Forethought is Key
Armed with information on the laws, you can answer the first crucial estate tax planning question: Does your estate qualify for the estate tax exemption? In 2011, estates valued at less than $5 million per taxpayer are exempt from the tax. Determining what qualifies as part of your estate may be tricky, however. It includes wealth you transfer during your lifetime as well as what you leave to your heirs [source: Pacific Life]. Sorting through the specifics of your estate may be difficult, especially if you've already given away portions of your wealth without considering the tax implications. In such a case, your time and money may be best spent by hiring a tax professional to help you.
If you determine that your estate will exceed the $5 million lifetime exemption, you owe it to your family and heirs to come up with a strategy that will minimize their tax burden after you die. Thankfully, there are a number of ways to do this effectively. If you're married, you can grant income-producing wealth, such as retirement accounts, to your spouse. While this doesn't eliminate the tax on this income, it does allow your spouse to postpone tax payments on part or all of the wealth until he or she dies [source: Pacific Life]. You may also be able to transfer a portion of your wealth to your heirs or a charitable organization in your lifetime, a move that changes the way that wealth is evaluated and taxed. If done properly, this could save you and your heirs from paying too much tax [source: Mayerhoff].
You've worked hard during your lifetime to accumulate your estate. You want the friends, family members and organizations you give that wealth to after your death to receive the maximum benefit from it. If not planned for properly, estate taxes can indeed take a painful bite out of your accumulated wealth. But a little forethought and knowledge, along with the assistance of an estate-planning expert, can help you ensure that your legacy lives on in the wealth you share with others.
For lots more tax information, check out the links below.
- American Family and Business Institute. "What is the Death Tax?" 2009. (Jan. 20, 2011)http://www.nodeathtax.org/deathtax
- Combs, Susan. "Texas Taxes: Inheritance Tax." Window on State Government. (Jan. 22, 2011) http://www.window.state.tx.us/taxinfo/inherit/
- Herpe, David A. et al. "Wealth Transfer Planning Considerations for 2011 and 2012." McDermott Will & Emery. Jan. 20, 2011. (Jan. 22, 2011) http://www.mwe.com/index.cfm/fuseaction/publications.nldetail/object_id/9e8952ff-a1f5-4fa8-99bb-f5e9a9b9f266.cfm
- IRS. "Estate and Gift Taxes." June 22, 2010. (Jan. 11, 2011) http://www.irs.gov/businesses/small/article/0,,id=98968,00.html
- IRS. "Forms and Publications." Jan. 21, 2011. (Jan. 22, 2011) http://www.irs.gov/formspubs/index.html
- IRS. "Introduction to Estate and Gift Taxes." Dec. 14, 2009. (Jan 22, 2011)http://www.irs.gov/pub/irs-pdf/p950.pdf
- Jacobson, Darien B. et al. "The Estate Tax: Ninety Years and Counting." IRS. June 18, 2008. (Jan. 11, 2011)www.irs.gov/pub/irs-soi/ninetyestate.pdf
- Mayerhoff, Gerald L. "Giving Foundation: Minimizing the Inherited Income Tax." Baptist Health South Florida. Feb. 6, 2004. (Jan. 22, 2011)http://www.baptisthealth.net/en/giving/Pages/Minimizing-the-Inherited-IncomeTax.aspx
- Money-Zine.com. "Federal Inheritance Tax." (Jan. 22, 2011) http://www.money-zine.com/Financial-Planning/Tax-Shelter/Federal-Inheritance-Tax/
- Oregon Department of Revenue. "Inheritance Tax." Oregon.gov. Aug. 31, 2010. (Jan. 22, 2011)http://www.oregon.gov/DOR/BUS/inher-general.shtml
- Pacific Life. "Estate Tax Exemption Amount." December 2010. (Jan. 22, 2010) http://www.pacificlife.com/Channel/Educational+Information/Estate+Planning+Concepts/Estate+Tax+Exemption+Amount.htm
- Policy and Taxation Group. "Horror Stories & Articles." 2009. (Jan. 20, 2011)http://www.policyandtaxationgroup.com/html/stories.html
- Retirement Living Information Center. "Taxes by State." January 2011. (Jan. 22, 2011)http://retirementliving.com/RLtaxes.html
- Schwab, Carol A. "Planning Your Estate: Estate and Gift Taxes." North Carolina Bar Association. October 2001. (Jan. 19, 2011) http://www.ncbar.org/download/planningYourEstate/taxes.html