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Vail Valley: Start preparing now to cope with estate taxes

Charlie Wick and Tina DeWitt
Vail, CO, Colorado

Throughout your life, you strive to provide financial security to your family. Your efforts can extend beyond your lifetime – if you work to control estate taxes.

It’s always challenging to create financial strategies that are somewhat dependent on tax laws, because these laws are always changing. In 2009, your estate could pass up to $3.5 million to your heirs before incurring federal estate taxes at a maximum rate of 45 percent.

In 2010, the estate tax is scheduled to be repealed, but in 2011, it is supposed to return, with a maximum exemption of $1 million and a top rate of 55 percent. But this may change, as Congress is considering extending the 2009 exemption and tax rate figures into 2010, 2011 and possibly even further.

You might think you’ll never have enough wealth to incur these taxes, but virtually every asset – your home, cars, life insurance policy, IRA and 401(k) – may be included in your taxable estate. These assets could push your estate over the exemption amount, costing your heirs a substantial amount in estate taxes.

To help address this potential problem, you might want to think about some of the following estate considerations. For example, if you owned a $1 million life insurance policy, and it was subject to an estate tax rate of 45 percent, your beneficiaries would receive a death benefit of just $550,000. But if you established an irrevocable life insurance trust with a new life insurance policy, the trust would own the policy and distribute the proceeds to the beneficiaries you’ve chosen. By using such a trust, you’d keep the policy out of your taxable estate.

Another estate planning consideration is a charitable remainder trust, which might be useful if you have a sizable amount of assets, such as stocks, that have significantly appreciated since you bought them.

If you kept these assets in your estate, your heirs would inherit them on a stepped-up basis, which means the value of the stocks would be the same as their fair market value on the date of your death.

However, in 2010 – and 2010 only – the step-up basis is limited to $1.3 million for your children or other heirs and $3 million for your surviving spouse. Beyond those figures, your heirs would assume, or carry over, the amount you paid for the assets. In 2011, full step-up is scheduled to return.

All stocks, and especially those that receive step-up treatment, could add to your heirs’ estate tax burden. But you could remove the stocks from your taxable estate by placing them in a charitable remainder trust. Furthermore, you could receive an income stream for life once the trust sold the stocks. You could then use this income to make gifts to your loved ones, further reducing the size of your taxable estate. You can give up to $13,000 per year to as many individuals as you like without incurring gift taxes, up to $1 million over your lifetime.

Before making any decisions related to estate taxes, consult with your estate planning professional and your tax adviser. Vehicles such as life insurance trusts and charitable trusts are complex and don’t lend themselves to do-it-yourself solutions.

Start thinking soon about estate tax issues. By putting your estate plans in order early, you could be helping your loved ones far into the future.

Charlie Wick and Tina DeWitt are financial advisers with Edward Jones Investments. They can be reached in Eagle at 970-328-4959 or in Edwards at 970-926-1728.


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