Federal Estate Taxes are only charged against Estates with assets exceeding $1,500,000 (Year 2004 and 2005)
The Estate consists of all assets held in Decedent's name, or controlled by the Decedent.
For example, a person's residence, cars, securities, IRA's, bank accounts, revocable living trusts,
and life insurance benefits (if the decedent owned the life insurance policy or had power to name
the beneficiaries under the policy) are all assets of the Estate.
As shown in "A/B Trust Basics", the use of a Bypass Trust
effectively raises the $1,500,000 limit to allow $3,000,000 of assets to be transferred for a married
If you believe your Estate will exceed $1,500,000 at the time of your death
(or $3,000,000 if you are married), the following techniques can be used to
save death (estate) taxes by lowering the value of your Estate at the
time of your death. You should talk to a qualified estate planning attorney or accountant
regarding each of these items. This website is not giving advice, only some techniques that
Gift giving will deplete the value of the Estate which otherwise would be taxed upon death.
Every person is allowed each year to give the sum of $11,000 to another person without
incurring any gift tax . Thus, you can give $11,000 this year to any one or more of your
grandchildren, cousins, etc., without incurring any adverse gift tax consequences, and at the
same time reducing your taxable Estate upon your death. Be aware that a gift has to be a true
gift. You cannot give your child $11,000, while at the same time keeping it in a bank account
in your name or without the ability of the donee to get to the funds. Gifts are not allowed to have
strings attached. (One important exception to this concept is a Crummey Trust, which is a
specialized trust that allows a gift to be made while at the same time retaining control of the
funds. A Crummey Life Insurance Trust is not yet featured in this package.)
A further advantage of gift giving is that assets transferred at an earlier date may have a much
lower value than if transferred at death. For example, a minority share in a new business may
only be worth a fraction of its value as a mature business twenty years hence.
A piece of undeveloped land, stocks, or investment account, may be much more valuable twenty years hence,
especially counting inflation. NOTE: A downside to a transfer is that you lose
the step-up in basis if the asset is transferred due to death. For instance,
if you bought property at $1000, and
at your death it is worth $100,000, your beneficiary's basis is $100,000, and a sale at that price
will not incur any federal income taxes. You need to offset the estate tax savings against the
capital gains tax savings lost if you decide to make a pre-death gift.
GIFTS FOR TUITION OR MEDICAL CARE:
Gifts paid for tuition for a beneficiary are exempt from gift taxes, so long as the gift is
paid directly to the university or college, and is paid for tuition expenses (as opposed for room
and board). As is true for direct payments to a college or university, you can pay medical
expenses incurred by a beneficiary directly to the care provider, and such payments are also
exempt from gift tax.
FAMILY LIMITED PARTNERSHIPS:
As a means for transferring assets to beneficiaries during your lifetime, while at the same time
keeping control of the assets and making it difficult for the beneficiaries to transfer or sell such
assets, a Family Limited Partnership is an effective tool. Family Limited Partnerships are more
expensive to set-up and maintain, and therefore are usually used when the other forms of tax
savings, such as gift giving, etc. are insufficient to reduce the estate to a level that will not incur
estate tax upon death. In a Family Limited Partnership, you as the general partner own about
five percent of the partnership assets, while at the same time maintaining all voting control over
the partnership. Your beneficiaries will own 95% of the assets, but as limited partners have no
voting or other control over the management of the partnership. Your assets, including real
property, business interests, securities, and the like can be gradually transferred into the
that at your death your Estate's value is the 5% General Partnership interest - the 95% owned by
the Limited Partners are excluded from your Estate. You have effectively removed a large
portion of assets from your Estate, and may be able to reduce your Estate to below the currently allowed
Lifetime Exemption. To establish a Family Limited Partnership, contact an estate planning
attorney in your area.