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Despite the scheduled repeal of estate taxes by 2010 (and scheduled to reappear in 2011), many estate planning strategies, including tax reduction strategies, are still needed. Here are eight estate-planning strategies you should know.

1. A will. A valid will stipulates to whom you want your assets distributed. Without a will, the laws of the state where you reside will determine for you.  

2. A living will, medical power of attorney and financial power of attorney. A living will stipulates what life-saving medical procedures you want or donít want in the event you are physically or mentally incapacitated. A medical power of attorney appoints a person the power to make medical decisions on your behalf, while a financial power of attorney states who can make financial decisions on your behalf.  

3. The annual gift-tax exclusion. One of the most basic and inexpensive strategies for saving estate taxes, the gift-tax exclusion allows you to give away, tax free, $11,000 a year (indexed for inflation) to each beneficiary you choose. Thus, you and your spouse could jointly give away $22,000 annually to each of your children, grandchildren or anyone else without incurring a gift tax. 

4. Medial and tuition payments. A person can make unlimited gift-tax-free payments for anotherís tuition or medical bills without it counting against the payerís lifetime gift-tax exclusion, as long as the payments are made directly to the educational or medical institution. A grandparent, for example, could pay a $20,000 annual tuition bill to a college for a grandchild gift-tax free, and then give directly to the child up to another $11,000 a year for non-tuition college expenses, taking advantage of the annual gift-tax exclusion. 

5. Lifetime giving. Assuming you have sufficient funds to live on, lifetime gifting often can better reduce your estate tax liability than waiting until death to pass on your estate. One advantage of lifetime gifting is that you can remove appreciating assets, such as common stock, from your estate. The second advantage is that if your gift is taxable (you can give away up to $1 million gift-tax free during your lifetime), the money you use to pay the gift tax is also removed from your estate, thus reducing any future estate taxes.  

6. By-pass trust or credit-shelter trusts. For people who die in 2002 or 2003, the first $1 million of their estate is exempt from estate tax (assuming they havenít used up some or all of their exemption amount through taxable lifetime gifts). That exemption amount gradually rises to $3.5 million by 2009. A spouse (with the exception of a foreign-citizen spouse) can pass his or her entire estate tax free to the surviving spouse. But because the surviving spouse canít take use the deceasedís exemption amount at his or her subsequent death, this ďwastesĒ the deceasedís exemption amount.  

Often itís better for the first-to-die spouse to pass his or her exemption amount to a credit shelter trust. The surviving spouse can use income generated by the trust assets, and at the survivorís death, the assets pass to the trustís beneficiaries tax free. In addition, the estate of the second spouse also saves the additional exemption amount. Thus, for example, if both spouses died in 2003, they could exempt $2 million between them instead of only $1 million. 

7. Irrevocable life insurance trust. The proceeds of a life insurance policy held in your estate, perhaps used to pay for estate taxes, is subject to estate tax. But if an irrevocable life insurance trust owns the policy, the proceeds will not be included in your estate. You may donate annually to the trust an amount equal to the premiums to pay for the policy. For these donations to qualify for the annual gift-tax exclusion, you must use a complicated strategy called Crummey letters. 

8. Charitable remainder trust. The donor transfers property to the CRT, receiving an immediate income-tax deduction and avoiding any capital gains taxes on donated appreciated property. In return, the donor receives an income stream generated by the trust assets either for a specified time or for life. At the end of that period, the charitable organization inherits the trust assets.

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We do not offer legal advice. All information provided on this website is for informational purposes only and is not a substitute for proper legal advice. If you have legal questions, we recommend that you seek the advice of legal professionals.

Tax Disclaimer: To ensure compliance with IRS Rules, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer under the Internal Revenue Code, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.

Copyright © 2017 Wink Tax Services / Wink Inc.
Last modified: January 30, 2017