Barring any last-minute congressional moves, the estate tax is on the verge of making a big comeback. After a year in which estates of any size escaped federal tax, those of people who die in 2011 will currently be allowed an exemption of only $1 million, down from $3.5 million in 2009. Holdings beyond that level will be taxed at rates of up to 55 percent or, in rare cases, 60 percent.
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Tax experts say they expect Congress to settle on a rate between 35 and 45 percent, and that the $1 million exemption will rise to closer to the 2009 level. Meanwhile, anyone with assets nearing or in the danger zone should probably do some planning.
How best to make sure your wealth ends up mostly in the hands of your heirs? These five strategies will help keep your money in the family, or with your favorite charity:
Make lifetime gifts. One simple option is to give money to family members while you can still enjoy watching them use it. In addition to letting you give away $1 million tax free over your lifetime, the law allows yearly handouts of $13,000 to any number of individuals.
And in the case of gifts for education or healthcare, there’s no limit on the tax-free amount as long as it goes directly to the providers. “Giving is the simplest estate-planning technique,” says Deborah Jacobs, author of Estate Planning Smarts. But it’s really appropriate only for people who have already stashed away enough to comfortably fund retirement.
Fund education. Sticking $13,000 per year into 529 plans to pay for future college costs can be a better idea than just handing over the cash, says Jacobs. That’s because you, as owner, still control the money (and can pull it out if necessary), but it doesn’t count as part of your estate. For grandparents whose adult children tend to live large, this method helps guarantee that annual gifts to the grandkids go toward education and not vacations or their very own car.
[For more money-saving tips, visit the U.S. News Alpha Consumer blog.]
Create an insurance trust. While life insurance is paid out free of income tax, many couples with young children forget that a $500,000 or $1 million death benefit could well boost them above the exemption ceiling and be subject to estate tax if they die unexpectedly. Putting the policy in an irrevocable trust shields the money from Uncle Sam. The trust can be designed to support a surviving spouse while keeping the proceeds out of his or her estate, too. But once you set it up, you can’t change it.
Consider a grantor retained annuity trust, or GRAT. McLean, Va., estate planning attorney Leigh-Alexandra Basha says this sophisticated technique works best for people who own assets expected to appreciate significantly. You put them into a trust for your beneficiaries and receive yearly annuity payments during the term of the trust; any appreciation past a certain threshold passes on free of gift or estate tax.
One of Basha’s clients transferred stocks into a GRAT after the stock market crash, which allows him to give away the future appreciation of the shares (assuming they rebound) tax free. While GRATs are popular now, Congress has threatened to restrict how they’re used, so their future appeal might wane.
Make charitable donations. Assuming your estate would be subject to a 55 percent tax rate in the future, every dollar you give to charity now would save 55 cents in estate tax, says Basha. Meanwhile, you’ll also get a break on your income tax and, presumably, a sense of satisfaction.
Online estate-planning tools have multiplied in recent years, but many experts recommend professional guidance, since a poorly executed strategy can fail. A simple estate plan might cost as little as $2,000; more complicated ones can run tens of thousands of dollars.
Kimberly Palmer is the author of the new book Generation Earn: The Young Professional’s Guide to Spending, Investing, and Giving Back.