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California Tax Planning

Tax Strategies

A key in protecting your estate for your beneficiaries is to reduce your estate tax liability. Strategies available for your unique situation depend largely on your total net worth and how you want your assets distributed. The most common tactics used to reduce estate tax liability fall into four categories: a gift-giving program, the use of both lifetime exemptions for married couples, removing assets from your taxable estate through irrevocable Trusts, and properly using life insurance to cover part of your estate tax liability.

California Tax Planning Attorneys - Married Couples - Estate Tax - Estate Planning - Hart, Mieras & Morris

Use Your Annual Gift Exclusions

The least complicated way to pass assets on to your beneficiaries is to use the annual gift exclusion, giving your beneficiaries annual gifts of up to $13,000 during your lifetime. For instance, a married couple could give their two married children, their child’s spouses, and their three unmarried grandchildren a cumulative total of $182,000 each year, since each spouse can gift $13,000 to each beneficiary. When such gifts are given annually to several recipients, the annual gift exclusion can be an effective way to reduce the value of your estate and thus its estate tax liability. Additionally, you can see your loved ones enjoy and use your gifts. To qualify for the annual exclusion, each recipient must have a “present interest” in the gift, which means that the recipient(s) must legally be able to use the gift immediately.

To use the annual gift exclusion without giving control of the gifted assets to younger recipients, you can put the gift into a Crummey Trust. This is a special type of trust that allows donors to meet the present-interest requirement and take advantage of the federal annual gift exclusion, even though a transfer to a trust is usually considered transfer of a future interest. A Crummey Trust satisfies the present-interest requirement by providing a 30-day window during which beneficiaries have the legal right to withdraw all or a portion of the gifted assets. If a contribution is not withdrawn, the trust’s terms specify when and how the assets can be used after that window expires.

Use Both Lifetime Exemptions

Every person is allowed to give away a maximum of one million dollars in his or her lifetime without paying gift taxes. If you give away more than one million dollars in your lifetime, you will owe gift taxes.

Many married couples wrongly assume that estate planning is unnecessary because the unlimited marital deduction allows a surviving spouse to receive all of the couple’s assets without paying estate taxes. While true regarding the transfer from spouse to spouse, the receiving spouse may nd up with more than the one million dollars he or she can give away for free. This mistake results in losing one lifetime exemption ($1 million in 2011). So, when the surviving spouse dies, the estate can only claim one exemption and pays taxes of 40-55% on the total net value of the estate.

To take advantage of both exemptions, a married couple can create a Tax Advantage Trust (also called an A-B, Q-TIP, Credit Shelter, Bypass, or Exemption Trust). At the first spouse’s death, the trust uses the first exemption, and the estate can be split into a “B Trust” in an amount up to the value of the lifetime exemption, keeping those assets outside the surviving spouse’s taxable estate while still providing the surviving spouse use of the assets. Upon the death of the surviving spouse, the second exemption is used for the assets remaining in his or her estate. This type of trust is the most common way for families to shield part of their assets from the federal estate tax.

Removing Assets From Your Estate

The most effective way of reducing taxes to be paid by your estate is to make your estate smaller. One way of accomplishing this is the Family Limited Partnership (FLP): A FLP is a business organization owned by family members, usually with Parents as the general partners having full control and risk, and the children as limited partners having no control and limited risk. The general partners control the distribution and investment decisions and the FLP’s assets, which can include a family-owned business, real estate, or stocks. Partners are entitled to income from the partnership in proportion to their ownership interest. By giving the shares of limited partnership to your children, you can remove up to 99% of the asset’s value from your estate. Additionally, the limited partnership shares’ value is highly discounted because there is no market for them, so general partners can transfer limited shares to family members at a reduced gift-tax cost. The FLP must be conducted like a business in order to withstand the formalities of an IRS audit or legal challenge verifying that the assets within the partnership are indeed business related. FLPs should also be funded for likely debts of the partnership. Personal assets should not be placed in the partnership.

Strategies Used to Design Your Estate Plan

A comprehensive estate plan is likely to include a combination of several strategies as introduced here. Each has its advantages and disadvantages and should be selected to suit your specific assets and goals. You should talk about your unique situation with one of our Estate Planning Attorneys before making any decisions about which strategies you want to use to protect your assets and/or to reduce your estate tax liability.

Tags: california tax planning, california tax, irrevocable trust, married couples, estate planning, gift tax, estate tax, tax strategies, planning, attorneys, harts, morris

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