HOW TO REDUCE DEATH TAXES

HOW TO EFFECTIVELY REDUCE FEDERAL AND STATE TRANSFER TAXES

There are both federal and state taxes that are imposed on the transfer of property in an estate planning context. These include:

Federal Estate and Gift Taxes

Generation-skipping transfer (GST) taxes can also be imposed on transfers from grandparents to grandchildren or more remote descendants.

Pennsylvania Inheritance Tax

Other State Estate Taxes

If you are domiciled in another state or own realty or tangible personal property in other states, additional death taxes to those states may be due.

Double Taxation on Retirement Benefits

Income tax -- as well as federal and state estate taxes -- will be imposed on retirement account assets.

What Property Is Subject to Transfer Taxes? The definition of the "gross estate" for transfer tax purposes is much broader than the definition of the probate estate.

What Is the Current Law on Federal Estate Taxes?

What is Definite: The following table shows the exemption equivalent amounts and tax rates for 2008 and 2009.

Calendar Year	Estate and GST Tax Deathtime Transfer Tax Exemption	Highest Estate and Gift Tax Rates
2008	$2 million	45%
2009	$3.5 million	45%

What is Possible: Repeal of the estate tax altogether for decedents whose deaths occur in the 12-month period starting on January 1, 2010 and ending on December 31, 2010.

However, for deaths occurring on or after January 1, 2011, the tax rate will revert back to an exemption of only $1,000,000 and the highest rate of 55%.

CAPITAL GAINS TAX INCREASE. Estate tax repeal would have an adverse effect on the capital gains income tax payable by beneficiaries upon their later sale of inherited assets.

Carryover basis will replace step-up in basis.

Executor's election to choose step-up in basis for certain amount of assets.

LIFETIME GIFTS AND OTHER TRANSFERS.

Death taxes are most effectively avoided by LIFETIME planning techniques. Some common techniques include:

Gifts made within the federal gift tax annual exclusion limit, which currently is $12,000 per donee per calendar year.

Irrevocable life insurance trust to hold ownership of life insurance.

Charitable remainder trusts

Allows tax-advantaged sale of highly appreciated assets

Guarantees income

Charitable lead trusts

Valuation Discount Entities for Closely Held Business Interests - can result in reducing the valuation of assets for transfer tax purposes. Form of the entity can be:

Family Limited Partnership

Limited Liability Company

S Corporation

Death -Time Tax-Savings Techniques

Marital Deduction Planning

An essential issue to consider when planning for married couples is to decide whether their assets are now (or are likely to become) large enough to suggest that they go beyond the "all to my spouse" type of estate plan, and engage in more sophisticated marital deduction planning.

More specifically, for married clients with combined assets in excess of $2.0 million, good planning should involve the utilization of the unified credit in the estate of the first spouse to die.

If each spouse owns enough property in his or her sole name, a combined $4 million (through 2008) or more of assets can be sheltered from federal estate tax.

This technique will entail placing $2.0 million (more or less) in a special trust for the surviving spouse's lifetime.

Flexibility of "disclaimer trust" approach for funding spouse's trust

The problem of owning too much in joint name

Marital deduction get applied first

Charitable Remainder and Lead Trusts

Same rules as with lifetime charitable trusts

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DISCLAIMER

Martin J. Hagan is licensed to practice law in the Commonwealth of Pennsylvania. This website is intended solely for informational use and is not intended to solicit clients. Likewise, any information contained in or obtained from this web site is for informational purposes only and is not intended to be used as legal advice.

IRS CIRCULAR 230 DISCLAIMER: Pursuant to Treasury guidelines, any tax advice contained in this website (or any link from it) does not constitute a formal opinion. Accordingly, any tax advice contained in this website (or any link from it) is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be asserted by the Internal Revenue Service. You should seek advice based on your particular circumstances from an independent tax advisor.

Send mail to mhagan@haganlaw.net with questions or comments about this web site.

Copyright © 2008 Martin J. Hagan, One Gateway Center - 8 South; Pittsburgh, PA 15222-1435

Last Updated: 05/28/08