they must be repaid with interest after a certain period of time. The IRS sets the specific interest rate according certain standards. These loans may are subject to capital gains tax, but not gift or estate tax.
Trusts. One common way to transfer wealth is to set up a Grantor Retained Annuity Trust (GRAT). These trusts use invested assets over a specified term, during which the grantor is paid an annuity. At the end of the term, the remainder of assets in the trust go to the beneficiaries. There are other types of trusts that can be set up to remove assets from your estate as well.
Transferring large assets. Another option for reducing estate taxes is to transfer ownership of a large asset to a child right now, rather than after your death. If the asset is worth less than $5 million, the lifetime gift tax exemption of $5 million will prevent any tax liability. One example of such an asset would be a family home.
These are just some of the techniques you might use to reduce your estate tax liability. An experienced estate planning attorney will be able to guide you in selecting the strategies that are right for you.
Source: Washington Post, “How to minimize estate taxes, even if you’re not rich,” Karen Hube, October 14, 2011.