The federal estate tax is basically a tax on orphans
because it doesn't apply to any assets left to a surviving spouse. However,
when the second spouse dies, then the government steps in and demands as much
as 50% of the value of an estate. When the main asset in the estate is a
small business or farm, it often has to be sold at distress prices in order
to pay the taxes.
However, the federal estate tax can be eliminated
or at least greatly diminished through advance tax planning. If you don't
want the government to consume a large part of your estate, you have to spend
some time and money now to keep that from happening after you are gone. To
the extent that the estate tax can be avoided by advance planning, it can
reasonably be described as a "voluntary" tax.
The federal estate tax has been called a "voluntary
tax" because there are so many legal ways to avoid this tax with advance
planning. However, few families will spend the time or money to restructure
their assets to prevent the IRS from taking up to 50% in one generation, up
to 75% in two generations and up to 87.5% in three generations. Basically,
estate planning isn't done for your own benefit. It's done for your children.
The current estate tax can be easily avoided until after the death of both
parents.
Thus, the estate tax is virtually a tax on orphans.
When you are both gone, the IRS gets a big chunk of what's left from your
kids. That is, they will unless you are willing to spend a little time now to
find legal ways to sidestep the problem. It's very easy to avoid the federal
estate tax on a total estate of up to $2 million. Beyond that, it requires a
little bit of effort. For estates over $3 million, the federal estate
tax can consume 40% to 50% of the excess estate.
If the value of your estate will be less than
$1,500,000 at the time of your death, you don't need to spend any time or
money on estate planning to avoid the federal estate tax. A simple living
trust will help you to avoid the state probate and inheritance taxes in most
states. If you are married, this amount can be doubled with an arrangement
known as a "credit shelter trust" or an "A/B Trust". It's a very basic
component of the "toolkit" used by every estate tax planning lawyer.
If you plan to leave everything you own to your spouse
and if you don't care what happens to it after that, then there's little
reason to spend any time or money on estate planning.
But - if it angers you to think that the IRS will force
your executor to sell off many of your assets - and even your business - to
pay the estate taxes after you and your spouse are gone, then you have two
other choices. One is to leave the residue of your estate to a charity. The
other is to spend some time now to arrange your assets so that they go to the
people who are important to you. Most likely, that's your children or your
grandchildren.
The current federal estate tax law offers a variety of
legal ways to greatly reduce or to even eliminate the estate tax. One example
is with a family limited partnership. Assume you transfer some assets to a
family partnership in exchange for an
interest as a limited partner. The assets in the partnership can't be sold by
the limited partners, so you have just placed a restriction on the use of
this asset. A buyer won't pay as much for it as for the assets you put into
the partnership. Hence, the law recognizes that a discount is appropriate in
valuing the limited partnership interest in your estate. At the present time,
the IRS and the courts have been accepting discounts of from 20% to 40%. (In
some cases, the discounts have been even higher.)
Assuming that your estate is worth $3 million (and you
are single), this one
device could save your heirs as much as $500,000 in estate taxes.
Essentially, the basic methods of estate tax savings
involve making gifts while you are alive, structuring your assets to reduce
their value or converting your estate into an income stream that ceases at
your death (an annuity).
For example, you could eliminate the estate tax
overnight by exchanging all of your assets for a life income annuity for
yourself and your spouse. In some cases, you might want to make one or more
of your children beneficiaries of part of your annuity. The three most common
methods of doing this include (1) a life insurance company commercial
annuity, (2) an annuity from a charitable trust ,
or (3) a private, unsecured annuity . If
you sell property to your children or grandchildren in exchange for a life
income annuity, at the time of your death, those assets are outside of your
estate and the assets are owned by your children or grandchildren.
Extensive additional information about estate taxes and
various methods of avoiding the tax on the Offshore Press
subscribers' web
site.
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