Avoiding Federal Estate Taxes
Only the little people pay taxes. - Leona Helmsley, hotel owner and prison inmate, 1989
Ms. Helmsley got it wrong. The easiest way to avoid estate taxes is to die a pauper. 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 have the value of your estate fall within the federal estate tax "applicable exclusion amount." If you die in 2009, the first $3.5 million of assets in your estate will be exempt from federal estate taxes (it was only $2 million in 2007 and 2008). Depending on your situation, this applicable exclusion amount may or may not be enough to shelter your estate from estate taxes.
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A $3.5 million estate tax exclusion 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 taking advantage of the applicable exclusion 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cheat death until 2010, you may win the death tax jackpot, because, as the law currently stands, the estate tax will be repealed for just one year, and 2010 is it. It is reinstituted with a vengeance in 2011, unless Congress makes changes before then.
But even if your estate is too large to fall within the applicable exclusion amount, all is not lost! There are many deductions and strategies available to help reduce or even eliminate the unified gift and estate tax liability. Here are some things you need to consider:
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