10 tax-smart estate planning moves

"Since interest rates are so low, the question is, 'Can I do better investing the money than the interest rate of the loan?'" says Kirchick. "That's where the borrower could come out ahead."

5. Sell assets to your heirs 
Instead of making an asset loan, consider selling the property to your family. You can sell a house and make up to $250,000 ($500,000 for a couple) before owing any capital gains tax, says Sorkin. Sell within the same year of a death, and the surviving spouse can claim the full $500,000 exclusion.

Say you paid $200,000 for a house that's now worth $1.2 million. If your spouse dies, you can add (and exempt from capital gains) half the fair market value of the house ($600,000) to what you paid ($200,000), so that the capital gains tax meter starts rolling at $800,000. That leaves you a taxable profit of $400,000.

But if you sell the home within that same year, you can use the joint exemption of $500,000 from capital gains, says Sorkin, meaning you can sell your home for up to $1.3 million ($800,000 plus $500,000) without triggering capital gains.

Make that sale to a family member and you have now frozen the value of your home at the sales price, because only the note, and not the appreciating asset itself, is part of your estate. If you die before the note is paid, you can leave provisions to forgive the debt in your will.

This isn't a good option if you suspect there's the slightest chance your kids would kick you out of the family homestead. And for your protection, you should include a clause that will allow you to rent the home at the lowest fair-value rate.

6. Reduce your pension plan 
In terms of being taxable, "one of the worst assets you can have is a pension plan that has a tremendous amount of money in it," says Sorkin. He suggests that as you enter your 60s, figure out how much money you can take out annually without being bumped into a higher income tax bracket, as well as what you're going to need down the road. You don't have to spend it all; sock some away in another savings vehicle.
7. Watch your insurance 
Estate tax is not always an upper-income problem. If you have $2 million in life insurance, that alone could subject your estate to federal taxation. Landmark Financial's Hayes says the key is finding a way to keep the non-exempt amount out of your estate. And it's a lot easier if you have several policies that add up to $2 million, rather than a single policy.

The most-common strategy, he says, is to put $500,000 or more worth of policies in an irrevocable trust. But remember, says Hayes, the premiums have to count against that person's gift exclusions.

8. Buy insurance to pay your estate taxes 
Some insurance, however, could help at estate tax time.

"Create an irrevocable life insurance trust for the purpose of purchasing a life insurance policy and the proceeds are used to pay the estate tax," says Ric Edelman, author of "The Truth About Money."

"You should focus on this as soon as your net worth is above $3 million or $1.5 million if you're single."

The policies are a good buy, he says: "It can be pennies on the dollar for a high net worth family." Just be sure to buy permanent, not term, insurance, notes Edelman, because "we need to know this money will be there for the heirs, that it's something guaranteed."

9. Consider a second-to-die policy 
"It's a common tool that a lot of my clients use," says Sorkin. It's a chunk of money that pays out when the second half of the couple dies "and it's cheaper [than regular life insurance] because it's joint life," he says. Put it in an irrevocable trust so that the asset isn't counted as part of the estate. And remember that the premiums count against your annual gift exemption to the beneficiary.
10. Form a company 
People who hold substantial real estate often create a family company, either a limited liability company or limited liability partnership, says Sorkin.

"This form of gifting works extremely well for families who are land-rich and cash poor," says Sorkin. "Basically, they put the real estate into this partnership, and they can use their annual gift exclusion to make gifts of equity to their children."

Once the senior generation owns less than 50 percent in the company, they might even be able to discount the value of their company ownership, thereby reducing its value when it comes to setting an estate's worth, says Sorkin. The reasoning is that a non-controlling interest in a company is inherently worth less. But the IRS monitors discounting very closely, so Sorkin recommends you get an appraisal and be conservative in your estimates.

There are no estate taxes when the children inherit, but there could be some income tax, says Kirchick. And they can't convert assets into cash overnight.

"That's one of the rubs," he says, " you can't just liquidate [the company] when you need the money."

Dana Dratch is a freelance writer based in Georgia.


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