Death and taxes. Benjamin Franklin referred to them as the two certainties of life, and angry Americans often quote him when venting their frustrations about the huge sums they're paying to various levels of government.
Some may take comfort in the belief that death at least brings an end to taxes, but that's not always the case.
Depending on how much people own (their estate), they may have to pay the federal estate tax. And depending on the states where they live, their survivors may have to pay state inheritance taxes.
Everyone should find out whether his or her state levies an inheritance tax. However, one thing's for sure: all Americans, no matter what their states of residence, are subject to the federal estate tax.
Along with an estate's size, the level of estate planning done by its owner has a great influence on the amount of taxes paid.
Another factor is the owner's level of giving. A great deal of giving can be done while a person is alive and, as the old saying goes, those who give while they're living have the added benefit of knowing where their money is going.
Giving reduces the size of an estate, thereby lowering its tax liability. Current laws provide several options that givers can use to pass a lot of tax-free money to loved ones and nonprofit organizations.
One of those options is the $10,000 annual exclusion, which allows someone to give up to $10,000 per year to another person tax free. The recipient may be a relative or someone who's totally unrelated to the giver.
There is no limit on the number of people who may receive $10,000 per year. So, a person with five children could give each of them $10,000 tax free, for a total of $50,000 in one year.
If the giver has a spouse, the two of them can each give $10,000 to an individual, for a total of $20,000. If the recipient is married, the couple can give another $20,000 to the recipient's spouse.
For example, they could give a daughter and son-in-law $40,000 in one year.
With five married children, a total of $200,000 could be given on a tax-free basis in one year.
The giving possibilities with the annual exclusion are almost limitless. That's why some politicians would like to place a cap on this option. Fortunately, their efforts have been unsuccessful thus far.
Another giving option is the tax-exempt 501(c)(3) organization. Individuals, during their lifetime or at death, can give as much as they want to these organizations without paying any tax on their gifts.
Again, it would be better for individuals to do this giving while they're alive. That way, they can keep track of how well their donations are used.
In the case of spouses, the amount of money that can be given is limitless. For example, a husband with a $1 million estate could leave all of it to his wife and owe no estate taxes. This option is known as the unlimited marital deduction.
There also is an exemption that allows individuals to give $600,000 tax free to children or beneficiaries other than their spouses. Not surprisingly, some politicians have tried and, fortunately, have failed to cut this exemption in half.
The $600,000 exemption and the unlimited marital deduction allow gifts to be made while the giver is living or at death.
As an illustration, let's suppose an individual named John has an estate of $2 million. John wishes to keep all his money until death and never gives anything away. At death, he uses the unlimited marital deduction to pass all of his $2 million estate tax free to his wife Sarah. Because John never used his $600,000 exemption, it is lost.
Like her husband, Sarah gives nothing away. She also has a $600,000 exemption, and at her death she uses it to pass that amount on to her children tax free. But the remaining $1.4 million of the estate is now subject to estate taxes of more than 40 percent. Estate taxes range from 37 to 55 percent.
Obviously, John and Sarah could have done a lot more to avoid the estate tax. Let's assume, for example, that John gave away $800,000 to his children (in $10,000 annual increments) and a tax-exempt Christian school. His money helped the school build new classrooms and begin offering high school classes.
With his $800,000 in giving, John reduced his estate to $1.2 million. Using his $600,000 exemption, he established a bypass trust, and when he died all of that $600,000 went into the trust. The money in the trust was designated for his children, but it was still available to Sarah.
The remaining $600,000 passed tax-free to Sarah under the unlimited marital deduction. When Sarah died, that money was passed tax-free once again, to John and Sarah's children, under her $600,000 exemption.
John's $600,000, which he had set aside in the bypass trust, also passed tax-free to the children.
One important note about bypass trusts: they are subject to restrictions. Thus, couples should seek the advice of an estate planning attorney with good references.
Obviously, this article covers only a tiny portion of the many possibilities involved with estate planning. However, it does show how giving can be an effective tool for reducing estate tax liability.
Sadly, many people these days probably believe their estates aren't large enough to pose any tax problems. But a surprising number of them may be mistaken.
Any person leaving an estate of more than $600,000 to a spouse should be concerned because, when that spouse dies, only $600,000 will be exempt from estate taxes.
Considering the land and home values found in and around numerous cities, many Americans might be amazed to learn just how large their estates are.
Furthermore, their estates include such things as bank accounts, life insurance, furniture, jewelry, stocks and bonds, retirement assets, and businesses.
Thus, it's not surprising that a 1992 study by Cornell University showed that the current generation will transfer some $8 trillion to $10 trillion in wealth to its heirs. And if some politicians can persuade their peers to reduce estate tax exemptions, this tax will become a concern for many more people.