You probably have not heard a lot of talk about the Federal estate tax lately. The most likely reason is that in our current estate tax system, your estate will only be subject to Federal estate tax if your taxable estate is more than the Federal estate tax exemption amount of $5.12 million in 2012. However, unless our Federal Congress acts, it is scheduled to go back down to $1 million in 2013 and thereafter. It will affect a lot more estates after this year.
If your estate is less than the exemption amount, you can leave your entire estate to your beneficiaries without any estate tax. If you are married and set up properly drafted trusts, both you and your spouse can each leave up to the exemption amount to your beneficiaries estate tax free. This doubles the amount you and your spouse can leave to your beneficiaries estate tax free.
Without proper planning, if your estate is greater than the exemption amount, your estate would pay Federal estate tax up to of 35% in 2012 and 55% in 2013 and thereafter. You may end up leaving a substantial portion of your estate to a beneficiary you never intended, the IRS. You want to be able to give what you have to whom you want the way you want when you want. For most people, who you want is not the IRS.
What most people believe is that if your estate is greater than the exemption amount, your estate will have to pay estate tax. This is not true. There is no reason your estate ever has to pay any Federal estate tax. With proper planning, no matter the size of your estate, your beneficiaries can avoid Federal estate taxes and have a zero estate tax plan.
If your estate is greater than the exemption amount, (or two times the exemption amount if you are married), you can leave your property three places, to your loved ones, to charities, or to the IRS. With proper planning you can eliminate one of the three. Most people in this situation elect to disinherit the IRS. By giving a little bit of your assets to charity, not only can you disinherit the IRS, you can leave more of your assets to your loved ones. You have worked hard your entire life to provide for yourself and your loved ones, why would you voluntarily give it to the IRS?
There are a variety of estate planning tools that you can use in order to leave more to your loved ones. You could use revocable and irrevocable trusts along with a private charitable foundation to maximize the amount to your beneficiaries and eliminate all Federal estate taxes.
Whether your estate is $3 million, $10 million or $100 million, you need not pay any estate taxes. You have paid enough taxes during your entire lifetime, you do not have to be paying more after you are gone. With proper counselling by a knowledgeable estate planning professional, not only could you leave more to your loved ones, you can disinherit the IRS.
By: Matthew M. Wallace CPA, JD
Published edited February, 2012 in Savvy Health magazine as: Avoid federal estate tax with proper planning