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| Monday, May 26, 2003 | (No comments posted.)
OK, if you have been following my column the last couple of weeks, you know that I've been discussing death taxation of estates. So far we've discussed federal estate tax, Indiana inheritance tax and income tax and how they are applied. This article is going to discuss what you can do to manage these taxes.
So, you don't want your estate or trust to pay any death-related taxes when you die? Here is the only sure fire way to accomplish that: Don't own anything on the day you die. If you can manage to spend your last dollar on the day you die, your goal will be accomplished. If you don't like the idea of not owning anything on the day you die, read on.
If your estate is more than $1 million, you probably have a tax problem. The federal estate tax is the most aggressive of the death taxes. If your estate is valued at more than $1 million and you are married, your attorney may recommend tax planning using an "A B'' trust plan. Space constraints do not permit me to go into great detail about an "A B'' trust plan. However, it basically works by utilizing both spouses' unified credits to offset estate tax on as much as $2 million. The plan is a little restrictive and may not be for everyone, but it's probably your best bet if you are married and think your estate may be subject to estate tax.
The Indiana inheritance tax is a little more of a problem for most of us. The good news is the inheritance tax is a lot less aggressive and is a little easier to manage. First off, remember that the relationship of your heirs makes a difference. More distantly related heirs tend to be more aggressively taxed. If you leave your property to your spouse, there will be no inheritance tax, or estate tax for that matter. Same thing for a qualified charity like the Salvation Army, Red Cross or your recognized church.
Also, remember that children and grandchildren start out at a tax rate of 1 percent. That really isn't that bad considering our tax system. I usually tell my clients that if your kids are getting everything, stop worrying about the taxes and start worrying about your golf game.
If you are leaving your property to someone other than your spouse, charity or kids, then it gets a little more difficult. Keep in mind that the only other viable way to reduce the inheritance tax is to reduce the value of your assets on the day of your death or increase the deductions. One thing you might be able to do is take advantage of gifting. If you are leaving everything to the nephew and you can afford it now, you can make a gift of up to eleven thousand dollars without any tax consequences. The gift will reduce your taxable estate and you enjoy the appreciation of your loved one.
Also, you can use life insurance. Remember, inheritance tax doesn't apply to life insurance proceeds unless the policy is payable to your estate. If you buy a policy and name your niece beneficiary, the money will go to her free of inheritance tax and your taxable estate is reduced.
Probably the most difficult tax to manage is the income tax. Generally speaking, only assets with built-in deferred income will be subject to income tax. Your loved ones may have options, but they will need to talk to an accountant to determine the best way to recognize the income. However, if you have ways to offset the income, such as medical or nursing home bills, it may be a good idea to start taking the income yourself. You may be a lower tax bracket and the money you use to pay the taxes will reduce your overall taxable estate.
I wish I had better news for you, but, taxes are here to stay. Seeing a professional can help, but there isn't a silver bullet out there, folks. The best advice I can give you is to plan, plan, plan. A little forethought can go a long way. I looked for a good quote, but the best one I could come up with is from an old Morgan Stanley commercial: "You must pay taxes. But there's no law that says you have to leave a tip.''
Christopher W. Yugo is a member of the Indiana Bar and a vice president and trust officer for Centier Bank's Trust Department. Address questions to Yugo in care of The Times, 601 W. 45th Ave., Munster, IN, 46321. The information is meant to be general in nature. Specific legal, tax, or insurance questions should be referred to your attorney, accountant, or estate-planning specialist.
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