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Estate Valuation and Planning 

How to Cut Your Estate Taxes 

You can't take it with you, but failing to plan for your estate can mean that the government, rather than your heirs, may get the major portion of your hard-earned money. Why? Because the top estate tax rate is 40%! 

Most people are aware of the exclusion of $12,920,000 (inflation-adjusted) of assets from estate taxes. This seems like a significant amount. Yet, when you consider the value of retirement benefits, life insurance, the value of your home, and other assets, you may be surprised at how much you're worth. 

It is not effective estate planning to simply put everything you own in joint title or to draw up a will leaving everything to your spouse. You need to review your total financial position and estimate what estate taxes you'd pay if you changed nothing. Then consider options available to cut estate taxes while still accomplishing your wishes concerning the disposition of your assets. 

Good income tax planning may result in savings of 37% - the top federal marginal rate. Good estate tax planning may result in savings of at least 30% and perhaps as much as 40%, depending on the size of your estate. 

Even if you have no concern for reducing estate taxes, you may want to consider some estate planning techniques that can be used to reduce your current income taxes. 

Some possibilities: 

  • Give away property that you don't use. 

Current tax law allows you to give away up to $17,000 per year, per recipient, free of gift taxes. 

For example, a married couple with two children can give away up to $68,000 (annually) that will not be included in the parents' estate. Making annual gifts over several years can remove substantial amounts from the estate. If you give away more than the $17,000 annually, you may not owe taxes for the gift, but you start to tap into your "unified tax credit." The "unified tax credit" allows you to transfer up to $12,920,000 of assets tax-free. If the credit is used up for gifts you make during your lifetime, you will have no credit left to reduce your estate taxes. 

The tax-free transfer of $12,920,000 is in addition to the tax-free gifting of $17,000 per year, per recipient. When undertaking a gifting program, consider the tax effect of various gifts. 

If you give away stock which generates dividend income, you'll shift income to the donee (often your children), thereby reducing your current income tax bill. You'll also reduce your estate by the value of the gifted property, and any future appreciation of the property will escape taxation in your estate. 

  • Gifts of tuition and medical bills, if paid directly to the school or doctor, are also tax-free. They do not count towards the $17,000 annual gift or the $12,920,000 unified credit. 

  • Make charitable gifts. If you're charitably inclined, you can reduce both your current income tax bill and your estate tax by making gifts to qualified charitable or educational organizations. Gifts to charities are tax-free. 

  • Property can be transferred to a spouse, either during your life or upon your death, tax-free. 

  • Protect your life insurance from taxes in your estate by having your policy owned by someone else. The owner will have to pay the premiums. You forfeit the right to change beneficiaries or borrow against the policy. 

  • Trusts can be an effective way to remove assets from your estate. There are many kinds of trusts, each designed to accomplish certain objectives. Trusts vary considerably in complexity, and they are under no circumstances a do-it-yourself affair, so you will want to seek professional advice. 

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