Plan ahead for Estate Tax

You've built a successful business and, even with the market's tumbles, have more than enough set aside for an enjoyable retirement. How can you pass more on to your kids and less to Uncle Sam?

While you've been taking care of business, the clock has been ticking on the Economic Growth and Tax Reconciliation Act of 2001. Unless Congress takes action, the threshold estate tax exemption will drop to $1 million for and individual and the peak gift and tax rate will jump to 55% at the end of 2010. (The individual exemption is set at $2 million this year and will go to $3.5 million in 2009, with a top tax rate of 45% for both years.) Pundits have labeled 2010 the year of "throw Momma from the train."

Given the current state of the economy and the national debt, even the pundits have stopped trying to predict how Congress will act. For every business executive who labels it a "death tax," there is another, like Bill Gates Sr., who call the estate tax fair, arguing that the services paid for with taxpayer dollars make it possible to become wealthy in the U.S.

So, how do you protect your assets while Congress makes up its mind? You do have some options.

Gifts

If you are comfortable reducing the size of your estate, you can make gifts now to family and friends. You can give as much as $12,000 in any one year to an individual without trigging the federal transfer tax. This is the simplest way to reduce the size of the estate, minimizing the tax repercussions.

Trusts

There are several estate planning options that will provide you (and your spouse) a way to outlive your money and still provide for your heirs. A credit shelter or bypass trust can help a couple take advantage of the estate tax credit and transfer up to $4 million in assets to your heirs free of estate tax in 2008.

A Qualified Terminable Interest Property trust can provide the surviving spouse with a lifetime income and still designate who will receive the property after both spouses have died.

Another widely used option is the life insurance trust. There are not only irrevocable trusts and also more flexible vehicles available to you.

If you would like to leave something to a charity whose work you admire, there are also several types of trusts that will provide an income to you or someone you designate, while providing for the charity at your death. You can reduce the size of your taxable estate and give the charity a chance to thank you.

There are gift and trust vehicles for a multitude of situations and needs. The first step toward a better future for you and your heirs is in the direction of a qualified financial planner who can review them with you.