Carnack says he uses trusts as much as possible. The charitably inclined can put assets into a charitable lead trust. There is no gift tax for charitable contributions, and the charity gets income from the trust. When the person dies, the assets go to beneficiaries. Meanwhile, a charitable remainder trust can be used if the surviving spouse wants income from the trust; assets in the trust go to the charity at death.
A business owner with a low cost basis in the company can face a hefty estate tax bill if the business grows, launches a profitable product, goes public or is acquired. Carnack recently had a business owner transfer $1.5 million of his business interest to his children using discounted shares into a family limited partnership. The limited partnership let the business owner maintain control of the company. In the future, the $1.5 million may have grown to as much $10 million dollars. He saved his client millions of dollars in estate and generation-skipping taxes.
Those with highly liquid estates should consider other options to cut the estate tax bill, says Hager of Integrated Wealth Management. Some individuals may be better off making gifts of present interest to their children. Some might set up loan arrangements or use a number of types of irrevocable trusts in addition to charitable trusts. Other types of trusts often used in estate planning include Grantor Retained Income Trusts, which allow an individual to transfer ownership rights to certain assets but retain income or use of the property, and QTIP trusts, which let couples postpone estate taxes until the second spouse dies.
Taxes Imposed On The Transfer Of Assets
Three types of federal taxes are imposed on the assets of the deceased: estate tax, gift tax and generation-skipping transfer tax.
Gift tax is imposed during the lifetime of the giver. Unlimited gifts may be given to a spouse or to charity without tax. And gifts of $11,000 or less per year may be given without taxation. On gifts of more than $11,000, the gift tax rate declines from 48% in 2004 to 45% in 2009. A lifetime gift tax exclusion is satisfied before taxes are paid. In 2004 and 2005 the lifetime exclusion was $1.5 million.
Estate tax is imposed upon death. All assets pass to the surviving spouse free of estate tax. Estate taxes, though, are paid within nine months after the surviving spouse dies. Estate taxes are based upon the total current value of all assets (liquid or not) after all appropriate expenses and appropriate asset transfers. In 2004 and 2005, the estate tax exemption is $1.5 million.
The generation-skipping transfer tax is imposed both at death and during the lifetime of an individual. A decedent (the person transferring assets) has a lifetime excludable gift amount of $1.5 million in 2004 and 2005.
This tax and exclusion is applied to gifts that are for grandchildren, great grandchildren or relatives further down the family tree.
Transferring assets to the skipping generation that are greater than the lifetime exclusion amount also may be subject to an estate tax if the gift is at death. The tax rates in 2004 and 2005 above the exclusion are 48% and 47%, respectively.