Avoiding Federal Estate Taxes
Only the little people pay taxes. - Leona Helmsley, hotel owner and prison inmate, 1989
The easiest way to avoid estate taxes is to die poor (see also, getting blood from a turnip and/or stone). Assuming you were reasonably successful at playing the game of life, however, you will want to prevent the federal estate tax collector from taking one last bite of any wealth you managed to accumulate.
The second easiest way to avoid estate taxes is to fall within the federal estate tax exemption amount. If you die in 2006 through 2008, the first $2 million of assets in your estate will be exempt from federal estate taxes. Depending on your situation, this amount may or may not be enough to shelter your estate from estate taxes.
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A $2 million estate tax exemption may seem like a lot, but it really isn't. For example, if you die shortly before retirement, your accumulated savings may easily exceed this amount. The same applies if you die shortly after you experience a sudden increase in wealth (e.g., due to winning a lottery, receiving a civil lawsuit settlement, or gaining an inheritance). Therefore, in addition to the applicable exemption amount, you always want to have a back-up plan or strategy to minimize the impact of estate taxes on your estate.
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Timing, as they say, is everything. If you manage to hang on and cheat death a while longer, the estate tax exemption will rise to $3 million in 2009. After that, you can win the death tax jackpot because the estate tax will be repealed altogether for one year in 2010.
But even if your estate is too large to fall within the exemption amount, all is not lost! There are many deductions and strategies available to help reduce or even eliminate the transfer tax liability. Here's what you need to consider:
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