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Income Taxes

Five strategies to reduce your estate tax bill

The timeworn saying, “money doesn’t grow on trees,” is just as true today as it has been for many years prior. No one likes to hand over their hard-earned money, especially to pay a tax that will affect the final gift you will pass on to your beneficiaries. The desire to leave your heirs as much of your assets as possible is a common motivator to finding a way to pay less estate tax. But how does this work?

reduce estate tax bill According to the Internal Revenue Service (IRS), estate tax is a “tax on your right to transfer property at your death.” As of 2015, the federal estate tax exemption rate is $5.43 million, which means that everything up to this amount is exempt from federal estate tax. Not all estates require the filing of an estate tax return, but if the value of your gross assets and total taxable gifts exceeds this number, your estate is taxable. Taxable estate is the fair market value of your assets, excluding any debts, and if your estate surpasses the exemption amount, your beneficiaries will be subjected to estate tax upon your death.

This is where planning can prove to be an extremely important asset to you and your beneficiaries. Fortunately, there are a few strategies that can be implemented during the estate planning process that can greatly reduce or even eliminate your exposure to an estate tax:

1. Annual gifting
A reduction of estate taxes can be accomplished through annual gifting. Each year, you can gift $14,000 per person without having to pay gift tax, which means that a married couple can make joint gifts for a total of $28,000 per person, every year. Therefore, if you have three children, you and your spouse can gift a total of $84,000 each year. Annual gifting reduces the size of your taxable estate, and for those who can afford yearly living expenses with money to spare each year for gifting, this strategy can prove to be very effective.

2. Double your tax exemptions
If you are married, you and your spouse can utilize both estate tax exemptions. The IRS permits each individual a lifetime exemption amount that will not be taxed upon your death. Therefore, you and your spouse have this resource at your disposal. The 2015 federal estate tax exemption rate is $5.43 million, which means that you and your spouse can each have $5.43 million, exempt from taxes. A common problem that used to arise with this strategy, was that once the first spouse died, if the surviving spouse was named the beneficiary, they were at risk of surpassing the exemption rate. If this occurred, once the surviving spouse passed, their estate would be exposed to taxation. However, in 2011 the Tax Relief Act was signed enabling “portability” of a deceased spouse’s lifetime exemption, meaning that a married couple could easily shelter all of both exemptions from estate tax.

3. Donate a portion of your estate to charity
donate to reduce estate taxesDonations made to charitable organizations can prove to be advantageous for reducing estate taxes. This option provides the opportunity for you to create a legacy and support an organization that you care for, all while reducing estate taxes and increasing the amount of inheritance for your beneficiaries. This is a great strategy for those who are actively working with a charity or who desire to dedicate a portion of their estate to a noble cause.

4. Purchase life insurance
Purchasing life insurance can assist in the reduction of estate tax. The proceeds generated from a life insurance policy is income-tax-free for the beneficiaries of the policy, but if you are the owner of the policy, it is considered part of your estate, and therefore, taxable. An effective strategy to avoid the estate taxes for your life insurance policy is to have your beneficiaries purchase the policy instead. If you gift money to your children and they acquire the insurance for you, the proceeds from the policy are not considered part of your taxable estate.

5. Irrevocable trust
An irrevocable trust is another advantageous strategy that can be implemented to avoid high taxes. This form of trust is beneficial for a surviving spouse because these limitations will also limit imposing estate taxes. You will not be limited to the amount that you can transfer into the trust, but always remember that the trust is irrevocable and once you have transferred any assets into the trust, you will be unable to utilize them for your own benefit. This resource is especially useful for life insurance policies through an irrevocable life insurance trust (ILIT), which is designed to hold life insurance policies and, if properly established, is not included in your taxable estate.

If your estate is valued higher than the federal or state estate tax exemption, then it is crucial to evaluate your exposure and take action to reduce your estate tax. Helpful resources, like this Estate Tax Planning Calculator from Bankrate, can provide an idea of where you stand, but it is essential to contact a professional in order to take advantage of all of the opportunities that are available. Estate tax policies vary by state and it is important to consult with a professional in order to ensure that you are taking the appropriate steps to reduce estate taxes and plan for the future of your loved ones.

Contact me today to learn more about how you can reduce your estate tax bill by calling 800-950-8522 or email me at

Life Insurance: An Array of Uses

With Federal and State income taxes rising, more retirees are concerned that their children will not be able to fully retire. In California, it’s not uncommon to see taxpayers paying over 50 percent of their earned income to taxes.

Wealthy parents are looking for ways to help fund their children (or even grandchildren’s) retirement shortfall. One of the best new plans on the market is an indexed universal life policy (IUL). The concept is fairly simple. Fund a life insurance policy on your child with level payments over a set number of years (usually 5-10 years). We want to have the smallest amount of death protection possible to still qualify as life insurance.

The cash values grow quickly since the costs are minimal due to the low death benefit. They can be invested in an account that tracks the S&P 500 index from year to year. The funds receive 100 percent of the upside of the index during the year (subject to caps of 12-14 percent) but none of the downside risk. In the event of a negative year, the policy is simply credited with zero interest and resets for the next year. For a risk-free investment, the short and long term returns are very favorable.

At some point in the future the monies can be withdrawn income tax free to help supplement retirement. The policy allows a withdrawal of your premiums paid without producing taxable income. After these monies have been withdrawn, the policy owner can continue to take out money by borrowing against the policy. The loan is a “wash loan” meaning no net interest costs. This allows for a completely income tax free distribution while still enjoying a life insurance death benefit. Upon death, whatever death benefit is left in the policy will be paid to the beneficiaries income tax free (and possibly estate tax free also).

I recently worked with someone where we set up a plan to fund $50,000 per year for 10 years for their 42 year son. His initial life insurance coverage is $2.4 million. The plan is to have him start distributions at age 65. We project about $100,000 per year will be distributed to him starting at age 65 through age 90 based on past returns. Of course, if the fund does not produce the projected results then less will be taken out and a higher return will increase the overall retirement payout.

If $100,000 were paid out tax free to him that is the equivalent of earning $200,000 per year before tax based on his current income tax burden.

One strategy is for Mom and Dad (Generation 1 or G1) to fund a plan for their children (generation 2 or G2) by utilizing annual gifts. This gets monies out of their estate and reduces possible estate taxes later. We have also seen G1 decide to keep the monies in their estate in case they need the money themselves later on. They would be the owners of the policy on G2 but turn it over to them at some point in the future or at G1’s demise. Of course, this also works well for Grandchildren (G3) utilizing the same concept except with a longer deferral period.

Lastly, many age 40-60 year old boomers hoping to retire someday do not have parents able to fund such programs so they have to fund their own policies. Often nicknamed a Super Roth, unlimited amounts of money can go into these IUL plans helping to provide income tax free payments in their retirement years.

With the current estate tax exemption of $5.34 million per person, I am finding more people worried about rising income tax rates and its effect on retirement assets than about avoiding estate tax. With indexed universal life, both income and estate tax planning can be accomplished across multiple generations.

It is always best to consult your professional advisors to assist with advice on how best to set up your plan.

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