|
Spending: The first estate-reduction technique is to spend and
use up your estate for your own benefit. You earned it; you spend it.
You do not have to leave it to anyone. You may want to tell your
children or other beneficiaries, "If I leave you anything, it is
only because I miscalculated." Most clients do not want to be so
aggressive in reducing their estates, but you may want to be a bit more
generous with yourself, and -- using one client's example -- "buy a
bit of melon in off-season."
Gift Giving: Most estate-reduction tools involve some sort of
gift giving. As you know, each person can give up to $10,000 to each of
any number of recipients in each calendar year without having to report
a taxable gift or use up the applicable exclusion amount ($650,000 in
1999). Taxable gifts require no out-of-pocket payment of gift tax until
the cumulative total of lifetime taxable gifts exceed the applicable
exclusion amount. From a transfer-tax perspective, making lifetime gifts
is much more effective than making after death distributions under a
will or trust. Consider the following illustration:
-
A lifetime
gift of $1 million in the 55% tax bracket would generate a gift tax
of $550,000, so the gift and the tax would total $1,550,000, of
which the recipients end up with $1,000,000 or 64.52%, making the
net transfer tax rate 35.48%.
-
A death-time
transfer of $1,550,000 at the 55% rate results in an estate tax of
$852,500, leaving $697,500 for the recipients. The true tax rate is
55%.
-
In both
examples, the combination of the transfer and the tax totals
$1,550,000, but the lifetime gift results in the beneficiaries
receiving over $300,000 more (and the IRS receiving over $300,000
less).
Making More
Effective Gifts: Some gifts can be more effective than others at
reducing the taxable estate.
-
It is common
for people to make annual gifts of $10,000 cash to children,
grandchildren, and other beneficiaries. This reduces the estate by
the amount of the cash and by the amount of its potential earnings.
-
A more
effective gift giving technique is to give away appreciating
property. This type of gift reduces the estate by the current value
of the asset given, as well as by the value of potential
appreciation and potential earnings.
-
The best type
of gift is a gift that reflects a small value for gift-tax purposes
but reduces the estate by a larger value. For example, if you can
give a $10,000 gift and reduce your estate by $15,000, $20,000 or
more, you have effectively "leveraged" your gift-tax
annual exclusion.
-
Examples of
"Leveraged Gifts": Gifts of life insurance, remainder
interests, and value-discounted interests are some of the
"gift-leveraging" or "gift-maximizing"
techniques.
-
Outright
Gifts; Gifts in Trust: It is common to make an outright gift to a
beneficiary, but it is often appropriate to make gifts through
irrevocable trusts. Irrevocable trusts are discussed more fully in
the article entitled "Irrevocable Trusts".
 
Home | Email
|