In our last post, we discussed the estate tax and how it is scheduled to come back into existence in 2011, albeit with rates far higher than when we last saw it. In this post, we wanted to discuss a few of the tools that an individual might use to reduce the impact the estate tax may have on his or her surviving family members.
One option that we have discussed before is a grantor-retained annuity trusts or GRAT. These trusts allow a grantor to put assets into a trust and pass on the appreciated value of those assets while still receiving annuity payments from the trust during their own lifetime. However, this option might not be available much longer as Congress has threatened to change the law in order to prevent individuals from avoiding capital gains or estate taxes.
A second option available for avoiding estate tax issues are the use of lifetime gifts. Instead of waiting until the end of life to pass assets on, you can make tax-free gifts during your lifetime up to the amount of $1 million. There are various limits as to how much you can give any one individual tax-free, but depending on how the gifts are structured, you may be able to exceed those limits for gifts related to healthcare or educational needs.
Another estate planning tool that can be used for protecting assets is an insurance trust. With the scheduled estate tax exemption amount only being $1 million next year, large insurance policies may end up falling within the reach of the tax. However, if you create an irrevocable trust for the life insurance proceeds, those funds may be available to support the intended beneficiaries without the danger of being caught up in the estate tax.
Lastly, an individual planning how to distribute their assets can always choose to make large charitable donations. Such donations could lower your income tax and help bring the value of the estate down closer to the exemption level.
Of course, all of the ideas mentioned above have been stated very generally. Careful estate planning takes an experienced hand. If you have any questions about protecting your assets or planning for your family’s future, you should consider contacting an experienced estate planning lawyer.
Source: U.S. News & World Report, Size up your estate plan and do some tax planning, Kimberly Palmer 12/1/10