Vail Valley Financial Focus: Be ready for estate tax changes
August 19, 2010
There’s never really a bad time to do estate planning. But in the months ahead, you may have an extra incentive to look at your estate plans. Why? Because changes are coming to estate tax laws – so you’ll want to be ready.
Change is nothing new in the world of estate taxes, which have been in a state of flux for years. As the law now stands, there is no federal estate tax in 2010. Then, in 2011, the estate tax is scheduled to return, with an exemption amount of $1 million and a top rate of 55 percent. Yet, these figures are highly likely to change; ultimately, we may see a return to what existed in 2009 – a $3.5 million or $5 million exemption and a top rate of 45 percent.
Of course, your susceptibility to the estate tax will depend on the size of your estate. But no matter what your level of assets, you’ll want to have your estate plans in order. First of all, you almost certainly need a will. You’ll also need to make sure you’ve named the proper beneficiaries in all your legal documents.
Now, let’s return to the estate tax issue. Specifically, how can you help reduce any potential estate tax burden your heirs may face? Here are some ideas to consider:
• Take advantage of your exemptions. You and your spouse each receive an exemption from the federal estate tax. As mentioned above, this exemption could be anywhere from $1 million to $5 million, starting in 2011.
To maximize these exemptions, you may want to create a credit shelter trust. In a nutshell, here’s how it works: When you die, you fund a credit shelter trust with assets equal in value to your available exemption; if you have other assets, you can leave them to your spouse, free of estate taxes. Your surviving spouse can draw income from the trust’s assets while he or she is alive.
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Upon his or her death, the trust disperses the assets to your children or other beneficiaries, taking advantage of your original estate tax exemption. Your spouse’s estate will also disperse assets to beneficiaries, using his or her exemption to reduce or avoid estate taxes.
• Use life insurance. If you owned a $1 million dollar life insurance policy, and it was subject to an estate tax rate of 55 percent, your beneficiaries would receive a death benefit of just $450,000. But if you established an irrevocable life insurance trust with a new insurance policy, the trust would own the policy and distribute the proceeds to the beneficiaries you’ve chosen. By using a trust, you’d keep the life insurance out of your taxable estate.
• Give generously. You can give up to $13,000 per year to as many individuals as you like without incurring gift taxes. And the more you give, the lower your taxable estate. You can also reduce your estate by making gifts to charitable organizations.
Keep in mind that estate planning can be complex. You will need to work with your legal and tax advisors before establishing any type of trust or other estate-planning mechanism. And with the looming return of the estate tax, there’s no time like the present to get started.
Edward Jones, its associates and financial advisors are not estate planners and cannot provide tax or legal advice. Please consult your attorney or qualified tax adviser regarding your particular situation.
This article was written by Edward Jones for use by your local Edward Jones Financial Advisers. Taylor Leary, Tina DeWitt, Charlie Wick and Kevin Brubeck are financial advisers with Edward Jones Investments. They can be reached in Vail at 970-476-1791, in Edwards at 970-926-1728 or in Eagle at 970-328-4959.