How can you reduce estate taxes?

Do you want to leave more money to your beneficiaries and less money to the federal and state government in the form of estate taxes?  Many of us would like to reduce estate taxes at our death, and enhance the wealth transfer we leave behind.

When someone passes away, federal taxes and often state taxes will be assessed.  The gross estate, the value of the property owned by the decedent on the decedent’s date of death, is the starting point in calculation of estate tax.  Debts of the decedent, administrative expenses, charitable deductions, and a marital deduction will be subtracted from the gross estate to arrive at the adjusted gross estate.  The tax rate will be applied to the adjusted gross estate, and the estate tax credit will be subtracted.  The result of this calculation is the estate tax due.

Under current law, every taxpayer is allowed to transfer a certain amount of assets free of federal gift and estate taxes.  The current exemption amount is $1.5 million.  This exemption will climb to $3.5 million in 2009.  The legislation allowing these exemptions will be repealed in 2010 and it is expected that the exemption amount in 2011 (absent any new legislation) will be $1 million.

What does this mean to you?  It means that if you die and your adjusted gross estate is more than the estate tax credit, that you will have an estate tax problem.  In 2004 and 2005, a decedent having an adjusted estate valued at $1.5 million or more will owe estate tax.  The estate tax rate ranges from 45% to 55%.  This very high tax rate makes many people who have taxable estates want to take action to reduce or eliminate their potential estate tax liability.  Can this be done?

Yes, you can reduce or eliminate your estate tax problem in a number of ways.  Credit shelter trusts, irrevocable trusts, charitable trusts, and gifting are all ways to solve an estate tax problem.  It is highly recommended that you seek professional legal advice before trying to reduce your estate on your own.  Gifting assets to others can have adverse effects on your exemption amount, and may result in increased estate tax, if not done properly.