How To Avoid The 'Death Tax'

Earlier today CNNMoney.com posted a helpful tips list on how to avoid the death tax. The article aims to help taxpayers understand how to pass on the most possible to their future heirs. You can read a clip of the story below, or read the full post here.

If 84-year-old Bob Sievers of Pacific Palisades, Calif., had his way, Congress would scrap the estate tax altogether when it considers an Obama administration proposal on the future of the controversial tax. As co-owner of a lumber business for 40 years, Sievers built his wealth from scratch and paid taxes on his earnings every step of the way.

"What we have, we earned, and we paid tax on everything we earned, and we don't want to be taxed again when we die," says Sievers emphatically. Sievers, along with his wife, Carol, first set up an estate plan in 1982, and they have updated it numerous times over the years to reflect changes in the value of their nest egg and the expansion of their family, which now includes five children, 11 grandchildren, and four great-grandchildren. They quickly discovered they would need to establish an intricate network of trusts and other tools if they hoped to pass along the bulk of their hard-earned assets to their children without Uncle Sam taking a sizable chunk in taxes.

The estate tax - known as the "death tax" among its detractors - will be a hot topic in coming months. The tax-cut package enacted in 2001 called for it to be phased out over 10 years. This year, for example, only the portion of estates that exceeds $3.5 million for an individual and $7 million for a couple is subject to tax; the rate is 45%. This exemption is far bigger than in 2008, when the tax applied to estates valued above $2 million. But the 2001 tax cuts expire after next year. If Congress doesn't act, the estate tax will disappear in 2010 but will return in 2011 at the pre-2001 level of $1 million with a tax rate of 55%.

President Obama has said that he wants to keep the estate tax where it is today: at 45% on amounts above $7 million (for couples). Estate-planning experts speculate Congress will pass a new law before year's end to prevent 2010 from being a tax-free year. "They can't suffer the revenue loss" from removing the tax for a year, says Jay Adkisson, an attorney and founding partner at Riser Adkisson LLP. (One thing that's not expected to change: A spouse can inherit an unlimited amount tax-free through the marital deduction.)

Regardless of what happens in Washington, creating an estate plan and keeping it updated is critical. A smart plan uses tools, ranging from life insurance to trusts, to lower or even eliminate the estate tax and to prevent strife and bitter feuds among beneficiaries after a death. "Poor planning can destroy a family," says Les Kotzer, an attorney who is the author of "Where There's an Inheritance - Stories From Inside the World of Two Wills Lawyers." If no plan is in place or if terms are not explicitly spelled out, chaos can ensue, he says. Kotzer recalls a man who made a handwritten will leaving "all his personal stuff" to a son. A bitter court battle erupted as a daughter claimed "stuff" meant his power tools and personal possessions, not gold and diamond rings that their mother had owned. The son vowed to fight her to the gritty end, claiming he hoped his sister's legal fees would cost more than the jewelry was worth. Here are some tools you and your lawyer or estate planner can use to avoid such disasters.

The joy of giving. Let's start with a couple of simple techniques. For example, giving away money during your lifetime can reduce the value of your taxable estate. Here are the basics: You can give any number of individuals up to $13,000 each year without any tax consequences. Amounts above $13,000 are subject to the gift tax, but you also have a tax credit that allows you to give up to $1 million during your lifetime without incurring taxes. In addition, there is no limit on how much you can give tax-free when you pay someone's higher education or medical expenses directly.

As far as how you make those gifts, you can simply hand the money over to the recipient, but you have other choices. One popular method is a so-called Crummey trust, often used for a child, which allows you to impose conditions on how and when the beneficiary can get access to the money.

Life insurance. If you're planning to leave property, a business, or other non-cash assets to your heirs, life insurance can be a lifesaver. If you purchase a policy that will cover the taxes on your estate, your heirs won't be faced with having to sell assets to pay the taxes. "Mom and Dad give money to the kids to take insurance out on their lives," says attorney Jeffrey Condon, author of "The Living Trust Advisor." "When they die, the insurance company will write a check tax-free to the kids." You can also set up a life-insurance trust to be the beneficiary of the policy: That way, the death benefits won't be taxed as part of the estate.

