Strategizing wealth transfers to heirs to lower taxes

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Wealthy families can strategize bequeathing to their heirs to limit tax liabilities.

Estate taxes are really only applicable to a very small percentage of people, says David D. Holland, chief executive of Holland Financial Inc. in Ormond Beach, Fla.

The limit is $5.43 million per person, and the surviving spouse picks up the unused portion of a deceased spouse’s estate tax exemption. That means that more than $10 million can be transferred at death to heirs without any estate taxes.

Although this is a large amount, it is possible that the exemption limit may decrease, meaning that more families may be subject to federal estate taxes, says Kevin J. Meehan, regional president at Wealth Enhancement Group in Itasca, Ill.

Clients who are subject to estate taxes should consider reducing them by spreading out gifts to heirs while they are still living, he says.

An individual can gift up to $14,000 to as many people as they like without being taxed, Meehan says.

For example, if a married couple has two children, each individual can gift $14,000, which comes to a total of $56,000 annually for that child, he says.

“If the couple’s children have spouses or children, the amount the individual, or couple, can gift increases from there,” Meehan says.

Wealthy clients can also consider implementing an irrevocable life insurance trust or buying life insurance to replace estate taxes that they may owe or to simply pass assets to their heirs’ income-tax free, he says.

“Another option is to leave retirement assets to charities and replace those assets with life insurance that will go to beneficiaries,” Meehan says. “This will reduce the estate’s and heirs’ future income taxes.”

For snowbirds in particular, their legal residence will dictate their estate planning, so they should make sure that the state that’s “more advantageous for living is also the more advantageous for dying,” Meehan says.

Although Congress has finally settled the years-long argument over the federal estate tax, setting it at 40% with a $5 million exemption, state laws remain a hodgepodge. Thirty-two states have no estate tax, but 18 states and the District of Columbia still do.

“In addition, state estate taxes are no longer a dollar-for-dollar credit against the federal estate. Instead, they are now a deduction, which is less favorable,” Meehan says.

“At least the states with estate taxes tend to be the northern ones that snowbirds abandon as their permanent residences,” he says.

Katie Kuehner-Hebert is a freelance writer in Running Springs, Calif. She has contributed to American Banker, Risk & Insurance and Human Resource Executive.

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