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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 TrustsReduce 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!
Wills, Trusts, Probate, and Estate Litigation, It’s All We Do!
Peter Klenk is the founding member of Klenk Law, a seven attorney boutique estate planning law firm. We serve clients in Pennsylvania, New Jersey, New York, Minnesota and Florida. Peter Klenk received his Masters in Taxation LL.M. from NYU Law School and his J.D. from the University of Minnesota Law School. He served his country in the Navy JAGC during Desert Storm. Easy to talk to, feel free to call Peter for an appointment. We will make the process as easy as possible!
What Our clients are saying
Peter provided outstanding advice and preparation of a will and trusts.
Peter was excellent. He explained everything very clearly and is super friendly. My wife and I originally tried using a lawyer through group legal coverage, but unfortunately the old adage - "you get what you pay for" - applied to the other lawyer, and we decided to go with a real professional.
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I'm totally satisfied with Klenk Law. Peter has a great legal mind with the personality of the guy next door.
Everything about my experience was a 10+! Peter and his staff made what I thought would be a difficult process easy and understandable. Every detail was handled correctly. No other firm could possibly do better than Klenk Law!
Peter and his staff are very responsive and always willing to help my clients and in a cost efficient manner.
Like another reviewer, I contacted Peter through his website using the free consultation link, for a question regarding PA inheritance taxes. The question was quite technical and difficult to explain, and the answer was nowhere to be found on the web. Peter grasped precisely what I was asking, and provided a clear, helpful response (with a touch of humor) the very next day.
Answered my question quickly and referred me to a colleague that could handle my problem
Mr. Klenk, quickly understood the circumstances presented and provided clear and concise advice. This advice provided me with the information I required to progress the case to my advantage.
Peter is excellent. I had a very complicated situation with my parents' estate planning and potential Medicaid needs. Peter was very knowledgeable in estate planning matters, able to define the best solution for the situation. Additionally, he was congenial and able to communicate effectively to my senior citizen parents the benefits of estate planning. He earned my trust, and more importantly, my parents' trust in a 45 mins consultation period. Highly recommend Peter. He is very easy to work with.
Peter recently gave a presentation about Wills & Trusts at my employer, and it was fantastic! He was extremely knowledgeable and provided valuable information to the group. People were very engaged and asked several questions, all of which Peter thoroughly answered. Personally, my husband and I have selected Peter to help us with our estate planning, and he has been very helpful in providing us with all of the information we need to provide a secure future for our family. Thank you, Peter!
Peter provided outstanding advice and preparation of a will and trusts.
Peter explained things in a way that was easy to understand. Everything was done in the time frame he said it. Could not have been better!
You & your staff are the best thank you for everything.
Peter and his staff handled all of our needs in a very professional and timely matter.
Peter Klenk made a complex subject understandable and allowed us to move forward with our estate planning. He was patient with our questions and creative in the solutions he proposed.
Peter explained a complex subject very clearly, helped us to decide the best approach to managing our estate and then made it very easy for us to execute the required documents. He will be a valuable resource for years to come and clearly has a great understanding of estate law that will lead to innovative solutions for us. I would unhesitatingly recommend him for estate planning.
Fantastic customer service. Very personable and most importantly they provide great explanations of what is required based on your individual needs. Highly recommend Klenk Law for anyone that needs to create a will and estate documents.
Always professional and very responsive. Everyone on the staff that I have worked with. I look forward to continuing our relationship.
Affable...yet surprisingly cerebral estate planning atty. High marks all the way around.