ESTATE PLANNING: SKIPPING ESTATE TAXES

It can be discouraging for Florida residents who are planning an estate to realize that assets can be so heavily taxed on both the federal and state level. Estate administration includes finding the best way to preserve assets from one generation to the next, and trusts can be a great tool for doing so. Regulations on trusts vary from state to state, so consulting a local professional who knows the ins and outs of the industry is prudent.

The federal government currently taxes estates at 35 percent. At the beginning of 2013, that percentage may increase to 55-60. The federal estate and gift tax rates fluctuate according to Congress’ decisions.

A discouraging scenario when planning an estate is when a family has a modest estate, such as a farm, which is slowly but surely sucked dry by taxes. In some cases, generation-skipping trusts, dynasty trusts or family banks may be used to circumvent estate taxes.

Without trusts, when a generation dies and the children receive the assets, they may be subject to taxes. This happens with each generation at the time of passing. To take advantage of a generation-skipping trust, a parent must will their estate into trusts for their children’s entire lives. To avoid the taxation of future generations, the trust can be passed from generation to generation, avoiding estate taxation with each passing generation.

However, the IRS knows about generation-skipping trusts and has a special tax for that. The generation-skipping tax is levied at the passing of each generation. If the trust is under $5.12 million, then it is currently exempt. Some states do not have generation-skipping taxes and therefore those types of trusts are safe.

Similarly, parents can set up irrevocable life insurance trusts that benefit the surviving parent and then later generations. The generation-skipping tax applies to premiums, not the benefit, so a $5 million life insurance policy obtained by a trust is only taxable if the amount in premiums paid exceeds the minimum.

It can be tricky to understand the intimate details of estate planning, but careful planning can benefit future generations.

Share this on...Share on FacebookTweet about this on TwitterShare on LinkedInShare on Google+Email this to someone

Written by Luis E. Barreto

Luis E. Barreto

Luis is a probate and guardianship litigator with over 23 years of experience in the field. Determination of heirs, will contests, breaches of fiduciary duty, removal of personal representatives, guardians and trustees are just some of the types of litigation he addresses. In addition, he administers non-contested estates and guardianships.