Prepare for the Return of the Estate Tax

NB: This article was published on July 5, 2010 and contains information that may be outdated. For current information regarding the estate tax, read: Estate Tax Certainty…For Now.

June has already come to an end, and Congress has not yet enacted new estate tax legislation.

Although the estate tax is currently dead, it is scheduled to be reinstated on January 1, 2011. Last year, only estates valued at over $3.5 million were subject to an estate tax of up to 45 percent.

But unless new estate tax legislation is passed, estates worth over just $1 million will be subject to an estate tax of up to 55 percent.

A million dollars sounds like a lot

While $1 million sounds like a lot, homes and insurance policies are included in the calculation of the size of your estate, making it easy to pass the $1 million threshold.

So, if Congress fails to pass any new tax legislation, many more families will need to consider estate plans that minimize their estate tax consequence.

Protecting your assets from estate taxes

Attorney Deborah Jacobs recently wrote an article published by Forbes that summarizes some of the things families can do to protect their assets from estate tax. Below is a summary of some of the tips she mentioned:

1. 1. Review your life insurance policy ownership. If you own an insurance policy at the time of your death, the proceeds are subject to estate taxes unless they are left to a citizen spouse or charity. By making a beneficiary the owner of a policy, estate taxes can be avoided. If the beneficiary is a minor, an irrevocable life insurance trust can be established to own the policy.

1. 1. Put some assets in your own name. You can create a family trust to hold the estate-tax exempt assets of a deceased spouse. Depending on your net worth and the estate tax laws in effect at the time of your death, certain assets can be disclaimed by your surviving spouse and placed into the trust. Income or principal from the trust can be used for the benefit of your surviving spouse but will be excluded from his or her estate. However, in order for this to work, each spouse must own some property individually. Property owned jointly automatically transfers to the surviving spouse upon the death of the first spouse.

1. 1. Maximize annual gifts. You can reduce the size of your estate by giving up to $13,000 a year to as many people as you want. Spouses can give up to $26,000 jointly. You can also take advantage of a $1 million lifetime gift tax exemption.

1. 1. Fund college savings plans. You can contribute your annual exclusion to fund a Section 529 state college savings plan. The earnings in a Section 529 state college savings plan are exempt from state or federal income tax and the money in the account is not counted toward the surviving spouse’s estate.

1. 1. Pay tuition and medical expenses.  You can pay tuition, dental, and medical expenses for anyone you want without using up your annual gift exclusion, as long as you pay the providers directly.

1. Convert to a Roth IRA. The value of the Roth IRA is included in your estate, but the taxes you prepay when you convert to a Roth reduce the size of the account. Upon your death, heirs can get the money income-tax free.

You can read Prepare for the Return of the Estate Tax by following the link.