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If you have a taxable estate over the current maximum exclusion amount,
you will be concerned with minimizing taxes on the taxable portion of
your estate. With the tax deductions, it might look as though the easiest
way to avoid the federal estate tax is simply to give away everything but
the maximum exclusion amount at the time of your passing. However, the
government has a different view.
To give a gift (to anyone other than your spouse), its value is generally
added to the property you hold at death in calculating your estate tax
liability. Fortunately, there is an important exception to this rule that
is crucial in estate planning, the gift tax applicable exclusion amount.
For 2007, you have a lifetime gift tax applicable exclusion amount of
$1.0 million. Also, you can make annual gifts of up to $12,000 to as many
individuals as you wish without triggering the gift tax. A married couple
filing jointly can give up to $24,000 to an unlimited number of individuals
each year, even if the gift comes from only one of the spouses’ funds.
Such gifts are a way of reducing your gross estate. These gifts also ensure
that the property goes to the individual that you want to receive it.
Taxes are not the only consideration in estate planning. Be sure not to
give away assets during your lifetime you might need such as reserves necessary
to fund emergencies and retirement.
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Comparing Property Transfer Methods
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Method
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Advantages
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Disadvantages
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Will
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Simple to prepare; fees relatively low. Primary way to name a guardian
for minor children.
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Involves time and expense of probate; becomes public record.
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Revocable Living Trust
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Avoids probate; offers great flexibility in providing for heirs;
generally remains private.
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Higher attorney's fees to create; expense retitling all
property to be put into trust; may require annual fees for
professional management of trust's assets. May not save estate
taxes.
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Testamentary Trust
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Protects children's inheritances. Grantor can retain some control
of assets.
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Assets must first go through probate (involves time and expense).
Annual cost to administer. May require annual federal income tax return.
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Irrevocable Trust (Life Insurance Trust)
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Removes life insurance proceeds from insured's taxable estate.
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Cannot name self as trustee. Cannot have any living ownership
interest in policy. If policy initially issued with insured
as owner, must create trust 3 years before death (for certain tax benefits).
May require annual federal income tax return in certain instances.
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Joint Tenancy With Right Of Survivorship
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Simplest way to avoid probate on first person's death, because
property automatically passes to surviving joint tenant(s).
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Surviving spouse loses half the "stepped-up basis" in a community
property state. Can complicate use of bypass trust.
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Basic Money Management
Basic Money Management
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