Tax Planning

Most people spend a lifetime struggling to accumulate an estate but very little time planning how to keep it.  Good estate planning will address the protection of assets during life as well as at death and additionally will require paying attention to non-monetary aspects of our lives.  Even if Federal and State governments suddenly eliminated gift, estate and inheritance taxes, estate planning would still be needed and, barring permanent elimination of these taxes (as happened in 2010 in which there was no federal estate tax), each person with a substantial estate is exposed to significant tax loss, up to 45% of the total estate (No Ohio Estate tax) and, in some cases where generation skipping tax is involved, the tax can even exceed the value of the asset involved.  To begin to understand estate planning you must first understand that it is not an event which happens once and is finished but rather it is a process which addresses multiple objectives on an ongoing basis.  As circumstances change the plan may need to change. The most notable objectives of an estate plan will include the following:

THE MANAGEMENT OF ASSETS AND BUSINESS AFFAIRS DURING YOUR LIFETIME.
THE TRANSFER OF YOUR ESTATE TO YOUR CHOSEN BENEFICIARIES IN THE MANNER YOU DESIRE.
REDUCTION OF GIFT AND ESTATE TRANSFER TAXES.
PROVIDING ADEQUATE FUNDS TO PAY ESTATE TAXES AND EXPENSES.

Deciding who you wish to benefit and how is usually the simple part and may be all you need to worry about if your total assets (including insurance, qualified plan and IRA benefits) are under the Applicable Credit Amount.  This "Credit Amount" is more easily understood as the amount of property which each person may transfer during his or her lifetime or at death, without incurring federal tax (in addition to annual exclusions gifts). This amount applies to the total combined transfers made by a person during life and at death.  You can find the federal estate tax exemption (which changes due to inflation by clicking here Historical Estate and Gift Tax Rates.

If your estate is over the available exemption amount you will have a challenge to maximize the net amount you can retain for your family.  This requires planning and regular review.  There are many factors which can influence the final result but, contrary to common belief, the most important factor in minimizing the loss to your estate is not probate but the tax that is imposed on the transfer of assets.  It is important to focus on avoiding probate costs for those who do not have a federal estate tax problem, but for those who do estate taxes become much more important.  The tax impact can be expected to average 35% on most estates in excess of the exempt amount and the tax can be even higher up to 45%.  In the case of qualified plans and IRA's the tax (including income tax) can reach 60% or more while a Generation Skipping Tax problem can cost you more than the assets are even worth. This is hard to believe but it is true and once you understand the tax problem it becomes easy to understand why it is not the probate costs but the transfer tax which should drive most of your estate planning, though probate costs are certainly part of the equation.

As of January 1, 2013, the state of Ohio no longer imposes an estate tax on the transfer of assets for resident or non-resident decedents. The Federal tax is a tax imposed on the transfer of property, either during your lifetime as a gift or at your death.  Excluding Charitable, Marital and Annual Exclusion gifts, the tax applies to each dollar transferred which exceeds the applicable credit (lifetime exemption) amount.  The tax rates are graduated but Federal gift and estate taxes start at 18% and go rapidly to the top federal rate of 40%.  The high federal exemption eliminates state estate taxes for the majority of estates.  

In addition to considering Federal death tax you must never lose sight of the Generation Skipping tax (GST).  The effective tax, if it catches you, can be equal to the federal estate tax, effectively doubling the total tax involved.  If your assets exceed the exemption you need to be careful to avoid what could be grave financial danger.  Married couples may be able to achieve a double exemption.   Fortunately GST is not a problem for transfers to spouses or children, but any transfer to a grandchild or someone else in that generation or below must be carefully examined.