CONSIDER THE IMPACT OF A 50% ESTATE TAX ON YOUR FAMILY’S INHERITANCE
There have been significant changes in estate and gift tax laws with tax increases scheduled. The amount you can pass tax-free to your children and grandchildren will be reduced to $1 million per person in 2011.
When you look at your projected estate tax amounts with even modest growth, the federal and state estate tax can be quite significant with a combined rate of 50%. While growth in the value of your assets is good, it creates a big tax problem that is compounded by the scheduled reduction in the applicable exclusion to $1 million beginning in the year 2011. If you start now, however, you have time to take steps to avoid this significant tax problem from eroding your family’s inheritance.
DO YOU HAVE AN ESTATE TAX PROBLEM?
The combination of a reduced applicable exclusion (the tax free amount), only $1 million in 2011, and an increase in value of your investments and other assets can create a major tax problem. It is important to be aware of this and begin implementing a plan to increase the gift and estate tax free amounts for your family members.
PLANNING TO REDUCE TAXES WITH GIFTING
Most people do not wish to pay any more in taxes than absolutely necessary. Given a choice, they would prefer to provide for their children, grandchildren, or even causes that are important to them. Saving taxes and benefiting your family is a matter of acting on the choices you have.
Gifting programs to children and grandchildren can allow you to reduce a taxable estate by $13,000 per year, per child or grandchild, $26,000 each for a married couple, which provides $260,000 tax free over a ten year period. If you have three children and they each had two children, that's over $3 million dollars that can provide an estate tax savings in excess of $1,500,000.
EDUCATION FUNDING FOR GIFT AND INCOME TAX SAVINGS
Parents or grandparents can also use gifting to fund the college education of their children or grandchildren. With a tax advantaged 529 Plan you have the opportunity to pre-fund an education with $65,000 in the first year, five years worth of gifts, without losing control of the money if your child or grandchild chooses not to pursue higher education. A grandparent can fund a 529 Plan without compromising their grandchild’s eligibility for grants and scholarships. 529 Plans have the added benefit of income and capital gains tax free growth as long as the funds are used for qualified tuition expenses. The sooner you start, the greater the savings.
Gifting should be done annually as the opportunity is lost as each year goes by. Therefore it is critical to evaluate your situation now to see if there is a potential tax problem and if so, take steps to reduce or eliminate it as soon as possible.