Estate planning tools

There are a number of techniques that may be utilized to reduce or eliminate federal estate tax. Some of these include the unlimited marital deduction, gifting, and trusts. The use of life insurance may also be considered to provide the cash needed at death to pay federal estate taxes. You should review your particular situation with your attorney or other advisors to see if any of these can be of benefit.

Unlimited marital deduction

Property passing to a surviving spouse is eligible for the federal unlimited marital deduction (assuming the spouse is a U.S. citizen). Therefore, if a married person passes the entire estate to the surviving spouse, no federal estate tax would be due. However, since there is no surviving spouse to whom the widow or widower can pass property (assuming the spouse does not remarry), the entire estate will be taxable at death. Although this is an effective strategy for deferring federal estate tax until the surviving spouse's death, it will likely not eliminate the tax. Consequently, planning should be done to keep the federal estate tax as small as possible at the surviving spouse's death and be sure those responsible for paying the tax, in most cases the children, will have the money to do so.

Applicable credit amount

The applicable credit amount for 2007 (formerly the unified credit) of $780,800 allows an estate owner to pass $2,000,000 of property to heirs, other than the spouse, free of federal estate tax. This property can pass either while alive (through gifts) or at death.

Provisions in a will or trust can make sure the credit is used in both estates. This type of arrangement passes up to $2,000,000 of property to heirs, other than the spouse, while the remaining property passes to the spouse. Due to the applicable credit amount and the unlimited marital deduction, there is no federal estate tax due at the first death. The $2,000,000 of property can pass to a trust that allows the surviving spouse access to the income for life. The principal could also be used, if necessary, for the spouse's health, education, and support. At the spouse's death, the property would pass to the eventual heirs and is not subject to tax. Since the surviving spouse also has an applicable credit amount at death, a married couple can potentially pass $4,000,000 to their heirs free of federal estate tax.

Gifting

By implementing a gifting program, an estate owner can dramatically reduce the size of the taxable estate. If an estate owner doesn't need an asset to live on, it may make sense to give the asset away, since the recipient will likely be the person who would receive the asset at death. The advantage of gifting property while living is that the appreciation in the value and income from the gifted asset is removed from the estate. However, the estate owner who gifts property must realize that once the property is gifted, the estate owner loses all benefits and control of the property. Further, the income tax consequences (basis issues) must be also considered when gifting is contemplated.

The annual gift exclusion is currently $12,000. This amount is indexed for inflation. If a husband and wife join together to make a gift, $24,000 (split-gift) can be given to an unlimited number of people every year, with no gift tax consequences (a federal gift tax return must be filed in gift-splitting cases).

Gift recipients can be anyone. For example, parents could conceivably give away $24,000 to each child; grandparents could gift property to each child and grandchild. You can see the potential for large federal estate tax savings if a significant amount of property is gifted.

Trusts

A trust is used in estate planning to manage or dispose of property, either during the grantor's lifetime or after death. A trust can hold virtually any kind of property...real or personal...tangible or intangible, and can be as flexible as it needs to be to meet the estate owner's objectives.

• Distributions from a trust can be arranged in any manner the grantor desires...in amount, frequency or for whatever purpose defined by the grantor.
• Trust beneficiaries can generally be anyone or any institution named by the grantor.
• The trust can be designed so that it can be changed whenever the grantor deems necessary or it can be set up so it may not be changed or revoked.
• The trust can be established while the grantor is living or at death.

Trusts are created for a variety of reasons:

• Asset management - the grantor or beneficiaries of the trust may lack the expertise to manage a large portfolio of assets.
• To benefit the grantor - the grantor can receive income from the trust and control its assets.
• To benefit or protect others (minors, elderly, or incompetent persons) - trusts can be set up for the care of minor children or incompetent persons.
• To divide property ownership among persons and provide flexibility in use of that property
• Federal estate or income tax purposes - trusts can contain provisions to reduce federal estate or income taxes.
• For charitable purposes.

Trustees can generally be anyone the grantor wishes, including the grantor himself. It is not uncommon to have co-trustees. One trustee could be the grantor, or a family member, whose role is to be sure that the grantor's personal objectives are met. The other trustee could be a bank or other financial institution that would make the investment decisions on behalf of the trust beneficiaries.

Three common trusts include:

• Testamentary Trusts
• Revocable Living Trusts
• Irrevocable Trust

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