How to Save on Estate Taxes

Even with all the uncertainty of whether or not Congress will extend the 2012 federal estate gift tax exemption limits of $5,120,000 set to expire on December 31, 2012, and which will decrease to $1,000,000 as of January 1, 2013, there are still a number of ways to save money on your estate taxes. The most popular and easiest method is to simply gift money to your children or other family members. For 2012, you can gift up to $13,000 tax free to each child and for 2013, you can gift up to $14,000. A married couple can gift a combined $26,000 for 2012 to each child and $28,000 during 2013 tax free.

Taxes on gift amounts exceeding the federal gift tax exemption must be paid by the donor and filed on Form 709, the Federal Gift Tax Return, with the IRS on or before April 15th of the year preceding the gift. So for 2012, if you and your spouse gave your son $30,000 for a down payment on a new home, you would have to pay the gift tax rate on $4,000. Gifts to a spouse are exempt from federal gift taxes.

New York Estate Tax Lawyers

Forming a LLC or Family Partnership and Trust

For larger estates, you can save New York estate taxes by forming a family LLC or partnership for your business or real estate investments. Then you can gift a portion of your interest in your partnership or LLC ($13,000 in 2012 and $14,000 in 2013) to your children by transferring the gift to a trust for your children’s benefit. You will need to hire an appraiser to value the amount of your partnership interest for what is called “lack of marketability.” This basically allows you to reduce the value of your total estate at your death so you pay less estate taxes.

Charitable Contributions

Giving money to charity is another great way to reduce the value of your estate and NY inheritance tax and at the same time help others. You can also form a charitable remainder trust and donate a larger amount of money to the charity while receiving income from the principal while you are still alive. After you pass away, the charity inherits a large sum, and you reduce the value of your estate and estate taxes.

Credit Shelter Trust

A married couple may want to form a Credit Shelter Trust by forming two irrevocable trusts. When the first spouse passes away, half of the estate assets are split into two separate trusts. An estate valued at $2,000,000 could split the assets into $1,000,000 by transferring the amount to each trust and avoiding estate taxes. The surviving spouse controls the assets of trust B while the assets in trust A stay there for the beneficiaries, the children. The surviving spouse gets the benefit of receiving income from trust A assets while the spouse is alive. When your spouse passes away, the assets get distributed to your children, the beneficiaries of both trusts. Because the trusts are treated as separate and the value is within the $1,000,000 federal gift tax exemption limit, your beneficiaries receive the assets from both trusts tax free.

Form a Life Insurance Trust

If you don’t want a life insurance policy to increase the value of your total estate, then you might want to think about forming a life insurance trust. How this works is your life insurance policy is transferred to the trust. You can gift up to the annual federal gift tax exemption amount (currently $13,000) to the trust tax free and use the amount towards the payment of your life insurance premiums each year. When you pass away, the life insurance proceeds are distributed to the beneficiaries of the trust tax free, and you save estate taxes because the value of your life insurance policy is not included in the value of your total estate.

Consult with a New York & Federal Estate Tax Attorney

Estate planning is complicated and should be discussed with a New York probate lawyer who can sit down and come up with a comprehensive federal estate tax plan for you and your family. Mike St. Pre, a prominent NYC estate plannin attorney will be able to prepare all the necessary legal documents including a will, trusts, power of attorney, living will, health care proxy and other documents.