The federal estate tax bill is still making its way through congress as we are writing this. It is expected that the first $5 million of the estate will not be taxed. However, New York State tax still applies on estates over $1 million, and can be up to 16%. This is a substantial amount. But at the same time, the law provides for many opportunities to save on estate taxes or even not pay them altogether.

For individuals dying In 2011, the first $5 million of any estate will probably not taxed by the federal government, and estates that are valued under $5 million will not have a federal estate tax at all. For a married couple, this means that they can pass $10 million of their wealth federal estate tax-free. This is known as the estate tax exemption.

The federal estate tax exemption historically varied from year to year. In 2010, the entire estate was exempt from federal taxes, which let the heirs of some millionaires get the estate federal estate tax-free. We will be using the year 2011 exemption of $5 million in our examples, both for the sake of clarity and because Congress is likely to pass the bill which provides for the $5 million exemption.

Although most people will no longer benefit from estate tax planning, here here are some of the ways in which this law firm can help families of high net-worth individuals save on estate taxes.

1. Leave Some Property to Your Spouse or to a Charity

Leaving property to your spouse or to charity is the simplest way to save on estate taxes.

Example:
If you have an estate worth $5.2 million, you can leave $100,000 to the charity of your choice and leave the other $ 100,000 to your spouse. You would not have to pay estate taxes on the total of $.2 million you left to charity and your spouse, and you will not have to pay estate taxes on the $5 million remaining estate because it would be covered by the estate tax exemption.
Estate Tax: 0

2. Leave $5 million in a Credit Shelter Trust

A Credit Shelter Trust protects (shelters) your tax exemption credit from being wasted. The following 2 examples will explain how it works:

Example 1: No Trust
A married couple has an estate of $ 10 million. The Husband dies first, leaving everything to the Wife. Estate Tax: zero. When the wife dies, she leaves the $10 million estate to their children. She uses her own tax exemption of $5 million, but she cannot use her husband’s tax exemption, so it's wasted.
Taxable estate: $5 million.
Resulting estate tax: more then $1 million.

Example 2: Credit Shelter Trust
The same couple with an estate of $10 million. The Husband dies first, leaving $5 million to the wife and $5 million to a Credit Shelter Trust for the benefit of his wife and children. Estate Tax: still zero. He did not get taxed on the $5 million transferred to his wife (see above) and he used his $5 million tax exemption to not be taxed on the money transferred to the Credit Shelter Trust. When the wife dies, she uses her own tax exemption of $5 million and the Trust preserves the husband’s tax exemption of $5 million.
Taxable estate: $0.
Resulting estate tax: $0.

3. Lifetime Gifts

Under the new proposed bill which is currently making its way through congress, you will be able to gift $3.5 million in the course of your lifetime tax-free. If you go over that exemption, you can gift $12,000 per person per year tax-free. A couple can gift twice as much. Let’s say you and your spouse have 3 children and 1 grandchild. You can gift to them $96,000 a year tax-free. Any amount over this will be subject to the gift tax.

If your children are still young or are unable to manage money, you can still take advantage of the $12,000 per person per year gift tax exemption by leaving the money for your child in a Crummey Trust. The Crummey Trust is a sort of a limited gift which is substantially delayed until the date of your death.

As an added benefit, lifetime gifts remove future appreciation of money from your estate. For example, if you gift $12,000 to your child now (or place the money into a Crummey Trust for your child’s benefit), and the money is invested and grows to $35,000 by the time you die, you have effectively transferred $35,000 to your child without paying any estate tax.

4. Life Insurance Planning

If not planned correctly, the proceeds of your life insurance can be included in your taxable estate. If the IRS finds that your life insurance is payable to your estate, or you've retained some indicia of ownership of the policy during your lifetime, the proceeds of the life insurance can be taxed as part of your estate. For a $5 million policy, you can end up paying more then $1 million in federal taxes alone, and that’s if the policy is the only asset you have. If you have other assets that use up your $5 million estate tax exemption, you will pay more then $1 million in estate taxes for your insurance policy. An experienced estate attorney can avoid those consequences by reviewing a life insurance policy and making the appropriate changes.

An Irrevocable Life Insurance Trust (ILIT) can be set up to own the life insurance policy, so that when the insured person dies, the proceeds of the life insurance will not become a part of the taxable estate. The insured can still pay the premiums by a "Crummy gift" to the trust. The downside of the trust is that the trust cannot be changed since it is irrevocable. The upside - no estate taxes (if set up right).

A Life Insurance Trust is also an important estate planning tool. It holds your life insurance for the benefit of your beneficiaries. After three years the Trust would be deemed the owner of the policy, so as to minimize and chance that your estate will pay estate taxes on the proceeds. It also ensures that any appreciation of the life insurance policy is kept out of your estate. As a note of caution, a Life Insurance trust has to be carefully drafted by an experienced estate attorney to meet exacting IRS requirements.

Call the Law Offices of Albert Gurevich at (212) 233-1233 and make an appointment to discuss your estate planning needs.