Examples of Estate Planning Reducing or Avoiding Taxes.

From Our “Ask a Question” Mailbag: “Please give me Examples of Estate Planning Reducing or Avoiding Taxes.”

Peter Klenk, Estate Planning Lawyer.

Examples of Estate Planning Reducing or Avoiding Taxes:

• Transfer a house to your child during your life, or at death? Example, Mrs. Jones purchased her Philadelphia house 40 years ago for $30,000.00 and it is now worth $200,000.00. At her death, her will gives the house her son.  Hearing about the Pennsylvania Inheritance Tax, Mrs. Jones is considering giving her house to her son now.  Is this a good idea? The Inheritance Tax on her Philadelphia house is 4.5% of its FMV at her death, or $9,000.00 ($200,000 x 4.5%). But, her son receives this house with a “Stepped Up Basis.” He can then sell the house for $200,000.00 with no capital gains tax. If Mrs. Jones instead gave her son the house he has a “Transfer Basis” equal to her own $30,000.00 basis. For this example, the son has a combined 18% capital gains tax bracket for state and federal taxes, so the sale generates a $30,600.00 tax ($200,000 – $30,000= $170,000 x 18% tax).  PLUS if the transfer took place within one year of Mrs. Jones’ death, the son still owes the $9,000.00 Inheritance Tax bringing the total to $39,600.00. So, you can see that a little bit of estate planning can reduce or avoid taxes.
• Dynasty Trusts Reduce Inheritance Taxes.  For example, if Mr. Smith had us create a Dynasty Trust for his two children, then at his death his stocks and real estate pour into the protective trusts. His children, as the trustees, invest the funds and they grow. During their lifetimes, the value doubles, doubles again, and then once again. At each child’s death, the trust does not pay the Pennsylvania Inheritance Tax. And furthermore, if the Dynasty Trust continues for grandchildren and great-grandchildren, the same holds. From generation-to-generation, Inheritance Taxes are legally and properly avoided.  Click here to read more about Dynasty Trusts.
• Disclaimer Trusts. For example, Mr. Philadelphia in his Will set up a Disclaimer Trust for Mrs. Philadelphia.  At his death, she decided to disclaim a portion of his stock account and life insurance. The terms of his will placed these assets into a trust for Mrs. Philadelphia.  In consultation with her Estate Planning Lawyer, Mrs. Philadelphia then moved her residence to Boca Raton, Florida. She lives there many years and becomes a Florida resident. She then dies, and the children divide the Disclaimer Trust in further protective trusts.  At her death, the trust assets avoid the Pennsylvania Inheritance Tax. Follow this link to learn more about Disclaimer Trusts.
• Irrevocable Life Insurance Trusts Reducing Taxes. Mr. Philadelphia had a $1,000,000 life insurance policy that named Mrs. Philadephia as beneficiary. At his death, she planned to place the money in an investment account, which then would pass to the children at her death.  If nothing changed, there would be no Pennsylvania Inheritance Tax at Mr, Philadelphia’s death, but the resulting cash (and it’s growth) would be subject to a 4.5% Pennsylvania Inheritance Tax at Mrs. Philadelphia’s death; a $45,000.0 tax if there was no growth during her lifetime. Instead, Mr. Philadelphia’s Estate Planning Attorney formed an Irrevocable Life Insurance Trust or ILIT into which Mr. Philadelphia transferred the policy.  At his death, the trust received the $1,000,000.00 and Mrs. Philadelphia, as the trustee, invests the funds. She is free to use to trust funds for her benefit under broad terms. In this example, at Mrs. Philadelphia’s death, there is no Inheritance Tax and the family saves $45,000.00. Follow this link to learn more about Irrevocable Life Insurance Trusts ILIT.

In Conclusion: Examples of Estate Planning Reducing or Avoiding Taxes.

I hope these Examples of Estate Planning Reducing or Avoiding Taxes were useful. We are always happy to brainstorm with you about your own, unique situation. 

Let our Estate Planning lawyers help walk you through what can be a confusing process. To begin with, call to speak to one of our experienced estate planning lawyers.  By all means, our lawyers are ready to answer your questions. In fact, feel free to contact our office for a free consultation. Ultimately our goal is to make the process as painless as possible!

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