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Estate Planning for the Return of the Estate Tax

In our last post, we discussed a little bit about the current status of the federal estate tax and potential changes coming in the next few months. Here, we wanted to just mention a few general ideas about what individuals and families can do from an estate planning perspective in order to be prepared for the reintroduction of the estate tax.

The following tools and strategies are just a general idea of what you may be able to do. If you have specific questions or unusual circumstances to plan around, the best course of action is to talk to an estate planning professional. These issues can quite complex, and the last thing you want to do is make a mistake that will leave you open to large tax bills or other unintended consequences.

The first estate planning tool you might want to use is a gift. Generally, you are allowed to give money away tax-free to family members and others up to a certain maximum amount. This has the advantage of being easy and allows you to enjoy seeing your loved ones benefit from what you were able to pass on. Moreover, if you award the gifts in a certain manner and for certain purpose such as educational needs, you may be able to give even more money without incurring tax consequences.

Another tool you might utilize with an eye toward the estate tax is a life insurance trust. Because the estate tax may return with a lower exemption level, even a rather modest life insurance payout may end up being subject to the tax. To defend against that, you may want to set up a trust that will hold the life insurance proceeds for the benefit of the survivors, but also keep it outside the reach of the estate tax.

Finally, individuals can also utilize charitable donations as a means of reducing the size of an estate and avoiding the tax. Of course, setting up donations must be done correctly or they may fail before they can be completed.

Whatever your circumstances, it is never too early to begin thinking about putting together an estate plan, but when you do, make sure you seek out the help you need to avoid causing confusion and legal problems for those you leave behind.

Source: U.S. News & World Report, Size up your estate and do some tax planning, Kimberly Palmer 12/1/10

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