Thursday, April 25, 2024
League of Power

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How The Wealthy Protect Their Money

Being known as a money saving expert has its advantages. I get asked to report on a lot of fun topics and attend a number of parties where I get to rub elbows with some supremely successful people.

Keeping up with all the rule changes and laws is tough when it’s not your main focus. My inbox is full of questions from bewildered readers trying to figure out money issues like IRA rollovers and conversions.

One issue that seems to top reader’s lists is estate planning, essentially everyone wants to know how they can pass down assets to their heirs without Uncle Sam taking a big bite out of the inheritance.

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For 2011 and 2012 only the U.S. government has given Americans a golden opportunity to pass on wealth to their children and friends at an immense “discount.” Congress has set the estate tax rate at 35 percent of a taxpayer’s estate, with an exemption for the first $5 million of an individual’s estate and $10 million of a couple’s estate from taxation.

In previous years the tax rate has been as high as 77 percent (from 1941 to 1977), although more recently it has been set at 55 percent on estates that exceeded $1 million.

But for all the attention being paid to estate taxes a lesser known change took effect this year that is making taxpayers with sizeable estates rethink the way they in which they pass down assets to heirs.

It’s called the lifetime gift tax exemption. Essentially this new rule allows you to give away up to $5 million ($10 million for married couples) over your lifetime to an individual or charity without ever paying any federal tax on the asset.  In years prior, the lifetime exclusion on gifts was only $1 million dollars.

In addition to the significantly higher lifetime cap on gift tax exemptions, individuals can give tax-free gifts up to $13,000 per year ($26,000 for couples) to as many individuals as they want. So say you and your spouse want to give gifts this year to your two children, their spouses and your four grandchildren (a total of eight people). Since you and your spouse can give up to $26,000 to any individual, you both would be able to give up to a total of $208,000 ($26,000 times eight people) per year to these heirs.

It’s a pretty significant way to help out your descendants while reducing the amount of taxable assets in your estate. A lot of times heirs are forced to sell businesses or property to be able to cover the huge tax bill that comes due after a family member dies.

The  exemption historically has not been as large as the estate tax exemption. Back when the gift tax exemption was significantly lower than the estate tax exemption, it was cheaper, tax-wise, for people with significant estates to give away their money after they died. Now, there’s just as much incentive to give your estate away during your lifetime.

For example, if you left $5 million in your estate and it grew to $20 million, that $20 million would be subject to federal estate taxes. But if you were to give $5 million to an heir today, no matter how that gift is eventually treated for estate tax purposes, any future gains on the $5 million will not be considered taxable assets by the government. You see the advantages?

While the federal government has given taxpayers a temporary estate tax reprieve, the states have not. More than a dozen states impose their own estate tax far below the federal government’s $5 million exemption, another reason to consider making gifts now to reduce the size of your estate. Residents of Main, Maryland, Massachusetts, Minnesota, New Jersey, New York, Ohio, Oregon, Rhode Island, Washington D.C., Connecticut, Illinois, Vermont and Washington should consider this money saving tactic.

This tactic should also be considered by anyone who owns a business that makes over a million a year.  If you wish to pass the business down to your children when you die, now is the time to put those plans in place. Don’t worry if you are not yet ready to give up control of your business, you can set up a trust and name your children as beneficiaries.

This approach is also monetarily advantageous to people with jobs that are at higher risk for lawsuits. People like doctors, lawyers, financial advisors, commercial real estate holders, and other business owners can benefit by moving assets to heirs, away from plaintiffs that want to get their greedy hands on your hard earned assets.

Same-sex and unmarried couples can also benefit from higher gift tax exemptions. Spouses can give unlimited amounts to each other without any gift tax consequences, unmarried couples cannot. This is a way for them to pass down their assets without Uncle Sam taking away a significant portion of your money.

If you believe your assets will never reach $5 million in your lifetime, you might feel as if this post on the gift tax is irrelevant to you.  However, you should still keep these tactics and tips in mind because these money saving principles apply to much smaller estates as well.

If Congress does not act, the $5 million exemption will reset to $1 million on January 1, 2013. Most middle-class American’s assets can easily reach above the $1 million bench mark. Regular savings into your retirement plan, a paid-off house, any inheritances, plus a life insurance policy can quickly push your estate well over the $1 million mark.

It is in your best interest to take advantage of these tax rules before they end next year, even if you are twenty or thirty years away from passing on.

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Keeping Money In Your Pocket,

Nancy Patterson


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