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Estate Planning 101 – Part 3

December 3, 2010

An excerpt from Follow the Money Weekly Radio with Jerry Robinson – 12/4/10

To hear the entire program, click here.

by John Bearss


Hi Jerry. Thanksgiving has come and gone and I hope you and all your listeners had a wonderful and safe time with your family and friends and remembered to thank God for all of the wonderful blessings and promises that he has given to us.

Over the last two weeks we talked about what estate planning is and who might need it.  We also talked about how to do it and where do you begin.  Today I would like to focus on another important factor that will help you develop a sound financial estate plan and that is the topic of how and what taxes affect your estate.

One of the largest potential expenses your estate may have to pay is taxes, and there are three categories of taxes.  The first category is the federal transfer taxes.  The second is state death taxes and the third category is the federal income tax.  Today we will focus on category one, the federal transfer taxes.

There are also three types of taxes inside of category one: the federal gift tax, the federal estate tax and the federal generation-skipping transfer tax.

Let’s start with the Federal gift tax.  This tax is imposed on property you transfer to others while you are living. Under the gift tax system, you are allowed a $1 million lifetime gift tax exclusion.  Keep in mind, any gift tax exclusion that you use during your lifetime effectively reduces the amount you can exclude on your estate at your death. Also, you are currently allowed to gift $13,000 per donee per year as a tax free gift under the annual gift tax exclusion. The lifetime gift allowance and the annual gift allowance are the two most common Federal gift tax rules and even though there are others we will not go into them here.

The second Federal transfer tax is the Federal estate tax.  In general this estate tax is imposed on property you transfer to others at the time of your death.

Unless the Bush Tax Cuts are extended, Estate tax rates could reach as high as 55 percent in 2011, which means that an enormous chunk of your estate may go to the federal government instead of your beneficiaries. If you want to preserve your estate for your beneficiaries, you’ll need to know how to minimize estate tax with respect to your property.

Under the estate tax system, you are allowed an applicable exclusion amount (formerly referred to as the unified credit) that reduces your estate tax liability. Also, there are exclusions, deductions, and other credits available that allow you to pass a certain amount of your estate tax free. You need to understand what these exclusions, deductions, and credits are and how they work to take full advantage of them.

Generally, estate tax must be paid within nine months after your death. To avoid depriving your beneficiaries of what you intend for them to receive, you should provide that specific and sufficient assets be set aside and used for this purpose. You should make sure these assets are kept liquid so that these expenses can be paid on time.

Although calculating estate tax can be complex, you should estimate what the amount of your estate tax may be, so that you can arrange to replace that wealth.

The third federal transfer tax you need to understand is the federal generation-skipping transfer tax also called GSTT. The GSTT is imposed on property you transfer to an individual who is two or more generations below you like a grandchild or great-nephew. Not surprisingly, the IRS wants to levy a tax on property as it is passed from generation to generation at each and every level. The purpose of the GSTT is to keep individuals from avoiding estate tax by skipping an intermediate generation. A flat tax rate equal to the highest estate tax then in effect is imposed on every generation-skipping transfer you make over a certain amount.

As you can see the three basic Federal Transfer taxes in category one can deeply impact the amount of your estate that will either go to the Federal Government or on to your heirs.

Next week we will continue on the topic of taxes as we talk about category two and category three, State Death Taxes and Federal Income Taxes.

I trust this financial insight has been helpful and I look forward to the next time when I can help you provide the foundation for a lifetime of financial independence.

About John Bearss: John R. Bearss is a Retirement Specialist with the Christian Financial Advisor Network. He has been helping clients and financial professionals understand financial strategies for 24 years.

Disclaimer: John Bearss is a registered representative of and does offer securities through Sicor Securities, Inc.  Lifetime Decisions Management, nor it’s representatives provide legal or tax advice.  Please consult your CPA or qualified tax advisor before making any decisions. Lifetime Decisions Management, Inc. is not a subsidiary of nor controlled by SICOR Securities, Inc.

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