Estate Planning:
Under the American law, when any person dies, their estate has to pay certain estate taxes. Estate taxes have to be paid if the value of an individual’s net assets (assets minus debts) exceeds the maximum exempt limit allowed by the law at the time of death. In 2004, federal estate taxes start at a minimum of 45% and could go up to 48%. These have to be paid in cash, within nine months of the person’s death. This is where estate planning can be very useful. With careful and efficient estate planning, a person can minimize the burden of taxes to be paid on his estate after he dies.
Need For Estate Planning
When a person dies intestate (without any will or trust), his estate is distributed according to the existing state laws. Under the state laws of intestacy, the assets are distributed exactly as per the law and there is no consideration given to any wishes of the deceased. Thus it is very important to have a will, trust or any other kind of estate planning measures so that a person’s estate can be distributed to his legal heirs or to whoever he chooses instead of the law deciding who gets what.
Estate Tax Determination
Certain things have to be determined for efficient estate planning. These are:
- The net value of the person’s estate.
- The estimated life expectancy.
- The value of the estate at the end of the estimated life term.
- The total estate tax obligation at the time of death.
Usually anywhere between 20%-50% of the net value of the estate can be taken away by the IRS as estate tax. Estate planning can thus help to reduce the estate taxes.
Estate Planning Techniques
As of 2004, the maximum net value of an estate that is exempt from tax is about $1.5 million. Anything above this is subject to taxes. There are a lot of ways by which an individual can plan his estate so as to pay only the minimum amount possible as taxes after his death. Some of these are:
- Qualified Personal Residence Trust (QPRT): Through this tool, a person transfers his house into a trust set up for his beneficiaries. The person continues to live in the house but the value of the house freezes and does not appreciate on paper. This constitutes as a gift and gift tax has to be paid on this value and not on any appreciated value in the future. Better still is that the person is allowed to deduct from this value, the cost of his living in the house. For example, if a person transfers his home to a QPRT for 15 years at the age of 60 when the value is $100,000, this is counted as the value of the house even after 15 years. Now if the person in those 15 years retained interest in the house of say $60,000, then the net value of the ‘gift’ would only be $40,000 and tax would have to be paid on this value. One condition though is that the person has to outlive the term of the trust.
- A Private Annuity: This is a very efficient estate planning technique, especially for those who are in the highest tax bracket and have no marital deductions. In a private annuity, a person transfers his property to his children, who in turn give him periodic payments throughout his lifetime. At the time of death, the payments stop and the property is entirely removed from the estate of the deceased and is received by the beneficiaries at the current market value. Thus tax is avoided on the property and the individual also has the advantage of getting payments throughout his lifetime.
These are just a couple of techniques for effective estate planning. There are a lot more avenues to reduce estate taxes and this differs from person to person. Do not procrastinate your estate planning. Find out the facts from a qualified attorney and act accordingly so as to provide security to your heirs and peace of mind to you.
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