Estate & Inheritance Tax Planning

It is said that one cannot avoid death and taxes. As Estate & Inheritance Tax Planning Attorneys in Portland , our clients certainly face more taxes than they expect: gift, estate and inheritance, generation-skipping, capital gains and the deferred taxes in pension assets such as IRAs.

In fact, these taxes can be eliminated, greatly reduced or postponed. But this does not happen without thoughtful planning. A brief description on these taxes is included below.

Gift Taxes

Gift taxation is the process of taxing certain gifts made during an individual’s lifetime. Note that it is the person making the gift who has the reporting and tax consequences, not the person receiving it.

The Internal Revenue Code distinguishes between reportable and non-reportable gifts. A non-reportable gift is a gift of $13,000 or less (as of 2009) made by one individual to any other individual in any one year. A married couple may give up to $26,000 to any one individual in any one year, without requiring the filing of a gift tax return. A reportable gift is a gift greater than $13,000 by an individual, or greater than $26,000 by a couple.

When you file a gift tax return, the amount gifted over $13,000 reduces dollar for dollar the tax-free estate “credit” used for federal estate taxes. You do not have to actually pay the government any gift tax until you have used up your credit, or until you give away over $1 million during your lifetime.

There are two special situations to remember in making gifts during your lifetime. An outright gift from one spouse to the other spouse is never reportable or taxable and the amount of the gift can be unlimited. A gift to a tax-exempt charitable organization does not reduce your tax-free credit.

Using reportable and non-reportable gifts to reduce estate taxes and accomplish a client’s beneficial intent is one of Nay & Friedenberg’s planning tools.

Estate and Inheritance Taxes

Estate and inheritance taxes depend on the size of your estate at the date of your death. Tax planning is an important part of estate planning if the size of your estate is over $1 million.

The amount of estate tax your estate will pay depends upon the year in which you die. Estate planners, politicians, etc., agree that the laws will be changed at some point in the future. Under the current law, if you die in 2009 with $4 million, your estate will owe federal tax on $500,000. However, if you die in 2010 with $4 million (or even more), your estate will owe no estate tax.

If you die in 2011 with $4 million, your estate will owe tax on $3 million. Your heirs could receive hundreds of thousands more dollars if you died in 2010 than if you died in 2011.

In any event, a married couple can establish a tax-planning trust to ensure that no estate taxes are paid until the death of the second spouse and to ensure that the couple maximizes the amount protected from estate taxes. With the proper planning, married couples can often transfer, free of estate taxes, twice as much as a single person. Nay & Friedenberg can advise how establishing a tax-savings trust can save your heirs hundreds of thousands of dollars.

If a couple’s estate exceeds the combined total of each spouse’s federal credit, additional strategies may be employed to reduce or eliminate estate taxation at the death of the surviving spouse.

One such strategy is to establish a charitable trust. You can set up a charitable trust so that you receive all income earned by the principal during your lifetime. Upon your death, the principal is distributed to the charitable entity, free of estate tax.

An irrevocable life insurance trust may also be employed to reduce the size of an individual’s estate, thereby reducing estate taxes by removing the life insurance policy out of the owner’s possession and giving ownership to the trust. An irrevocable life insurance trust may also serve as a means of creating funds to cover some or all of the estate tax burden at the death of the individual.

Generation-skipping Tax

A tax known as generation-skipping tax is seen in cases in which a trust or will passes an estate to beneficiaries more than one generation removed from the decedent— to one’s grandchildren or great-grandchildren, for example— bypassing the generation of one’s children. In 2009, generation-skipping tax only applied to amounts in excess of $3,500,000. Planning to avoid or reduce this tax requires the very highest level of sophistication.

Capital Gains Tax

Capital gains taxes will also be changing over time because of the 2001 tax law. For 2009, if you are giving someone property that is likely to increase in value or that was purchased for a lot less than it is worth now, you must consider the effects of capital gains tax. If you have an asset that is worth more when you sell it than when you bought it, the amount of gain can be taxed. This is a “capital gains tax.” With proper planning this tax can often be avoided or minimized.

If you have questions or concerns about specific Estate or Inheritance Tax issues, please don't hesitate to call us at 503.245.0894.