When it comes to taxes, a
little planning goes a long way. Here are some of the best strategies available
today for minimizing gift and estate taxes:
Maintain Family Assets
A family limited partnership (FLP) allows you to manage and control
family assets in a way that provides the tax-effective transfer of wealth to
others. Typically, the majority of limited partnership interests are gifted to
family members. Limited partners have no control over the partnership’s
operation, and typically cannot sell or borrow against their partnership
interests, due to the lack of liquidity and marketability. Therefore, valuation
discounts apply for gift tax purposes, and additional discounts may apply to
the assets themselves, depending on their liquidity.
Transfer Wealth During Your Lifetime
Lifetime gifts
are generally superior to testamentary gifts for minimizing transfer taxes,
since they reduce the size of your taxable estate. You’re permitted to give up
to $14,000 ($28,000 for spouses splitting gifts) to any number of recipients in
a single year without incurring gift tax. The unified tax credit of $5.45
million includes both the lifetime gift tax exemption and the estate tax
exemption, so an increase in one reduces the other. Since the gift must be
irrevocable, it’s crucial that you leave yourself sufficient funds to live on,
and the recipient must be responsible enough to manage the money wisely. You
can preserve your lifetime exemption by making unlimited payments directly to
qualified medical and educational providers on behalf of your loved ones, and
they won’t owe any gift or income tax on the funds.
Control The Time Period
To be eligible
for the annual $14,000 exclusion, it should be a present interest - meaning the
beneficiary should have the capability to use or spend the proceeds
immediately. The Crummey power trust allows transfers to the trust to qualify
as a present interest, since the beneficiary has a limited period of time to
withdraw the annual gift. As long as the trust provides a time window during
which the beneficiary can withdraw the gift before it becomes subject to the
terms of the trust, it creates a present interest and qualifies for the
grantor’s annual gift tax exclusion.
Transfer Wealth From Illiquid Assets
Life insurance
is frequently included in the estate planning package, to provide liquidity in
the case of closely held or relatively illiquid assets, such as a family
business, farm, or real estate. While life insurance proceeds are generally tax-free
to the beneficiary, they are included in the decedent’s gross estate as long as
the decedent owned the policy at any point during the three years leading up to
his death. The best way to avoid this issue is with an irrevocable life
insurance trust. As long as the trust owns the policy, the proceeds remain
outside the estate, and will be exempt from both income and estate taxes. The
trust should purchase the policy, since the transfer of an existing policy
within three years of death brings the proceeds back into the estate.
Provide For Your Children From A Previous
Marriage
The most
flexible marital trust - the qualified terminable interest property (QTIP)
trust - allows the executor to determine how much of the estate qualifies for
the unlimited marital deduction. While the surviving spouse’s needs and
expenses are provided for during his lifetime, the final distribution of trust
assets to the first spouse’s children is also protected. This makes it a
particularly attractive option for people with children from a prior marriage,
or if there is any concern over what might happen if a surviving spouse
remarries.
Lower Your Gift Taxes
A grantor
retained annuity trust (GRAT) permits the grantor to transfer assets to a trust
for a few years. During this term, the grantor will receive an annuity from the
trust, before the remaining assets are transferred to the beneficiary. The
payment amount that must be disbursed by the GRAT to the grantor is calculated
using an interest rate determined by the IRS, known as the hurdle rate. Annuity
payments received by the grantor reduce the gift’s value for gift tax purposes,
which is determined at the time of transfer into the trust. As long as the
assets in the trust outperform the hurdle rate, this can be a very effective
transfer strategy.
Investment professionals can help you identify the tools and strategies
necessary to reduce your gift and estate taxes. Werbin Rubin knows how to use
these tools to your advantage, and we’re committed to helping you achieve your
financial goals, with comprehensive solutions designed to meet your needs.
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