How much is the current estate tax?
There is a 45 percent estate tax on all estates that have net assets in excess of $3.5 million, the exemption amount. In 2010, this tax rate is repealed to zero and, in 2011, the exemption amount is scheduled to be reduced to $1 million and the tax rate is scheduled to increase to 55 percent. Almost all advisers believe that prior to Dec. 31, 2009, Congress will amend the law to at least keep the 2009 exemption equivalent of $3.5 million and the 45 percent rate. There is also a generation-skipping tax (GST) for gifts made to individuals two generations or more below the retiree, such as grandchildren or nonrelatives more than 37.5 years younger than the retiree. The GST tax exemption is approximately $2 million.
What are some ways to minimize GST, gift and estate taxes?
- Credit shelter trusts: For married couples that have net assets in excess of the exemption amounts, the retiree can create a trust at the first spouse’s death up to the exemption amount, effectively doubling the exemption for married individuals if assets of the respective spouses are properly titled. Typically, an attorney can draft these documents to satisfy the technical requirements.
- Annual gifting: Both a husband and wife can gift up to $13,000 each without reducing the estate tax exemption amount. At a minimum, families with high net worth should be making gifts annually to children/grandchildren to reduce the amounts of estate tax that may be due in the future. These gifts should be assets with the greatest future appreciation value, for example, interests in closely held businesses that may be eligible for valuation discounts.
- Pay tuition and medical expenses for another individual: The retiree may pay these expenses gift-tax-free without using the exemption equivalent amount, as long as the retiree makes the payment directly to the school or medical provider.
- Other potential strategies: Qualified domestic trusts, qualified terminable interest property trusts, irrevocable life insurance trusts, grantor retained interest trusts and dynasty trusts should all be considered. These are complex alternatives, but, when properly used under the right circumstances, can significantly reduce the estate tax burden.
David E. Shaffer is a director in the Auditing and Accounting group of Kreischer Miller and specializes in government contracting. Reach him at (215) 441-4600 or [email protected].