Before embarking on Estate Planning, here are a few important concepts to consider.
The Unified Credit
Each person has a tax credit of $1,455,800, which protects estates worth $3,500,000 or less from taxes for 2009. You may use up to $1 million of this credit equivalent for gifts during your life. Proper planning is required to allow both spouses full use of both credits.
Unlimited Marital Deduction
You can leave your spouse (if a U.S. citizen) any amount of assets without gift or estate taxes, thanks to the unlimited marital deduction. This allows you to postpone the taxes until both of you have died.
State Death Taxes
Most states impose some inheritance or death tax. There is limited deduction available on amounts paid to the state that may be applied against Federal Estate Taxes.
Credit Shelter Trust
Often referred to as the Bypass Trust, this device allows $3,500,000 to be placed into trust in 2009 at the death of the first spouse. The transfer is tax-free and passes to beneficiaries tax-free too, even though it may grow in value. Typically, Bypass Trusts are structured to provide the surviving spouse with annual income and access to principal.
Gifting
Transfers of up to $13,000 per year, per individual, may be made by each spouse. This does not erode your $1,000,000 lifetime gift amount. Remember, on gifts made during your life, the recipient takes your cost basis. Inherited assets may be eligible for an increased basis to date of death value. Gifts of cash are a great source of premiums to buy life insurance to pay estate taxes.
Life Insurance
Estate taxes must be paid in cash within nine months of the date of death. Finding the money may be a problem. It may mean being forced to sell valuable assets such as an investment portfolio, a family business or farm land. Your options are to borrow money, sell investments or pay taxes with life insurance.
Life insurance is a highly effective method because proceeds are usually received income tax-free and estate tax-free, if properly arranged. Since the cost of the policy is far less than the taxes, you are paying with discounted dollars. Proceeds are paid promptly, giving your family flexibility when paying the taxes.
