Estate Tax a Concern for Wealthy Families
By Saghir Aslam
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities.)
The estate tax’s impending death is often reported, but unless congress acts, it’s still alive- at least for now. For affluent individuals who want control over what happens to their wealth after their death, that should be concern.
Understanding the basics. Like many taxes, the rules are complicated. Everyone has an “applicable exclusion” that protect a portion of his or her estate from the tax. For those who pass away in 2017, it’s $5.49 million. On a $10 million estate, for example, the tax may apply to $4.51 million ($10 million-$5.49 million). The current rate is flat 40% on an estate’s taxable value. If you’re not careful, you could make financial moves during your life time that will eat away at your applicable exclusion, possibly exposing more of your estate to the tax.
Married couples face added complexity. If you’re married, you may think that because there’s two of you, each with his or her own applicable exclusion, $10.98 million of your combined estate would be protected from the tax in2017. Not so fast. In fact. Without proper planning, only $5.49 million would be protected, and one of your exclusions could essentially be lost. This is one of the many places where the rules gets complicated. When a spouse dies, the law allows an unlimited amount to pass to the other spouse free from estate tax. That’s good news, but there’s a catch.
Assume each spouse has an estate worth $5 million and when one dies the other’s estate becomes worth $10 million. As a result, when he or she passes away, $4.51 million will likely be subject to estate taxes because one of their applicable exclusions was essentially “unused.” That’s why it’s important to consider a strategy to help ensure both exclusions are taken advantage of, such as:
• Credit shelter trust. With this strategy, the couple’s estate plans provide for an amount equal to the applicable exclusion to go into a trust instead of to the surviving spouse. This would prevent the surviving spouse’s estate from doubling in value. One of this strategy’s advantages is, because it is the part of the estate planning documents, it’s automatically implemented when one spouse passes away. On the other hand, it require pre planning and incurring the expanses of working with an attorney to prepare the appropriate documents.
• Portability election. The portability election makes it possible to transfer a deceased spouse’s “unused” exclusion to the surviving spouse, increasing the protected amount. This strategy let you avoid pre planning and the attorney’s fees, but if the executor of the estate of the first spouse to die fails to file the proper paperwork with the IRS within nine months after the death, the entire strategy will fall apart.
Work with a team. If you suspected your estate may be subject to the tax, it’s important to consult a team of legal, tax and financial advisors – especially you’ve worked hard all your life to build your wealth and don’t want a significant portion of it going to the IRS.
Some of the people don’t know but uncle Sam has made it very easy for the American public. Time and time again uncle Sam gave you a break and this particular case the best way to reduce your taxes are gift giving. Start gift giving at an early stage, as early in your life as possible. For example, I started my gift giving years and years ago.
This year husband and wife each can gift $14,000 that means uncle sam is giving you a break on $28,000 from the Estate Taxes. Lets say you have 3 kids thus you have saved $84,000. Lets go a step further, each one of the three kids also have 3 children each so that’s 9 more gifts you can make. So $28,000 multiplied by 9 , now you have taken out of your estate and gifted your grandkids $252,000 add to that what you gave to your children. That is $336,000, in one year uncle Sam is giving you a gift that you can help your children and grandchildren. I said to start early. Let’s say you have given in your lifetime for 25 years now you start to appreciate uncle Sam’s gift of $8,400,000.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)