Presently, there are no taxes on estates that are under $5 million. This changes on January 1, 2013. Beginning in January, if you die with an estate of over $1 million, the estate will be taxed at a rate of 55 percent. In other words, over half of your estate will be paid to the government for estate taxes.
Considering that the value of an estate is the sum of personal property, your home, business interests, life insurance death benefits, deferred compensation,stock options, IRAs, retirement plans,401(k)s, investments, real estate, bank accounts, etc., many people will quickly find themselves with a potential estate tax problem in 2013. Tax planning with an attorney can greatly reduce or eliminate estate tax exposure.
There are many methods for reducing the value of an estate for estate tax purposes. The tax planning method chosen will depend on the assets of the individual and the goals and wishes of the individual. One method of handling estate taxes is through the use of sophisticated gifting techniques where assets (ideally assets that are expected to appreciate) are gifted or transferred out of the person's estate using gifting tax credits.
Many estate planning techniques use the IRS gifting rules to move valuable assets out of a person's estate. Generally, the focus is on taking the assets out of the person's estate while allowing the person to have use or reduced use of the asset. One example is a qualified personal residence trust which allows a home or vacation home to be transferred to the trust for a discounted value. This freezes the value of the property for estate tax purposes yet allows the person to continue to reside or enjoy the use of the property. Other techniques include creating family limited partnerships and limited liability companies to hold assets and gradually transfer value to the person's chosen beneficiaries.
Trusts utilizing annuity planning can also be used to transfer assets out of the person's estate while still providing some benefit or income stream for a specified time.
Significant assets can be removed from an estate by care use of the gifting rules. This type of estate planning needs the advice and supervision of an attorney; especially, as these rules have been in a constant state of change.
Editor’s Note: Melanie B. Bradford is an attorney located in Scottsboro, Alabama at 803 Garland Ferry Road at the intersection of Veterans Drive and Garland Ferry near The Daily Sentinel. Her phone number is 256-259-3301. The Alabama State Bar requires any communication that may be interpreted as an ad to state: “No representation is made about the quality of legal services to be performed is greater than the quality of legal services performed by other lawyers.”