Estate taxes can really hurt a lot of families. Lot’s of families in America are really surprised when they end up paying estate taxes. Oh, they didn’t think they had big enough estates. They certainly weren’t rich. They were just the standard American family. If you’re going to avoid estate taxes, you need to know exactly what can be done, so there are no surprises.

You can plan to avoid estate taxes, and chances are your family won’t pay a dime to the IRS in estate taxes. After all, they often call estate tax the “voluntary tax.” Rich families don’t lose a dime when somebody in the family dies. Why should you lose a dime? You can attack the estate tax issue from a number of different angles. You don’t have to crack the full nut all at once. You can protect your estate step by step. This is particularly important if you have a big estate.

The first line of defense in estates and trusts is gifting. Take a look at Oprah and Mr. Gates. Big time philanthropists. But not because they’re necessarily altruists. Even you’re a coupon clipping household, you can get some benefit from gifting and charitable donations. But this can’t be your only angle.

The first thing a family should do is create a revocable living trust with estate tax provisions. Some living trusts don’t help avoid estate taxes, but others will permit a family to get twice as much down to the family without an estate tax being payable. The living trust can be structured so that the husband has one trust and the wife has one trust. If this is the case the couple has to pay attention to exactly how much property is in each trust. The couple should try and keep the value held in each trust about equal in most situations. The trust may be designed so that there is only one trust while both spouses are alive, or there may be two trusts. It doesn’t matter. A single person can not achieve any estate tax advantage by using a living revocable trust.

It’s a surprise, but life insurance often forms the major value in an estate that will be taxed. Yes, life insurance is taxed in the estate of the “owner” of the policy. Life insurance is easy to remove from the estate tax problem; just use an irrevocable life insurance trust or ILIT. You will have to change ownership of the policy to make the ILIT the owner. If you buy a new policy directly in the trust, you are home free. If you transfer an existing policy into the trust’s ownership, there is a 3 year waiting rule until the policy is “out of the estate.”

Once you have established the living trust and removed the life insurance from the estate, and you still have an estate tax problem, then gifting does come into play. A lot of estate planning techniques allow you to “give the property away” and still basically control it while you are capable. If you can control an asset, you can often retain a lot of the benefits (the income) from the asset and still remove it from your estate for estate tax considerations. Corporations, limited liability companies (LLCs), and family limited partnerships are often used to achieve the gifting and still give you benefits derived from the asset.

Have any living trust questions? Want to learn more about revocable living trusts? Learn the 6 mistakes people make when doing their estate planning.

categories: estate taxes,financial planning,wealth management,finance