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You've worked hard for the financial assets that you've built up over the years. If you want to pass them to your loved ones instead of to the government, read on. I'm going to show you some simple strategies that will enable you to completely wipe out or slash the estate tax your heirs will have to pay.

First of all, remember that you and your spouse can each pass on up to $625,000 of assets to heirs, free of federal estate and gift tax, either while you're alive or in your estates. That's a total of $1.2 million free of estate or gift taxes.

An unlimited marital deduction lets you give as much property as you wish to your spouse free of estate or gift taxes. But this only defers the potential estate tax liability until the inheriting spouse dies. Once a taxable estate passes $625,000, a fierce estate tax kicks in at 37% and climbs to as high as 55%. That means that if, like most couples, you use only one $625,000 exclusion, the estate tax on $1 million -- your home, retirement plan, life insurance, etc. -- could exceed $150,000.

If the value of your estate is greater than $625,000, these simple, proven moves will move assets that you may not need out of your estate forever:

Estate tax slasher #1: Make gifts during your lifetime. This is all that most of us will ever need to do. Just be sure, before you give any property away, that you'll have enough to maintain a comfortable retirement. You can give up to $10,000 per recipient -- children, grandchildren or anybody else -- each year free of gift or income tax. If your spouse joins you in making the gifts, that doubles your annual gift-tax exclusion to $20,000 per recipient. Depending on the size of your family, you could shift $100,000 or more out of your estate each year.

Sometimes it pays to make even larger annual gifts than $10,000/$20,000. Even though you'd trigger current gift or estate tax, you'd remove property from your estate that's likely to appreciate substantially over the years. You could even give away your home, while continuing to live in it - or shares of a closely held business.

It may pay for you to consider the cost basis of property you give away during your lifetime. If you have a loss, sell the property first, then give the proceeds. Then you can take a loss deduction on your own tax return. If you have a gain, remember that the gift's cost basis for income tax purposes is the donor's basis. So when the property is later sold, the recipient is taxed on the entire gain. But if appreciated property is inherited in an estate, it receives a "stepped-up" basis. This means the asset's value is figured as of the owner's death rather than based on its original cost. The benefit here is that there is no income-tax liability.

Estate tax slasher #2: Don't leave everything to your spouse in your estate. Instead, use some or all of your $625,000 estate tax exclusion for other heirs. Then, at your spouse's death, estate tax will be avoided again on his or her first $625,000.

There are several ways to do this. One is simply to leave some assets to other family members. Just make sure that your spouse will have enough liquid assets to live comfortably.

Another solution is to give your spouse assets while you're alive. The unlimited marital deduction applies here, too, so you can give as much as you want free of gift tax. Suppose you have $1 million and your spouse has $200,000. You could transfer $400,000 to him or her. Then, no matter which of you dies first, $625,000 will pass to other heirs tax-free. Another approach is to set up a bypass trust. This gives your spouse use of the assets while he or she is alive, and removes them from your taxable estate.

Let's say that you own $800,000 of assets and your spouse has $300,000. A bypass trust could hold up to $625,000 of your estate, with $200,000 given directly to your spouse, free of federal tax. Your spouse collects the trust's income. At his or her death, other heirs get the trust assets. Since the assets aren't part of your spouse's estate, it's as if the $625,000 were left directly to them. Meanwhile, that $500,000 estate ($300,000 plus the $200,000 given in your will) falls within the federal estate and gift exemption.

Each spouse can bequeath $625,000 to a separate trust. Both can provide for a trust, so that one will be set up at the first spouse's death no matter who dies first.

Estate tax slasher #3: Buy life insurance so that your estate will keep its full value. As I pointed out last month, life insurance enables you to transfer as much wealth as possible in an estate. This may be important if a married couple's estate exceeds $1.2 million. Life insurance policy proceeds are often free of estate tax and income tax (see the explanation below).

Another reason to consider using life insurance for estate planning is to furnish enough cash to pay estate tax and other expenses for estates with assets that your heirs do not want to sell, or that would be hard to sell quickly, such as real estate or a closely held business.

This might also come into play if you want to provide estate "equalization" among heirs. Suppose you own a closely held business in which one child, but not others, will actively participate. One solution is to give the active child the business itself and give other heirs other assets. If the "other" assets aren't of equal value on a per-heir basis, life insurance proceeds can fill the gap.

In your planning, remember that proceeds of life insurance policies will avoid estate tax only if they are owned outside the insured's estate. And if your spouse is the policy beneficiary, the insurance proceeds will go into his or her estate and become taxable at the time of the second death. (That may or may not be an estate-tax factor for you.) Instead, life insurance might be owned by and payable to either other heirs themselves or by an irrevocable trust that you set up.

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