Question: My parents have considerable assets. What can they do now to reduce the potential estate taxes?
Many clients may be near or over the estate tax exemption and owe federal estate taxes upon their death (see my post on ways to avoid state taxes to see federal estate tax rates). Furthermore, individuals must also face a much lower threshold and may also be subject to Massachusetts estate taxes (currently assets over $1,000,000 are subject to the MA estate tax).
Here are some common, somewhat complex examples on how to reduce your estate in order to minimize the ultimate tax owed:
- The Credit Shelter Trust (By-Pass Trust) – In 2009, a married couple will be able to transfer $7,000,000 without federal estate tax. To do so, each spouse must make maximum use of their $3,500,000 applicable exclusion amount. A credit shelter trust can allow us to take full advantage of the applicable exclusion amounts and still provides for the surviving spouse and children. Both a credit shelter trust and a marital deduction trust can be included in a Will or a Living Trust.
- Family Limited Partnerships (FLP) – One can use a family limited partnership or an LLC to consolidate ownership and management of family assets and potentially shift income or appreciation to the children. In essence, these entities allow parents to make discounted gifts of limited partnership interests to children and grandchildren without surrendering control of the business or property. Such gifts make qualify for gift tax discounts on their valuation as they can be discounted as much as 35% due to lack of control and marketability.
- Benefits of Lifetime Gifting – If one still expects estate tax liability even after applying the above mentioned options, one may consider gifting strategies. For example, in 2009 anyone can make a $13,000 gift, income tax free and gift tax free. Lifetime gifts can remove assets and their future appreciation from the estate. When deciding what to gift, it is best to gift assets that are likely to appreciate after the gift. Consider a husband and wife with two children, each spouse can give each child $13,000 annually. This amounts to $52,000 of tax free gifts annually. Also, any medical or education related expenses you pay directly on behalf of a child or grandchild are immediately removed from your estate without any gift tax.
(photo credit: http://michiganelderlaw.info)