Many people do not want to discuss what will happen when they pass away. However, planning ahead is critical. Death can never be planned or timed, and therefore, you can never predict when your estate will become one of the most critical aspects of your family’s financial well-being.
Estate with assets over two million dollars may be subject to a Federal Estate Tax of as much as 45%. “Two million dollars!” you say, that is a lot of money. Well, to quote a famous billionaire, “A million ain’t what it used to be”. In fact, there are an estimated ten million millionaires in the U.S. Besides, we are learning how to become millionaires so we better get ready.
While the laws may not apply to your estate now, it is important to understand what the estate tax laws are currently and what they will be in the next few years. After all, the goal is to create an estate large enough to attract the attention of the government without giving them anything.
In the 2008, an estate tax will only be placed on an estate that is valued at two million dollars or more. In 2009, this figure increases to three and a half million dollars. In 2010, there will be no estate tax imposed on any estate. However, it is not time to start rejoicing yet; in the year 2011 and thereafter, an estate tax will be applied to any estate worth one million dollars or more.
One of the easiest ways to minimize the amount of estate tax is to reduce the value of your taxable estate without eliminating its value to your heirs. There are a few ways that one can accomplish this. A person can give a gift to their spouse, relatives, or to certain charities in order to reduce the value of their estate upon their death.
A gift that does not trigger a gift tax is currently one that is $12,000 or less given to a citizen of the United States in a single year. The tax-free gift applies to several circumstances:
Using trusts to minimize estate taxes
Another way to minimize the effect of the estate tax is to create a trust during your lifetime. You can then transfer your assets into the trust and if properly designed, the trust will defer estate taxes by effectively transferring the assets forward to another person or trust.
If you retain the control of the assets in the trust and can terminate the trust (revocable trust), you can transfer the assets tax-free but they may still be included in your taxable estate upon death. If you transfer the assets permanently and cannot terminate the trust (irrevocable), you can usually exclude the assets from your estate; however the funding of the trust may be subject to the gift tax limitations discussed above.
Trust rules and tax laws are complicated; get professional advice before you consider them in your planning. The most important thing is to create your wealth plan, implement it and watch it grow.