Death may be certain, but estate taxes are not. At least not at the end of 2012 when the current Estate Tax exclusion of $5.12 million is set to expire and be automatically reset to $1 million. With proper planning, married couples can combine their exclusions for a total amount in 2012 of $10.24 million. At that rate, there aren’t too many estate subject to estate tax. But if the estate tax exclusion falls back to $1 million ($2 million for couples who plan), there will be far more people affected by this tax. Worse yet, the tax rate, currently set at 35%, will increase to a staggering 55% of asset value at time of death.
The size of your estate is based on the total fair market value of all your assets measured from your date of death. But there are a few surprises thrown in as well. For example, your estate inlcudes the total death benefit of all life insurance policies you own. So if you have a $1 million term life policy (an asset that does you little good while alive) it counts towards your total estate value. Add in a house, a retirement account, and a few bank accounts, and your estate could top $1 million easier than you think.
If you own your own business, that must be valued as well. Your estate could end up owning a 55% tax on assets that are highly valued, but not highly liquid. That can cause a financial hardship for your family after your gone.
So now is the time to take advantage of the increase Estate and Gift tax exclusion amount of $5.12 million. But what action should you take? That depends on your situation. There are quite a few different ways in which to reduce the size of your estate while also benefitting your family members.
For example, you can fund a Trust for your children or grandchildren that can be used for educaitons, health, and support items. You can fund a life insurance trust that allows you to pass the death benefit of an insurance policy to your children free of estate tax. You can even create a family business (referred to as a family LLC) that could provide a way to share the wealth while also reducing your estate value.
For a few other interesting ideas, check out this article from www.nerdwallet.com’s personal financial management blog (quoting some expert advice that you may find interesting).