Avoiding Federal Estate Taxes

Only the little people pay taxes. - Leona Helmsley, hotel owner and prison inmate, 1989

Ms. Helmsley wasn't completely accurate. The easiest way to avoid estate taxes is to die a pauper. Assuming you were reasonably successful at playing the game of life, however, you will want to prevent the federal estate tax collector from taking one last bite of any wealth you managed to accumulate.

You minimize estate taxes the same way you minimize income taxes: claim all the exempt ions, deductions and credits that are available and in the largest amounts that are available--keeping in mind that you are looking at the total tax picture: estate, gift, income and (maybe) generation-skipping taxes for both the estate and the beneficiaries. The following articles will help you do just that. But before we delve into the details, let's pause a minute to see if the estate is large enough to be taxable.

Exclusion Amount. Most people realize that if your income is under a certain level, you won't owe income taxes for that year. This same principle applies to federal estate tax. If the value of your estate falls within the federal estate tax "applicable exclusion amount," then no taxes will be owed.

For estates of decedents dying in 2011, the applicable exclusion amount was $5 million dollars. Since the applicable exclusion amount is indexed for inflation, it increased to $5,120,000 in 2012. In 2013, it is $5,250,000.

Save Money A $5 million estate tax exclusion may seem like a lot, but it really isn't. For example, if you die shortly before retirement, your accumulated savings may easily exceed this amount. The same applies if you die shortly after you experience a sudden increase in wealth (e.g., due to winning a lottery, receiving a civil lawsuit settlement, or gaining an inheritance). Therefore, in order to leverage the applicable exclusion amount, you will want to have a back-up plan or strategy to minimize the value of the assets that are included in your asset and to transfer assets in a way that minimizes the impact of estate taxes on your estate.

If your estate is too large to fall within the applicable exclusion amount, all is not lost! There are many deductions and strategies available to help reduce or even eliminate the unified gift and estate tax liability. Needless to say, you will want to explore these and engage in tax planning before your death. Here are some things you need to consider:

• the marital deduction
• the charitable deduction
• credit shelter bequests
• lifetime gifts
• trusts
• life insurance
• powers of appointment
• special use valuation
• deferred payment of estate tax
• alternate valuation date
• generation-skipping transfer tax

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