Avoiding Estate Taxes Through Understanding Them

Many people fail to absorb the fact that they have an estate. It may be small or it may be immense but it is still regarded as an estate, especially by the taxman. And he wants his share of yours.

And as the saying once went: small estate-small problems, large estate- large problems, and if you are one of the fortunate few, immense estate-immense problems.

Even the smallest of estates many need to pay 37 percent in estate taxes and the largest ones can get as high as 55 percent. And that's a lot to pay.

By establishing a living trust, the liability to pay estate taxes for the majority of people will be taken care of. There are estate planners who will advise and tailor a plan based on the size and the nature of the estate, but for those on the lower edges of the scale, this may prove to be too expensive. Nowadays, the wonder of the internet will provide reams of information on the subject of estate taxes and how to avoid them. Many people have become experts on the subject, and have prepared their own living trusts, using documentation that they have purchased on the internet. By appointing themselves as their own trustees they have protected their loved ones when they pass on. At the same time, they save a considerable amount of legal fees.

The larger the estate the more complex it can become, and those who feel that they do not have sufficient knowledge to establish and prepare their own living trust, and have sufficient capitol to appoint an estate planner, may be advised to accept this option. Having said that, the potential trustor should still take some time to understand the implications of establishing a living trust and how it will affect his assets and way of life. Many people in this position establish an A-B Revocable Living Trust.

This form of revocable living trust basically involves assessing the total value of the joint trustors (usually husband and wife) into two equal shares. This means that neither of the parties will pass over the $1,500,000 upper threshold on their estates that will make them move out of the upper threshold of estate tax, and be liable to pay estate duty on the value of their assets over that sum.

When the first trustor passes on the A-B Revocable Living Trust creates a tax situation known as a "credit shelter" trust.

The "credit shelter" trust, or the B in A-B is a form of irrevocable trust that evolves from the original revocable living trust and becomes part of it. This trust is designed to be managed by the surviving trustor along with an independent trustee. When the surviving trustor's time has come to meet their maker, then the entire estate can be distributed by the managing trustee.

This is only one example of innovative estate management available for people who have amassed considerable estates. Here are another few examples:
  • Lifetime gifts to children and grandchildren. Each person can make annual gifts of $11,000 to any number of persons, without incurring a gift tax.

  • Uniform transfer to minors. This is a form of gifting that can be used where the children are still minors.

  • Irrevocable life insurance trusts. By transferring funds an irrevocable life insurance trust, trustors can reduce the size of their taxable estate, while at the same time creating a much larger and generally not taxable asset.

  • Charitable transfers. Lifetime charitable transfers or gifts to charities upon death can reduce the size of the estate and thereby reduce estate taxes. Lifetime gifts provide the added benefit of an income tax deduction. Gifts can also be made in a manner that lets the donor retain the right to use the gifted asset or income there from until death.

The desire to leave their estate as intact as possible will encourage many people to innovate and creative. The costs involved should be commensurate with the size of the estate, and if the trustors understand this, they will save their loved ones a lot of money.