Minimizing taxes is a common goal among all of our estate planning clients. Fortunately, there is much we can do to reduce federal estate taxes.
The first step is to ascertain whether your estate will be over the federal tax exemption at your death. This isnt as easy as it sounds because the exemption (i.e. allowable amount without incurring federal estate tax) changes. For example, in 2011 and 2012, not many families are affected by the tax because the exemption is $5 million. With good advice, a married couple can pass $10 million.
However, on January 1, 2013, the exemption is automatically reduced to $1 million and many families will be affected. Congress could change the exemption, but the government desperately needs income and we cant count on it. We need to plan.
Ignoring federal estate tax issues will cost you about half of everything you have above the applicable exemption. This means that if you have $1 million over the exemption, your family loses $500,000. If youre $5 million over the exemption, your family loses $2.5 million. Its worth planning to avoid the tax.
Make a list of all of your estate assets, which is everything you own and all financial assets, monies or contracts owed to you. Think about your home, vacation home, retirement accounts, investment accounts, bank accounts, life insurance policies, annuities, collections, antiques, jewelry, cars, notes for money owed to you, businesses, and the like. Add all of these assets up; youll likely be surprised at the total.
Consult with a qualified estate planning attorney, who can do the calculations to estimate what your estate value will be at the time of your death. Regardless of current portability laws, if youre close to the exemption and youre married, your attorney will likely recommend an AB tax planning strategy in your revocable living trust.
If that doesnt cure your federal estate tax problem, a life insurance trust, charitable planning, or a gifting plan may be appropriate.