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Hopp & Associates, pc
Attorneys and Counselors at Law
353 Main Street
Longmont, Colorado
303 • 776 • 4045
Simple Sophisticated
Estate Planning
Wealth Planning News
Vol. II, No. 7
A Voluntary Tax?
A tax you can avoid by planning is a voluntary tax if you fail to avoid it.
We care about ourselves. Given a choice between keeping our assets or giving them to the IRS, we choose to keep our assets.
We also have a choice for those loved ones who will receive our assets when we die. We can choose to let loved ones give some of our assets to the IRS, or we can choose to let them keep the assets for themselves. The tax we let them pay by our inaction is a voluntary tax we impose on them.
The planning we do to save them taxes after we are gone is a gift of love from us to them.
"Coupons" from the IRS
There are things the law allows you to do to save death taxes for those you love. Think of tax saving techniques allowed by law as "coupons" from the IRS. We will mention just a few basic ones.
Credit Shelter Trust Planning
The most obvious coupon is the exemption equivalent amount that started at $600,000 in 1987 and has now gone up to over $11 million. It is free to everyone unless they are married. For married couples the price of the exemption for both spouses is the effort and expense of setting up credit shelter trusts in wills or trusts, and retitling assets to make sure the credit shelter trust will be funded at the first death. For married couples to each use their own coupon, they have to do this planning.
As the exemption equivalent amount goes up, the penalty for not using the exemption coupon increases for a couple of reasons:
First, your heirs lose more exemption if you fail to plan. When the exemption was only $600,000, the price of not planning was tax on $600,000. When the exemption went to $1.5 million, the price of not planning became the tax on an extra $1.5 million.
Second, heirs are pushed into higher tax brackets as the exempt amount increases. When the exemption was only $600,000, the tax on the amounts above that started at 37 percent. After the exemption reached $1.5 million, the tax on amounts above that started at a higher percentage.
Present Pain for Future Gain
The work and the expense of planning hit you now, while the savings may only be for those who survive you. It takes an unselfish act of will to do planning. We sometimes hear, “I don’t care, I won’t be there when the taxes hit.” If that is you, then your descendants will pay the taxes you could have saved. But if you care then do the planning. A bit of present pain for a big future gain is always worth the effort when you care.
Planning is a gift of love.
In This Issue
A Voluntary Tax?
"Coupons" From the IRS
Credit Shelter Trust Planning
Tax Free Life Insurance
Residence Trusts
Other Split Interest Trusts
Valuation Discounts
Sophisticated Planning
Present Pain For Future Gain
Tax Free Life Insurance
Life insurance proceeds are subject to death taxes. Another coupon from the IRS is your right to shelter life insurance proceeds from being taxed. Life insurance trusts, or even business entities that own life insurance and qualify for valuation discounts, are techniques available to you. Use these techniques or lose them.
There are also techniques that allow you to make a "capital transfer" of funds from where they would be taxed, into life insurance that will be partly or wholly tax free. Use these techniques or lose them.
Residence Trusts
The law allows special trusts to transfer your residence and vacation home, and all future growth in their value, out of your taxed estate at tremendously reduced values. Use these trusts or lose the benefit they provide.
Other Split Interest Trusts
The law allows special trusts to transfer business assets and future growth in their values out of your estate at drastically reduced values. A good example is a split interest trust called a GRAT. Use these techniques or lose them.
Valuation Discounts
There are legitimate business reasons to form entities that will own business or investment assets. If properly arranged, you get substantial business benefits such as asset protection, centralized management, the ability to train loved ones in the business or in investing. And you also get valuation discounts that can range from 30 to 55 percent. Use these business entities or lose them.
Sophisticated Planning
The examples mentioned above are some of the things you can learn about and use by doing some sophisticated and comprehensive planning. The benefits of planning will go far beyond mere tax savings. But the tax savings can often be pretty impressive. Just don’t pretend there is nothing you can do to save the taxes for your loved ones. You have a choice, and they will know it.
Call us for a free consultation on this topic.