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Further Tax Saving Techniques
Federal Estate Taxes are only charged against Estates with assets exceeding $1,500,000 (Year 2004 and 2005) per person. 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 couple.

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 are available.

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 children, 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 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.

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 partnership, such 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.