Because Congress let the federal estate tax lapse for 2010, there is much uncertainty about what the federal estate tax will be in the future and how to best plan for its return. The tax is scheduled to take effect at new levels on January 1, 2011. But Congress still has the ability to change the laws, and any changes could be made retroactive.
The following are a few estate planning steps you can take now to lessen the impact of federal estate taxes and preserve assets for your heirs, no matter what becomes of the federal estate tax. Even if Congress makes future tax rates more favorable, you will be no worse off.
Make Monetary Gifts
One way to reduce the amount of estate taxes owed is to reduce the size of the estate by making monetary gifts. You can give money tax-free to any person you choose as long as the total amount given to one individual is not more than $13,000 in one year. Spouses can combine this amount to give $26,000 jointly to as many people as they would like each year.
If you give more than $13,000 to one person per year, you may incur a gift tax. However, there is a $1 million lifetime gift tax exemption, which means that the gift tax will only apply if the gifts over $13,000 add up to more than $1 million over your lifetime. In other words, you can give up to $1 million before you must pay a gift tax on the monetary gifts.
Get Life Insurance
Another way to cover uncertainty until Congress acts definitively is to get a short-term life insurance policy. A one- or two-year term policy can provide funds to help pay estate taxes if the laws are implemented as currently planned. The policy also can be canceled if Congress makes favorable estate tax changes.
It is vitally important that your beneficiaries, and not you, own the insurance policy. As owners, your beneficiaries must pay the premiums, but you can give them money to pay the premiums using annual gifts. If you already own a policy you can sell it to a family member for its fair market value.
Lend Money
Finally, you can create an arrangement that is beneficial to both you and your family members by lending them money. To avoid potential gift and income tax consequences, you must charge the minimum interest rate that is set each month by the U.S. Department of the Treasury. Importantly, this interest rate is often less than your family members would have to pay with a bank loan. It is also more interest than you could earn from Certificates of Deposit (C.D.s) or money market accounts.
Although the future of the federal estate tax is uncertain, careful financial planning can help you minimize the impact of taxes and any changes to federal estate tax laws. Contact a knowledgeable estate tax planning lawyer in your area to develop a tax-planning strategy that works for you.
From our law offices in Hackensack and Manhattan, Kirsch Gartenberg Howard LLP has served individuals and businesses across northern New Jersey, including Bergen County, Essex County, Union County, Middlesex County and Passaic County, and the five boroughs of New York City since 1984.
