Redlig Financial Services - Reducing Your Estate

Tax Strategy for Reducing Your Estate

With a new year upon us, the repeal of the federal estate tax looming in 2010, the tax hit on inherited assets is gradually declining. But Congress has yet to determine whether the so-called “death tax” will disappear permanently or for just one year.

Why would legislators get rid of a tax that could provide an estimated $850 billion in revenue between 2011 and 2020, especially in light of the high deficits the governments is currently running? Many people are asking this very question. With the democrats clearly in control of the Senate and Congress, change is more likely now than before. Both sides are posturing for the upcoming battle; one side arguing that getting rid of the tax will reward rich families at the steep cost of a deeper deficit and the other side arguing that it’s unfair to tax income twice – once it is earned and again when it’s inherited by heirs.

There is also concern about small businesses, which often fail for lack of funds to pay estate taxes. A proposed Senate bill that keeps the tax but reduces its bite may be the final compromise. Meanwhile, maximizing your bequest requires an estate plan that keeps in mind both current estate tax laws and possible future changes. For 2007 and 2008, you can pass $2 million of your property estate tax-free and the exempt amount increases to $3.5 million in 2009. (Remember, we are talking only about federal taxes; you will still be required to pay New York State tax on this.)

Federal Estate Taxes Through 2011

Tax Year	Exclusion Amount	Tax Rate
2007	$2 Million	45%
2008	$2 Million	45%
2009	$2 Million	45%
2010	N/A	N/A
2011	$1 Million	55%

Your heirs' potential tax burden is also affected by the declining estate tax rates. The maximum rate, 50% in 2002, is now 46% and will drop to 45% for the next three years. After the estate tax holiday in 2010, the rate could jump to 55% in 2011 although this is uncertain at the moment.

Consider giving assets now, not later. One solid way of doing so is to transfer assets during your lifetime. Both you and your spouse can make annual tax-free gifts gifts of up to $12,000 per year in cash or property to as many people as you wish. For example, if for four years you and your spouse gift $12,000 per year to each of your three children (that's $24,000 per year per child), you'll reduce your total estate by $288,000.

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Under the Uniform Gift to Minors Act and the Uniform Transfers to Minors Act, an adult custodian holds control over the funds until the age of 18 or 21, depending upon your specific state's laws. However it is crucial they receive access to these accounts once they come of age, or they suffer tax consequences.

Furthermore, you can give away additional assets totaling $1 million during your lifetime without owing gift tax. (Your spouse can do the same as well). Gifts to pay for the recipients' tuition or medical expenses neither qualify as annual gifts not count against your lifetime exemption.