As Americans, we pay taxes on almost everything. The cost of a sandwich at the deli may be listed as $7.95, but it actually costs a little more than that. Your employment contract may list your annual salary as $60,000, but after the appropriate deductions are made, a smaller portion of this figure reaches your pockets. Taxes are hard to escape, and some of us will pay them after death in the form of transfer taxes on our estates.
Without careful estate tax planning, the tax amount can easily exceed half of the value of the estate if previous tax rates are automatically put into effect next year. Often, the heirs must sell assets or close family businesses just to settle up with the government. With a little foresight and initiative, however, huge sums of money can be saved. Take the contrasting stories of Sam Walton and Elvis Presley, for example.
The Wal-Mart magnate achieved an estate transfer of $86 billion dollars. His heirs paid nothing in estate taxes. The rock n’ roll singer, on the other hand, lacked the appropriate financial guidance. His heirs inherited his $10 million estate but paid almost 75 percent in taxes and fees.
How, then, does one follow in the footsteps of the retail tycoon? The answer is gifting. Assets such as cash, stocks, bonds and family businesses can be moved to holding companies. The owner can then transfer the interest in the holding company to a trust that exists outside the estate. This trust is exempt from transfer taxation. All the owner has to do to complete the arrangement is file a gift tax return so that the IRS is aware of the donation.
The consequences of inaction can be severe. A family embroiled in tax woes and the financial hardships of succession is a common, but avoidable, scenario. When it comes to avoiding potentially substantial estate taxes, a little planning goes a long way.
Source: Deseret News, “Gifting, estate planning can help avoid transfer taxes on inheritances,” Rich Bloomfield, Aug. 14, 2012