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Estate Tax Planning

There are only two certainties in life - death and taxes. Unfortunately, for some people those two things go hand-in-hand. In 2012, as part of the deal to avoid the "fiscal cliff," the government set the federal estate tax exemption at $5.43 million, indexed for inflation.

That means that you won't owe federal estate taxes unless your estate is valued at more than $5.43 million dollars. That makes estate taxes a non-issue for many people, but there's still a great need to plan for many others. You've probably worked very hard in your lifetime to accumulate your wealth. You want that wealth to go to your family, friends or charitable causes, not to the government. However, if you are required to pay estate taxes and fail to plan, that's just what may happen.

A tax planner with specific estate taxation knowledge can review your situation and recommend strategies to reduce your estate tax liability. He or she may recommend using various trusts, making gifts during your lifetime or leveraging charitable giving to reduce your taxable estate.

Who is affected by estate taxes?

How do you know if you should be concerned about estate taxes? Here are a few situations in which estate taxes could be an issue:

You have a private net worth of more than $5.43 million and are not married.

You can always pass an unlimited amount of money to your spouse tax-free. However, singles don't have that ability. An estate tax planning strategy can help you put mechanisms in place to reduce your burden.

You have more than $5.43 million and are married, but have children from a previous marriage.

This can be a tricky situation. You have the ability to pass all your money to your spouse, but that may not be what you want to do. You may want some money to go to your spouse and the rest to go to your kids. Unfortunately, the kids could face an estate tax bill while your spouse may not.

You own a private business that could be valued at more than $5.43 million.

This situation catches many families by surprise. You may not feel like a millionaire because all your wealth is tied up in your business. However, once all your revenue and assets are counted, a business valuation expert could find that your business is worth more than the exemption amount. Now your family has to pay a tax bill. In a worst case scenario, they may be forced to sell the business to come up with the cash to pay the tax bill. This happens more often than it should because the owner failed to consider estate tax planning when he or she had the opportunity.

You die in one of the following states:

  • Washington
  • Oregon
  • Minnesota
  • Nebraska
  • Iowa
  • Illinois
  • Kentucky
  • Tennessee
  • Hawaii
  • Pennsylvania
  • Maryland
  • New Jersey
  • New York
  • Rhode Island
  • Connecticut
  • Massachusetts
  • Vermont
  • Maine

All of these states have estate taxes, inheritance taxes, or both. They also have exemption levels that are much lower than the federal amount of $5.43 million. Any estate tax planning strategy should include plans for reducing the tax burden at the state level. There are many other situations in which estate taxes could be an issue. If you have personal and business assets that are worth more than one million dollars, it's probably not a bad idea to meet with a tax planner. They could tell you whether you'll be affected by state or federal taxes and what you should do.

What can you do about it?

Some individuals mistakenly assume that estate taxes are just a fact of life, that there's nothing that can be done about them. That's not the case. While it may be difficult to completely avoid estate taxes, proper estate tax planning can reduce your taxable estate and relieve the burden. Here's just a sampling of some of the ways in which tax planners manage estate taxes:


Some trusts allow you move assets out of your estate. If you put certain assets in a trust of this type, the asset won't be counted in your estate, which will allow you to maximize the use of your exemption. Keep in mind, this isn't true of all trusts. The differentiating factor is whether or not you'll retain control of the asset after it's placed in trust. If so, then it likely will stay in your estate. However, if the placement of the assets in the trust is irrevocable, meaning you can't undo it, then the asset is removed from your estate.


If you know where the money should go, why not start giving it away before you die? That's what many tax planners recommend. Of course, there are also tax rules regarding gifts, but you can at least manage your giving strategy within those rules while you're alive. You can also leverage gifts to charities. That achieves the double benefit of getting the asset out of your estate and providing you with a charitable deduction. An estate tax planning strategy will likely involve some level of giving during your lifetime.

Business Transition

Do you own all or a significant portion of a business? It's better to plan as early as possible for transition. Identify the next in line quickly and, if possible, start transitioning ownership during your lifetime. Of course, ownership transitions can be delicate processes in a business, particularly a small business. There's a lot more to consider than just the financial or estate tax benefits. However, a good planner could help you see the issue from all angles and provide you with all the information you need to make confident decisions.

What to Look For in a Tax Planner

The most important thing is to find a tax planner who is knowledgeable and competent in your area of concern. There are plenty of tax planners out there, but they're not all experts in all areas. Take the time to find one who specifically meets your needs. Do you want to start a giving program to your kids and grandchildren? Find a planner who has implemented such plans. Want to give your money to charity? Find one who has experience in charitable estate tax planning strategies. Worried about business legacy? There are tax planners who build their entire practices around helping business owners with these very issues. Also, make sure that the planner doesn't speak over your head or use confusing jargon. You want someone who clears and clarifies issues, not makes them more complex. The issue is important enough that you should take your time. Think about your priorities and wishes. Talk the issues over with your family. Then interview several tax planners until you find the one that fits your estate tax planning needs.

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