Gift and Estate Taxes - Tax Avoidance Estate Planning Strategies by SchneiderLawOR


More Info
									 Get a Better Understanding of the Federal Gift
 and Estate Tax and Incorporate Tax Avoidance
        Strategies into Your Estate Plan


                 RICHARD B. SCHNEIDER
           If you have worked hard, saved responsibly, and invested well throughout
           the course of your lifetime you have likely accumulated a respectable
           estate that you plan to pass down to family and loved ones when you die.
           In order to accomplish this goal without losing a significant portion of your
           estate's value to federal and/or state gift and estate taxes you will need to
           incorporate tax avoidance strategies into your overall estate plan.


           In order to create an estate plan that
           accomplishes your tax avoidance goal
           you must first have a clear
           understanding of what you are trying
           to avoid. At the federal level that
           would be gift and estate taxes. Some
           states have a tax that essentially
           mirrors the federal tax so a discussion
           of the federal gift and estate tax should suffice. When you die you will
           leave behind an estate that is comprised of everything you owned, or had
           an ownership interest in, at the time of your death. As part of the probate
           process all of your estate assets will be identified and a date of death value
           ascertained for each asset. The total value of your estate is then subject to
           gift and estate taxes. In recent years, the gift and estate tax rate was as
           high as 55 percent; however, the American Taxpayer Relief Act of 2013, or
           ATRA, permanently established the gift and estate tax rate at a maximum

Gift and Estate Taxes – Tax Avoidance Estate Planning Strategies
           of 40 percent, lower than it was in recent years yet still a high enough rate
           that an estate could lose a significant portion of its value as a result of a
           gift and estate tax liability. Careful planning though can avoid this
           unwanted result.


           Each taxpayer is entitled to exempt from gift and estate tax the total value
           of gifts made during his or her lifetime or at death up to the “lifetime
           exemption limit”. Just as the gift and estate tax rate was subject to change,
                                                      so was the lifetime exemption limit
                                                      prior to the passage of ATRA.
                                                      ATRA permanently established the
                                                      lifetime exemption limit at $5
                                                      million, adjusted yearly for
                                                      inflation. For 2013 the adjusted
                                                      lifetime exemption is $5.25 million.
                                                      Estate assets that exceed the
           lifetime exemption limit that do not qualify for another exemption or
           exclusion will be subject to the gift and estate tax.

           The easiest way for a taxpayer to understand the often confusing rules,
           exemptions, and exclusions that relate to gift and estate taxes is by way of
           illustration. Let's use Anna and John as a hypothetical married couple.
           Assume that John has recently died, leaving behind an estate valued at $4

Gift and Estate Taxes – Tax Avoidance Estate Planning Strategies
           million. So far, John's estate would not incur gift and estate taxes because
           John is entitled to exempt up to $5.25 million. John, however, made gifts
           during his lifetime valued at $2.25 million. Because gifts made during your
           lifetime and at death are included, John actually has a total of $6.25 million
           toward his lifetime exemption limit. This leaves $1 million subject to gift
           and estate taxes ($6.25 million - $5.25 million = $1 million), resulting in a
           tax liability of $400,000.


           The unlimited marital deduction allows a taxpayer to leave an unlimited
           amount of assets to his or her spouse at the time of death free from gift
           and estate taxes. On the surface, this sounds like the solution to John's tax
                                                          problem; however, it is not
                                                          that simple. John can leave his
                                                          entire estate, valued at $4
                                                          million, to Anna and avoid gift
                                                          and estate taxes for the
                                                          moment. Because John made
                                                          gifts during his lifetime valued
                                                          at $2.25 million John still has
                                                          $3 million of his lifetime
           exemption available which he will not use. Though this does solve the
           immediate gift and estate tax issue it may, in the long run, result in over
           funding Anna’s estate. For instance, assume that Anna also owns separate

Gift and Estate Taxes – Tax Avoidance Estate Planning Strategies
           assets valued at $4 million and then receives gifts from John when he dies
           valued at an additional $4 million. Anna now has an estate valued at $8
           million which will then incur a gift and estate tax liability upon Anna's
           death. Even if Anna did not make any gifts during her lifetime she will still
           have an estate that exceeds her lifetime exemption limit by $2.75 million
           ($8 million - $5.25 million = $2.75 million). At a tax rate of 40 percent this
           means that Anna’s estate will lose $1.1 million to gift and estate taxes
           ($2.75 million x 0.40 = $1.1 million).


            Clearly, losing $1.1 million to gift and estate taxes is not a desired result.
            The concept of "portability" can help. The concept of portability was
            introduced in recent years and was also made permanent by ATRA.
            Portability allows a surviving spouse to make use of any unused portion of
            the deceased spouse’s lifetime exemption limit. For John and Anna means
            that Anna may combine the $3 million that John did not use of his lifetime
            exemption limit with the $5.25 million that Anna is entitled to as her
            lifetime exemption for a total exemption amount of $8.25 million.
            Assuming that Anna's estate remains stagnant, or does not grow in the
            intervening years between John's death and Anna death, this means that
            Anna's estate will be able to avoid gift and estate taxes altogether. This is
            accomplished by using a total lifetime exemption of $8.25 million with a
            total estate value of $8 million, effectively exempting the total value of
            Anna's estate from gift and estate taxes.

