How can I reduce my estate tax liability?

Practical Estate Planning:
Seven Steps for Preserving Your Wealth

Every Estate Is Planned --
Either by You or by the Government

For most of us, our days are filled not only with raising families, managing careers and building businesses, but also with planning for a more secure financial future. Creating a balance among these major responsibilities is probably the greatest challenge we have before us. It's no wonder, then, that some things get overlooked and postponed. But there's one critical area of family and wealth management we can't afford to put off -- estate planning, the process of preserving for your family, charities or friends the majority of the wealth you've worked for all these years.

Who Qualifies as "Wealthy"?
It's in the Eyes of the IRS

Estate planning -- the process of preserving for your family, charities or friends the majority of the wealth you've worked for all these years.
If you're thinking that you're not wealthy enough to need an estate plan, better think again. While you may not consider yourself wealthy, once you've accounted for your home, investments, jewelry, retirement account and insurance policies, you may easily have accumulated assets that exceed the "Applicable Exclusion Amount" of $600,000 in 1997 (gradually increasing to $1,000,000 in 2006). And to the IRS, if you're worth over the Applicable Exclusion Amount, you're a wealthy individual; any amount over the Applicable Exclusion Amount is subject to estate taxes that may range from 37% to 60%.

Combine these taxes with state taxes and income taxes on retirement plan distributions (see chart, "Taxation Can Shatter Qualified Plans and IRA's"), and your estate can be reduced by nearly 65% of its value (if the majority of your assets are in qualified plans and individual retirement accounts). Essentially, your heirs may receive only thirty-five percent of all you've worked so hard to accumulate.

A Seven-Step Plan to Preserving Your Wealth

The estate tax structure can effectively "rob" you of up to nearly 60% of your estate, but if you plan today and follow these basic steps of estate planning, you can significantly reduce this tax impact.

Prepare a will. A will is a testament to your life's work. Review it periodically to be sure it keeps pace with changes in your circumstances or objectives as well as adjustments in tax laws. Marriage, divorce, newborn children, a move to another state or a significant change in your financial situation should be immediate signals to consider updating your will. Unfortunately, seven out of ten Americans die without a will and, consequently, the laws of their states decide the disposition of their assets and property.

Applicable Exclusion Amount Table

1997 $600,000

1998 $625,000

1999 $650,000

2000-2001 $675,000

2002-2003 $700,000

2004 $850,000

2006 $950,000

2006 $1,000,000

Use Your Federal Unified Estate and Gift Tax Credit. The IRS gives each of us (except nonresident aliens) a tax credit of $192,800 in 1997 which will gradually increase to $345,800 in 2006, the equivalent of the estate and gift tax liability on assets worth $600,000 and $1,000,000 respectively. Using this credit allows you to pass the first $600,000 of assets in 1997, increasing to $1,000,000 in 2006, to your beneficiaries free of estate and gift taxes. Gifting property equal to the Applicable Exclusion Amount during your lifetime can effectively reduce your estate by the value of the property and avoids estate tax on any subsequent appreciation and income earned on the property.

Monitor retirement plan assets. In most cases, determining the appropriate strategy for dealing with the estate and income taxation of qualified plans and IRA accounts depends on your objectives and the needs of your family. We recommend that you consult your attorney or tax advisor before taking any action.

Taxation Can Shatter Qualified Plans and IRAs
Retirement Assets		$1,500,000

Estate Tax^*		$792,426

Income Tax^*		$280,199

Total Tax		$1,072,625

Percentage Lost to Taxes		71.5%
^*Assumes an estate tax rate of 55%, and an income tax rate of 39.6%. Estate taxes ($792,426) are deductible for income tax purposes. For illustrative purposes only.

"Gift away" what you don't need. If you have sufficient income from a certain portion of your holdings, consider starting a gifting program. Lifetime gifts to family members or other individuals can not only reduce your estate and subsequent tax liability but may also shelter any asset appreciation from taxation. You are entitled to transfer up to $10,000* per person each year without incurring any gift tax; spouses together may gift up to $20,000* per person. (Additional gifts made directly to educational institutions for tuition or to medical care providers are also excluded from gift tax.)
Gifts to qualified charities may be exempt from gift tax. The value of charitable donations, including artwork, real estate and financial assets such as stocks, and any future appreciation of those assets, reduces the value of your estate. In addition, these charitable donations may qualify for current income tax deductions.
A special tax provision has been temporarily restored by Congress. This provision permits donors to private foundations to deduct the fair market value of gifts of appreciated publicly traded securities for income tax purposes from June 1, 1997 through June 30, 1998. (After June 30, 1998 the law may then provide that donors can only deduct the cost basis of such gifted securities.) This window of opportunity is fairly narrow. If you have ever considered establishing a family foundation and funding it with highly appreciated stocks, now may be the time to do it.
* After 1998, the annual exclusion gift amount may be increased based upon inflation indexing.

Keep enough assets liquid to satisfy estate taxes. Generally, the IRS demands that any estate tax liability be satisfied within nine months of the date of death. There are four sources from which funds can be obtained to pay estate expenses: cash reserves, loans, liquidation of assets or life insurance proceeds. Be sure your heirs aren't forced into the position of selling investments at the wrong time because of a shortage of liquid funds.

Have a trustee of an irrevocable trust purchase your insurance policy. Usually life insurance proceeds avoid probate and are exempt from income tax. However, they are subject to estate tax if you own the policy or have rights in the policy. Purchasing the policy within an irrevocable trust may prevent life insurance proceeds from increasing your estate tax liability.

Meet with your Financial Consultant. Discuss your estate-planning objectives, concerns and fears with your Financial Consultant so that both of you can develop a plan for effectively transferring wealth to your heirs. If you would like additional information, we would be pleased to meet with you, your attorney and CPA.

Estate Planning Red Flags

If any of the following statements apply to you, we recommend a thorough review of your estate plan with your Financial Consultant:

All or almost all of your assets are jointly held (i.e., nonsegregated).

You own property in multiple states.

You have substantial qualified retirement plan and IRA benefits.

You own life insurance outside of an irrevocable trust. (If a trust is irrevocable, you may give up rights to the trust property and cannot amend the terms of the trust.)