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Despite uncertainty as to future of federal law, tax minimization opportunities abound

On Behalf of | Jun 6, 2012 | Asset Protection |

In estate planning, everyone should be concerned about how to reduce to a minimum the tax liabilities of their plan. Not only is there gift and estate tax to be mindful of, but also income tax, generation skipping transfer tax, and inheritance tax in some states. A good estate plan will address each of these potential tax liabilities and determine the best way to reduce them.

Among the various strategies available for this purpose is lifetime gifting. Current tax law allows each individual to gift a maximum of $13,000 per year to another individual without incurring any tax liability. The recipient will not owe any taxes on the gift amount, unless the money is placed in a fund where it earns interest.

Gifting, in general, is an important way to reduce the assets in one’s estate so as to reduce the estate taxes to be paid upon one’s death. But one should not approach gifting haphazardly. There are a number of factors to consider. To take one example, giving assets as a gift may cost the recipient more money than if the assets were received as inheritance, because of the way capital gains tax is calculated.

Another potential avenue for reducing tax liability is to set up a 529 college plan. Under tax law, such plans allow money to grow tax-free if they are used to pay for college or vocational school education. Up to $13,000 can be given away per year, or a $65,000 lump sum can be given in any one year to cover a five year period. The recipient of these funds will not be taxed if the money is used for designated educational expenses.

In terms of real estate, a life estate can help reduce estate tax liability by removing the property from one’s estate, as well as locking in its value for capital gains tax purposes.

For the remainder of 2012, taxpayers are permitted a $5 million federal estate tax exemption. Only Estates exceeding that amount will owe federal estate tax. Unless Congress determines otherwise, the exemption amount will go back to $1 million in 2013. Because of this, there is a degree of uncertainty in how to approach tax minimization. Working with a qualified attorney can help one to keep abreast of changes in the law, and to ensure that one’s estate is set up so as to minimize tax liabilities to the best of one’s ability.

Source: CNBC.com, “Spreading Around Your Retirement Wealth Tax Free,” Michelle Lodge, May 29, 2012.