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What exactly is estate tax?

Is there any way to avoid it?

Feb 02, 2012 by Brittany from Portland, OR in  |  Flag
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Blair duQuesnay Level 14

The estate tax is a tax on money inherited by anyone other than the deceased's spouse at the time of death. Currently the federal estate tax applies only to amounts over $5,000,000. The 2011 estate tax rate is 35%, alhtough it is has been as high as 55% in the recent past. One can inherit up to $5,000,000 without paying any estate tax. There are only a few thousand estates in the entire country that are subject to the estate tax under the current limits. However, the tax laws have changed frequently over the past few years, and there is no guarantee that the exemption will remain at $5million. While there are no ways to avoid the estate tax, there are ways to reduce the size of an estate before the individual dies. An individual may gift up to $13,000 per year to another individual without having to pay gift tax, which is a discussion for another question. This strategy is often implemented by gifting $13,000 to each child, grandchild, spouses, and other family members each year. Sometimes, these gifts are made to fund a premium on a life insurance policy that will be used to pay the estimated estate tax. Any payments of tuition directly to an educational institution do not qualify as gifts, so often high net worth inididuals will pay for their grandchildren's private school and college tuition. There are more compicated strategies to reducing the size of an estate, but to sum it up, the only way to reduce or avoid estate tax is to essentially spend or give away the money.

Comment   |  Flag   |  Feb 02, 2012 from Metairie, LA

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Estate taxes are imposed by the federal government on the total assets or estate of U.S. citizens and residents when they die. For this reason, the term "death tax" has been coined to describe estate taxes in a pointed way. Currently in the United States there is an exclusion of $5 million ($10 million for a married couple), which means that someone who dies in 2011 with an estate of less than that amount pays no estate tax. However, the exclusion amount has varied wildly over the past few years, from $1 million to zero to the current limit. It is a political football.

There are a number of ways to mitigate estate taxes, through trust structures, gifting programs, structured insurance programs, ROTH conversion, and other methods. A good financial advisor or estate planning attorney can help you with planning and implementation. I hope this helps. Jim

Comment   |  Flag   |  Feb 02, 2012 from San Francisco, CA

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No you cannot avoid it if you meet the threshold of the current estate tax legislation in effect when you die. Remember the estate tax has been repealed and re-instated 3 times. It has been changed numerous time. There are stategies which you can put in place considering the assets you own, the ownership of those assets to reduce the monetary funds to pay the taxes if you qualify. It really depends on what you want to accomplish with you estate which will determine the tools and actions to take to lessen the tax burden. Always pay taxes with discounted dollars.

Comment   |  Flag   |  Jan 09, 2013 from San Antonio, TX

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Blair and James are right on the Mark. Let me add a gentle reminder that when Life Insurance is owned by an individual, the proceeds are included in the owners taxable estate. A strategy that is relatively easy to implement would be to transfer the ownership of the policy to an irrecoverable trust or adult child thus removing the proceeds from the owners taxable estate. But don't try any of this at home! Find a good estate attorney that you like and trust - if possible.

Comment   |  Flag   |  Aug 30, 2012 from Port Washington, NY

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