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Protect Your Assets from Estate and Inheritance Taxes

According to a June 2010 report released by The Boston Consulting Group, the United States has the 7th highest density of millionaire households.  If you’re one of those lucky people, you’ll want to take steps to minimize the amount of estate and inheritance taxes imposed by the federal and state government.

Many Americans cherish the ability to pass one’s wealth down to their children (and even grandchildren). A married individual may leave all of his/her assets to their spouse tax-free, but you’ll need also to do some estate planning to protect your spouse’s assets from estate and inheritance taxes when he/she passes away.

Gift Tax Exemption

One way to protect your assets from estate and inheritance taxes is to ‘gift’ money to your family or friends before you pass away.  You and your spouse can each give up to $13,000 per year (to as many individuals as you like) without incurring any gift tax.  Even if you exceed the lifetime maximum of $1,000,000 (or $2,000,000 for a married couple), the 35% tax on gifted assets is still lower than the estate tax rate ? unless the estate tax is reinstated at 45%-55%, as the Obama Administration has proposed.

Trust Accounts

Trust accounts can also be useful vehicles to help minimize estate tax and inheritance tax.  Below are examples of trusts that are commonly used to ensure the proper distribution of assets.

A Living Trust is set up while you are alive, so that when you pass away, the successor trustee distributes your assets to the beneficiaries you’ve named. By doing this, your assets can avoid the probate process, but estate or inheritance taxes may not be eliminated entirely.

A Bypass Trust provides financial support for a surviving spouse and enables the couple to give the maximum amount of assets to their children (or other heirs) once both spouses pass away.

An Irrevocable Life Insurance Trust is typically set up to benefit children and/or a surviving spouse. When you pass away, the proceeds of your life insurance will not be subject to estate or inheritance taxes.

A Charitable Remainder Trust can also help minimize the impact of estate and inheritance tax. This type of trust lets you designate a qualified charity (or other tax-exempt organization) as the recipient of the proceeds from your estate when you pass away. It also enables you and your spouse to continue receiving income from your assets until each of you passes away.  A charitable remainder trust is irrevocable, but you may be able to maintain control over how the assets in the trust are managed and you may be able to modify the beneficiaries.  You will have to fulfill the IRS requirement and distribute a minimum portion of your assets (currently 5%) each year to the charity, but you will be also able to claim a tax deduction for charitable contributions. Another benefit to this type of trust is that any realized profits are exempt from capital gains tax, meaning that you can pass on a greater portion of your estate to charity.

A Charitable Lead Trust works in a similar manner as a Charitable Remainder Trust in that a designated charity receives a certain percentage of your income every year. However, when you pass away, a Charitable Lead Trust distributes your remaining assets to your surviving spouse and any other beneficiaries you named (rather than to the charitable organization).

There are several ways to reduce the amount of estate tax or inheritance tax that your assets will be subject to upon your passing. It’s pays to be prepared and have a good estate planning lawyer to help you design an effective and pro-active tax strategy.


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