41. Estate Tax Planning

Generally, the primary objective of estate planning is to arrange the decedent's affairs in such a manner that at his or her death, as much property as possible passes to his or her heirs while as little as possible is lost to taxes. One of the best ways to achieve this goal is to plan in advance for the estate tax--even though at present it may seem distant and remote.

One way to decrease estate taxes and pass the property on to the decedent's heirs is the use of lifetime gifts. A donor can make a gift of up to $10,000 to each of an unlimited number of donees per year without incurring any gift tax liability. If the donor elects to "split" the gift with his or her spouse, the amount is increased to $20,000 per donee. By giving his heirs lifetime gifts, the donor removes the gift property from his estate, thereby lowering the estate tax liability. The I.R.S. does have special rules regarding gifts made during the three years prior to the decedent's death.

A second way to reduce estate taxes is to reduce the amount of taxes due on the decedent's gross estate below the applicable Unified Credit Amount. If this can be done, the decedent will pay no federal estate tax. The Unified Credit Amount increases each year until 1987 according to the following schedule:

…..YEAR……….CREDIT AMOUNT……TAX BASE

…..1985……………$121,800…………….$400,000
…..1986……………$155,800…………….$500,000
…..1987……………$192,800…………….$600,000

After the decedent's death, the estate executor can lower the amount of estate tax to be paid by taking advantage of several estate tax deductions. Generally, the estate is entitled to a deduction for the value of any property passing to the decedent's surviving spouse or to a qualified charity. There are also deductions available for certain administrative expenses, funeral expenses, and taxes paid by the estate.

Even if the decedent takes advantage of these methods there still may be some estate tax due. A common problem is that the estate is "cash-short" and the executor is forced to sell some assets to raise the cash needed to pay taxes. An effective way to avoid this difficulty is for the decedent to purchase life insurance. The death benefit of the policy provides the executor with the cash needed to pay taxes and the various administrative costs of the estate. Additionally, the estate will receive the proceeds of the policy income tax free.

Tax reference verification 1-800-829-1040

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