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Estate Tax strategies prior to December 31, 2010…and after!

September 23, 2010

One of the biggest issues that have taxpayers upset with the tax cuts that are expiring on December 31, 2010 is the Estate tax. This certainly does not affect everyone and some might say it effects very few, but those that it does see big changes. Here is the break down on what is happening. The estate tax is basically what happens to someone’s money when they die (it is not just their money but all of their goods, i.e. estate). Currently the amount of each estate that is exempt from paying estate tax is $3.5 million; another words the person dies, all his accumulated money, goods etc. is say $3 million, his estate does not have to pay estate tax as it is under the $3.5 million. After December 31, 2010 that number goes to $1 million and in this scenario his estate would pay estate tax on everything above $1 million and in 2011 it is at 55% up from 45%. That is lots of money that his beneficiaries are paying.

There are some strategies to avoid the tax while it is still in limbo.

 One would be to Buy Life Insurance. The beneficiaries need to own the policy (or if you did the proceeds would become part of the estate and could be subject to tax) and pay for the policy (but you can give them the money via annual $ gifts). The proceeds would pay off the estate tax.

Another would be Money to Lend. If you lend money to family members to (for example) by a house, you can create a win-win situation. You have to charge interest which is set by the treasury department (called the applicable federal tax; in Sept it was 3.6%) to avoid gift tax and income tax issues.

Then there is Financing College Savings. The Section 529 education savings plans are a tool for financing your family member’s education (or your own). Earnings in the account are exempt from federal tax provided that the money is used for various education expenses. You name yourself as the owner of the account while you name your child (or any other family member) the beneficiary that would use the money for educational expenses. If the beneficiary has used all they need you then can tap the money yourself, or pass it on to the next child, grandchild etc. There are lump sum deposits you can make into this account provided you file a gift tax return etc. Lots to do with this strategy but it can be beneficial.

And don’t forget about Remarrying. A widow or widower who remarries gains the estate tax advantage available to all married couples….you can leave an unlimited amount to your spouse with no estate tax issue. The assets must be left outright or in certain types of trusts. This strategy affects only the assets your deceased spouse left to you; assets left to the other beneficiaries are not affected.

At Gunwel we try to educate you and help you make those sometimes difficult decisions on how to structure and benefit from various tax scenarios. Give us a call or stop by for a free consultation; we are always willing and able to help! You can always contact us via our website www.gunwel.com  where we can answer your questions.

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