Net Zero Tax Estate Planning
As many of our clients know, the current estate tax exemption in the United States is $2,000,000 (this $2,000,000 exemption is scheduled to change in future years). This means that if a U.S. citizen dies in 2007 with a gross estate (i.e., roughly your net worth) of less than $2,000,000, then no estate taxes are owed and no estate tax return need even be filed with the IRS.
The maximum estate tax rate for a person dying in 2007 is 45%. This means that after the $2 million exemption is applied, your taxable estate would be subject to this wealth transfer tax equal to 45% of the value of those assets.
If an estate is larger than $2,000,000, we want our clients to know that it is possible to effectively “zero-out” your estate tax bill. Depending upon the net worth involved, advanced planning techniques necessarily involve some degree of complexity and a higher risk of IRS audit. Advanced estate planning often also involves life insurance in order to replace estate taxes paid. Some of our clients have opted for simplicity at the price of paying more estate taxes.
We strongly recommend that basic foundational estate planning documents be put into place to ensure that husband and wife each take full advantage of the $2,000,000 estate tax exemption. These foundational documents include separate trusts for husband and wife, separate “pourover” wills for husband and wife, and other collateral documents. Many of our clients with net worth larger than $2,000,000 have executed these important foundational documents. With these documents and appropriate asset titling in place, a married couple can leave up to $4,000,000 to their children free of any U.S. estate tax.
We have clients with net worth in excess of $4,000,000 who have not yet gone beyond the basic foundational documents in order to “zero out” their future estate tax bill. These additional techniques involve strategies such as the following: ownership of life insurance in an irrevocable life insurance trust or in an LLC owned by the children; forming a family foundation and transferring assets to it; engaging in other charitable giving techniques such as charitable remainder trusts; forming family limited liability companies and gifting away interests in it; combining various types of trusts such as grantor retained annuity trusts, qualified personal residence trusts, etc.
If you have a desire to zero-out your net estate tax bill, we would be happy to sit down with you and explore these additional estate planning strategies.
One important component of almost every estate tax savings plan is to shrink your estate through a regular, annual gift-giving program to your children and other descendants. The annual gift tax exclusion (i.e., the amount you can gift each year to each donee) is $12,000. In addition, each U.S. citizen has a lifetime gift tax exemption of $1,000,000. This is over and above the annual exclusion. Gifting away $1,000,000 worth of assets now is a good way to leverage the shrinking of your taxable estate, since a gift today also carves out of your estate the future appreciation or growth in value on the assets that you gifted away.
If you would like assistance in any of these areas, please feel free to contact any member of the Strong & Hanni Business and Estate Planning Group.
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