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1. A WILL
A valid will stipulates to
whom you want your assets distributed. Without a will,
the laws of the state where you reside will determine
for you.
2. A living will, medical power
of attorney and financial power of attorney
A living will stipulates what
life-saving medical procedures you want or don’t want in the
event you are physically or mentally incapacitated. A
medical power of attorney appoints a person the power
to make medical decisions on your behalf, while a financial
power of attorney states who can make financial decisions
on your behalf.
3. The annual gift-tax exclusion
One of the most basic and inexpensive
strategies for saving estate taxes, the gift-tax exclusion
allows you to give away, tax free, $11,000 a year (indexed
for inflation) to each beneficiary you choose. Thus, you
and your spouse could jointly give away $22,000 annually
to each of your children, grandchildren or anyone else without incurring
a gift tax.
4. Medical and Tuition payments
A person can make unlimited
gift-tax-free payments for another’s tuition or medical bills
without it counting against the payer’s lifetime gift-tax exclusion,
as long as the payments are made directly to the educational
or medical institution. A grandparent, for example, could
pay a $20,000 annual tuition bill to a college for a grandchild
gift-tax free, and then give directly to the child up
to another $11,000 a year for non-tuition college expenses,
taking advantage of the annual gift-tax exclusion.
5. Lifetime
giving
Assuming
you have sufficient funds to live on, lifetime gifting
often can better reduce your estate tax liability than
waiting until death to pass on your estate. One advantage
of lifetime gifting is that you can remove appreciating
assets, such as common stock, from your estate. The
second advantage is that if your gift is taxable (you
can give away up to $1 million gift-tax free during
your lifetime), the
money you use to pay the gift tax is also removed from
your estate, thus reducing any future estate taxes.
6. By-pass trust
or credit-shelter trusts
For people who die
in 2002 or 2003, the first $1 million of their estate
is exempt from estate tax (assuming they haven’t
used up some or all of their exemption amount through
taxable lifetime gifts). That exemption amount gradually
rises to $3.5 million by 2009. A spouse (with the exception
of a foreign-citizen spouse) can pass his or her entire
estate tax free to the surviving spouse. But because
the surviving spouse can’t use the deceased’s
exemption amount at his or her subsequent death, this “wastes” the
deceased’s exemption amount.
Often it’s better for the first-to-die spouse
to pass his or her exemption amount to a credit shelter
trust. The surviving spouse can use income generated
by the trust assets, and at the survivor’s death,
the assets pass to the trust’s beneficiaries tax
free. In addition, the estate of the second spouse also
saves the additional exemption amount. Thus, for example,
if both spouses died in 2003, they could exempt $2 million
between them instead of only $1 million.
7. Irrevocable
life insurance trust
The proceeds of a life
insurance policy held in your estate, perhaps used to
pay for estate taxes, is subject to estate tax. But if
an irrevocable life insurance trust owns the policy,
the proceeds will not be included in your estate. You
may donate annually to the trust an amount equal to the
premiums to pay for the policy. For these donations to
qualify for the annual gift-tax exclusion, you must use
a complicated strategy called Crummey letters. Contact
your tax professional for more information.
8.
Charitable remainder trust
The donor transfers property
to the CRT, receiving an immediate income-tax deduction
and avoiding any capital gains taxes on donated appreciated
property. In return, the donor receives an income stream
generated by the trust assets either for a specified
time or for life. At the end of that period, the charitable
organization inherits the trust assets.
First WallStreet
Financial Advisors does not provide tax or legal advice.
Please consult with your own tax and legal advisors before
taking any action that would have tax consequences.
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