Estate and Gift Tax Planning

Estate Tax PlanningEstate Taxes

In general, there will be an estate tax owed nine months after you die if you are worth more than the applicable exemption amount (AEA) the US Government allows you to leave estate tax-free.

In general, the AEA is $5.34 Million in 2014 and will be indexed for inflation annually.  To the extent you are worth more than the AEA, you should consider doing estate tax planning.

If estate taxes are owed at your death, there are four ways to pay the taxes:

  1. Have sufficient liquid assets in your estate to pay the taxes. If the estate taxes equal 40% of the net worth of your assets, then you would need to have 40% of your estate in liquid assets. It is very unusual to have that much of your estate be liquid.
  2. Sell assets to raise the money for taxes.
  3. Borrow the money for taxes. It may not be possible for your family to sell assets, depending on market conditions. In addition, a forced sale typically brings in less money than could be had if the sale was not a fire sale. It may not be possible to borrow the money. There is no guarantee your beneficiaries will be able to borrow money.
  4. Use life insurance proceeds to pay the estate taxes. While no one wants to pay the premiums for life insurance, the cost of the life insurance is usually much cheaper than the methods discussed above for paying estate taxes. Life insurance is especially important if you want your family to be able to keep the assets, such as a business or rental real estate. If you decide to purchase life insurance, we will need to discuss how it should be purchased. Purchased incorrectly, the life insurance proceeds themselves will be subject to estate taxes, which defeats the purpose of the life insurance.

    Estate Tax Planning

It is important to remember that there is no one answer to solving the estate tax issue. Proper estate tax planning generally requires a combination of several methods of planning, including life insurance and Advanced Estate Tax Planning.

Gift Taxes

Congress imposes a gift tax on assets you gift to your family while you are living. In general, you can gift someone $14,000 per year without paying a gift tax. In addition, you can gift up to $5.34 Million (as of 2014) during your lifetime without paying gift taxes. See Annual Gifting and Using Your Gift Tax Exemption.

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