If you're in a high tax bracket, there are steps you can take to reduce your
current, or your eventual, tax burden - all entirely legal.
Some of these strategies mean more dollars into your own pocket. But some of
the best tax sheltering strategies require making gifts, with the result that
your family's wealth and income is increased in the aggregate.
Strategies for Family Asset Protection
Effective use of tax strategies, including proper estate planning, can save you
and your family hundreds of thousands of dollars. Think of this as wealth
protection, not just tax avoidance!
- You have children or grandchildren who work, but who aren't earning enough
to set money aside in an IRA. You can give them each $2,000 to jump start their
retirement program, using the annual gift tax exclusion.
- In fact, if you can afford to do so, you should give children and
grandchildren the maximum $10,000 tax free each year (indexed for inflation
beginning in 1998). They can use part or all of the gift to buy a life
insurance policy in your name - to help pay estate taxes later or to buy
out your surviving spouse's share of the business.
- If you're among the very high net worth group, you can make a one-time
transfer of $1 million ($2 million if your spouse contributes to the gift)
to grandchildren or great-grandchildren - free of the 55% federal generation
skipping transfer tax.
- You can transfer $625,000 (in 1998) to children tax free, and double that
amount if your spouse participates. That means a total savings for the family
of close to two hundred thousand dollars - money that would otherwise have
been paid in taxes.
Also, you can leverage that tax-free transfer by giving assets that will
appreciate over time - for example an equity interest in the family business,
shares of stock in publicly owned companies or real estate.
Paying Tax While You're Alive Can Save Money Too Let's assume you've exhausted
the unified estate and gift tax credit. It's still advantageous to make taxable
gifts to heirs before death - because of how the tax liability is computed.
The federal gift tax uses the net amount gifted to the family member for computing
the tax to the donor - but not the money used to pay the tax. The estate tax is
figured on the gross amount - including the money needed to pay the tax.
What About the Accumulations in Your Retirement Account?
Also, watch your retirement account accumulation. Your tax-deferred retirement
account balances can become the most heavily taxed of all your assets at
death - with the IRS taking 70% or more, when estate, deferred income and
capital gains tax, and excess accumulation penalty taxes are combined.
Here's one solution to consider. Assuming you want to do something for your
alma mater, or another non-profit organization, you're better off leaving your
retirement fund to the charity, while leaving your other assets to family heirs.