Gift and Estate Taxes – Tax Avoidance Estate Planning Strategies

           Unless Anna dies shortly after John it is unlikely that her estate value will
           remain stagnant. The goal of investing after all is to grow your wealth. If
           Anna’s estate grows by just $1 million between John’s death and her death
           her estate will again be threatened with gift and estate taxes. At that point
           Anna would have an estate valued at $9 million with just $8.25 million
           available in exemptions, meaning $750,000 would be subject to taxation.
           Anna’s estate would then owe $300,000 in gift and estate taxes ($750,000
           x 0.40 = $300,000).

           Making use of the annual exclusion is something that Anna can do-and in
           fact is something that John and Anna should have been doing all along- to
           reduce her estate’s exposure to gift and estate taxes. The annual exclusion
           is a very simple and straightforward tax avoidance strategy that a taxpayer
           can incorporate into a comprehensive estate plan. The annual exclusion
           allows you to make gifts of up to $14,000 to as many beneficiaries as you
           wish each year. Because Anna and John are married they can make use of
           "gift-splitting" to double the value of each gift. Imagine that John and Anna
           had four children. Together John and Anna could gift assets valued at up to
           $28,000 to each child each year free of gift and estate taxes. Moreover,
           gifts made pursuant to the annual exclusion do not count toward your
           lifetime exemption limit. To put all of this in perspective, John and Anna
           could have transferred $1.12 million worth of assets tax-free and without
           using up any of their lifetime exemption limit over the course of just 10

Gift and Estate Taxes – Tax Avoidance Estate Planning Strategies
           years ($28,000 x 4 x 10 = $1.12 million). Had they done this, Anna’s
           estate would not owe any gift and estate tax under the above scenario
           because her estate’s value would be under the $8.25 million in exemptions

           As you can see, determining your estate's potential exposure to gift and
           estate taxes can be complicated; however, if you have a moderate to large
           estate it is best to assume that your estate could incur gift and estate
           taxes. By doing so, you will be able to work with an estate planning
           attorney to create a comprehensive estate plan that includes tax avoidance
           as one of its primary goals.

           IRS, What’s New—Estate and Gift Tax

           Forbes, After the Fiscal Cliff Deal: Estate And Gift Tax Explained

           Wealth Counsel, Understanding the Impact in 2012 & 2013 of Federal
           Estate Tax Laws

Gift and Estate Taxes – Tax Avoidance Estate Planning Strategies
           About the Author
           Richard B. Schneider
                                        Before devoting his professional efforts primarily to estate
                                        planning, Mr. Schneider spent over fifteen years working
                                        on Wall Street for major law firms and investment banks.
                                        After graduating from law school, he practiced general civil
                                        law in New York City for five years, specializing in business
                                        transactions, financings and corporate matters. He also
                                        represented major investment banking firms in mortgage
                                        trading and real estate-related matters. Among his clients
                                        were international shipping companies, commercial and
                                        investment banks and institutional lenders, including
                                        General Electric Capital Corporation, Salomon Brothers and
                                        Merrill Lynch.

           For the next ten years Mr. Schneider served as Senior Vice President at the investment
           banking firm of Kidder, Peabody, where he managed outside legal counsel for a variety
           of large financial transactions between major institutions. He played a central role in the
           creation of Kidder, Peabody’s mortgage trading subsidiary and advised and executed
           transactions with insurance companies, pension funds and government agencies,
           including the Resolution Trust Company.

           In 1996 Mr. Schneider established a residence in Portland, Oregon and began his law
           practice there in 1997. He has made a long-term commitment to providing first-class
           estate planning legal services to families and individuals within the Portland
           metropolitan area and the surrounding SW Washington region. His motivations for
           moving to the Northwest were several: the natural scenic beauty of the Northwest
           landscape, the clean air and streets, the healthy, diversified economy and the overall
           high quality of life. Mr. Schneider is very grateful for the warm reception he has received
           from Portland/Vancouver and is pleased to have become a respected member of the
           Portland/Vancouver legal and business community.

           Mr. Schneider is a member of the American Academy of Estate Planning Attorneys, the
           National Academy of Elder Law Attorneys, the Estate Planning Council of Portland and is
           on the board of directors of the the Rental Housing Association of Greater Portland. He
           is admitted to practice in Oregon, Washington and New York.

                                 Law Offices of Richard B Schneider, LLC
                                      2455 NW Marshall St, Suite 11
                                            Portland, OR 97210
                                          Phone: (503) 241-1215

Gift and Estate Taxes – Tax Avoidance Estate Planning Strategies

To top