Geoffrey VanderPal, of Elite Financial Planning Group of America in Las Vegas, recalls one client who had a $40 million financial services business that he wanted to pass on to his son. The client ignored suggestions that he set up an estate plan with a life insurance trust to cover the taxes on the estate. When the client died, the son couldn't afford the $18 million in taxes and had to liquidate the business.

Lay 'Death Tax' Debate To Rest

From the LATimes.com:

Everybody's familiar with Ben Franklin’s old saw about nothing being certain but death and taxes. But how about the "death tax"?

That's the loaded term employed by opponents of the estate tax, which has been part of the federal tax code for more than 90 years and the subject of furious repeal campaigns for almost that long.

Thanks to lobbyists and legislators looking out for the welfare of the richest Americans, the tax currently hits fewer than 3 of every 1,000 estates every year and bristles with exemptions and deferments for the rest. Its contribution to the federal treasury is about 1% of all revenue.

Yet it consumes enormous mind share in Washington. This month, a new tax-cut proposal from Sens. Jon Kyl (R-Ariz.) and Blanche Lincoln (D-Ark.) won Senate approval. The resolution would raise the exemption on taxable estates to $10 million from the current $7 million (after the death of both spouses). It also would cut the rate charged on the nonexempt portion to 35% from the current 45%.

The tax is currently set to fall to zero for 2010 and return with a $1-million exemption and a 55% rate in 2011; President Obama proposes merely making today's exemption and rates permanent.

Arguments against the estate tax rank as the most special of special pleading, considering that more than 99.7% of all estates already are exempt. Perhaps 3,000 Americans who died in 2007 left estates valued from $7 million to $10 million; Lincoln and Kyl would have extended the exemption to them. As for those left to carry the burden, the number of taxpayers who died in 2007 leaving estates worth more than $10 million was 1,700. Their average estate was $31.6 million. Lincoln, Kyl and their colleagues actually wasted time on the Senate floor to give people like this a new tax break.

But then Kyl represents a state with a lot of wealthy retired sinus patients and Lincoln a state brimming with billionaires coincidentally bearing the same last name as the founder of Wal-Mart.

Even financial planners for the affluent acknowledge that many taxpayers are excessively concerned about the estate tax.

"A lot of people afraid they are going to be hit by it are completely out of the system" because of the exemption, says Mary Ann Mancini, head of the private client group at law firm Bryan Cave in Washington. "It resonates with people more on an emotional basis than a logical one."

No kidding. On the website of the Policy and Taxation Group, an anti-estate tax outfit founded by an Orange County wealth manager, you can find comments from taxpayers like this: "If I died today, I'd pay about $200,000 in death tax."

Death Tax Conflict of Interests

The death tax, also known as the Federal Estate Tax, has been getting a lot of media attention lately. For those unfamiliar with the death tax, it is essentially a tax levied on the transfer of a taxable estate usually following a person’s death. As part of President’s 2001 tax cuts, the death tax was set to slowly die off and eventually be completely removed by December 31, 2010. However, unless the next President renews Bush’s tax cuts the prior law will reassert itself the next day, January 1st, 2011. Therefore theoretically some one who dies in December 2010 would pay no estate taxes whatsoever, while some one who passes away 24 hours later could have as much as a 55% tax levied on their estate.

Warren Buffet has been one of the strongest supporters of continuing the estate tax, even appearing before the Senate. Which seems odd considering Buffet is worth an estimated $52 billion, meaning when he dies his estate will be hit with some sort of estate tax. So why would he support the estate tax? The truth lies in Buffet’s business dealings. He has major investments in companies that sell life insurance and directly profits from the continued estate taxes.

When people want to avoid loosing large portions of their estate to the death tax, they often put their wealth into life insurance policies. Therefore once they pass the designated heirs are paid the life insurance funds without having to pay any taxes. Therefore Mr. Buffet has a huge conflict of interest and his insurance companies stand to directly profit from a continued death tax. I hope that the Senate will consider this information the next time Mr. Buffet testifies.