Simple Steps to Avoid Estate Taxes

The IRS and The Estate Tax

The IRS doesn't want you to know that the estate tax — if you have the right tax, financial, and legal strategies in place — is largely a voluntary tax. Unfortunately, many well intentioned professionals are completely unaware of the simple planning necessary to avoid such taxes; and many individuals with a taxable estate wait until it’s too late or incorrectly believe the issue doesn’t affect them.

Additionally, the traditional plan of using a revocable living trust will only help with probate and not reduce or eliminate any estate taxes. Yet, by making some simple changes and implementing a few tax planning and financial strategies, it's easy to legally avoid the estate tax. Just use the correct strategy for each significant asset that you own.

For example, for each of the following assets, use the strategy immediately following:

• Residence: Qualified Personal Residence Trust; 50/50 Title
• Your Business: Intentionally Defective Grantor Trust; Family Limited Partnership
• Funds in a Qualified (Taxable) Retirement Plan (401(K); Pensions; Traditional IRA: Roth Conversion
• Investments (cash, CDs, stocks bonds, real estate, etc.): Gifting; Dynasty Trust; Charitable Family Foundation; Grantor Retained Trust.

Succession Planning And Transferring A Business Interest

The biggest transaction of your life will probably be the transfer (or sale) of your business. What should you do? Use an IDT or a holding company like a family limited partnership, which is tax-free to you (no income tax or no capital gains tax) and your buyer (typically, your kids or employees).

Qualified Plans Are Double Taxed

Do you have a large amount of money in a 401(k), pension or traditional IRA? Those funds will be double taxed (both income taxes and estate taxes); with as much as 64 percent going to the tax collector. Convert those qualified retirement accounts to a non-taxable account and the earnings and growth will be tax free to you and your beneficiaries when you’re gone.

How Important Is Life Insurance In Your Estate Plan?

Life insurance proceeds are taxable for estate tax purposes. Fortunately, there are many strategies that convert life insurance proceeds into a tax-free pool of money. What if you already bought the policy, and it won't be tax-free? Transferring the policy to a non-taxable entity or converting the old policy to a new one in a new entity can get you out of the taxable portion.

Some things to consider for life insurance include the following:

If you have a policy that has built up enough cash surrender value so you’re not paying out-of-pocket premiums, you can trade the old policy for a new one with a larger death benefit (and still never pay another premium); and yes, it's all tax-free. But the insurance company won't tell you.

Nor will the insurance company tell you that your CSV dies when you die. Yes, you and your family lose it; every penny. What to do? While you are alive and healthy, check out your options (there are many) to use that CSV toward a new policy.

Here's something else the insurance companies won't tell you: 98 percent of term policies never pay a death benefit; 91.5 percent of CSV policies lapse and don't pay a death benefit.

Don't forget; when your estate plan is done, make sure you will legally avoid the impact of the estate tax. If not, you owe it to yourself and your family to get a second opinion.