Advanced Sales - Estate Planning

Who Has To Pay Estate Taxes?
 
Depending on how much you own when you die, your estate may have to pay estate taxes before your assets can be fully distributed. Estate taxes are different from, and in addition to, probate expenses (which can be avoided with a revocable living trust) and final income taxes (on income you receive in the year you die). Some states also have their own death/inheritance taxes.
 
Federal estate taxes are expensive—in 2004 they start at 45% and quickly go up to 48%. And they must be paid in cash, usually within nine months after you die. Since few estates have this kind of cash, assets often have to be liquidated. But estate taxes can be substantially reduced or even eliminated—if you plan ahead.
 
Your estate will have to pay estate taxes if its net value when you die is more than the "exempt" amount set by Congress at that time. Here is the current schedule:
 
Year of Death "Exemption" Amount
2004 & 2005 $1.5 million
2006, 2007 & 2008 $2 million
2009 $3.5 million
2010 N/A (repealed)
2011 and Therafter $1 million
 
How is the Net Value of My Estate Determined?
 
To determine the current net value, add your assets, then subtract your debts. Include your home, business interests, bank accounts, investments, personal property, IRAs, retirement plans and death benefits from your life insurance.
 
How Can I Reduce or Eliminate My Estate Taxes?
 
In the simplest terms, there are three ways:
  1. If you are married, use both estate tax exemptions.
  2. Remove assets from your estate before you die.
  3. Buy life insurance to replace assets given to charity and/or pay any remaining estate taxes.
Charitable Remainder Trust (CRT)
 
A CRT lets you convert a highly appreciated asset (like stocks or investment real estate) into a lifetime income without paying capital gains tax when the asset is sold. It also reduces your income and estate taxes, and lets you benefit a charity that has special meaning to you.
 
With a CRT, you transfer the asset to an irrevocable trust. This removes it from your estate. You also get an immediate charitable income tax deduction.
 
The trust then sells the asset at market value, paying no capital gains tax, and reinvests in income-producing assets. For the rest of your life, the trust pays you an income. Since the principal has not been reduced by capital gains tax, you can receive more income over your lifetime than if you had sold the asset yourself. After you die, the trust assets go to the charity you have chosen.
 
Charitable Lead Trust (CLT)
 
A CLT is just about the opposite of a CRT. You transfer an asset to the trust, which reduces the size of your estate and saves estate taxes. But instead of paying the income to you, the trust pays it to a charity for a set number of years or until you die. After your death, the trust assets will go to your spouse, children or other beneficiaries.
 
Buying Life Insurance
 
Depending on your age and health, buying life insurance can be an inexpensive way to replace an asset given to charity and/or to pay any remaining estate taxes. The three-year rule mentioned earlier does not apply to new policies. But you should not be the owner of the policy - that would increase your taxable estate and estate taxes. To keep the death benefits out of your estate, set up an ILIT and have the trustee purchase the policy for you.
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