If you are not aware of the extent of the federal estate tax, the details may come as something of a shock to you. The powers that be are potentially poised to consume an enormous portion of your resources after you pass away, and as a case in point, look no further than the estate of the entertainment impresario Dick Clark.

Clark passed away a very wealthy individual, with an estate that is estimated at well into the hundreds of millions of dollars. The estate tax exemption is currently $5.12 million; this is a drop in the bucket for somebody with the kind of wealth that Dick Clark had at the time of his passing.

The maximum rate of the estate tax this year is 35%. So, the heirs to the Dick Clark estate are faced with the prospect of parting with 35% of  hundreds of millions of dollars.

It should be noted that as confiscatory as this may sound they’re getting off easier than they might have had Clark survived until next year. At the end of 2012, the top rate of the estate tax is scheduled to rise to 55%, and the exclusion is set to be reduced to $1 million.

The good news it is that there are steps you can take to reduce your estate tax liability, and we have to think that Dick Clark was prescient enough to plan his estate accordingly.  If you would like to do the same, simply take a moment to arrange for a consultation with an Ashland KY estate planning lawyer.

The Potter Law Firm is a member of the American Academy of Estate Planning Attorneys.

Taxes are controversial, and though most people accept that tax revenue is necessary to support our societal infrastructure, you probably don’t want to be taxed at every turn, and you probably don’t want to be taxed twice on the same income.

With this in mind let’s take a look at the federal gift tax. You may not realize that some gifts that you give to your loved ones are taxable. The reason why you don’t get a bunch of IRS bills in your mailbox around the holiday season is because there is a gift tax exemption.

This exemption is unified with the estate tax exclusion. So when you combine the value of all the gifts that you gave during your life using this unified exclusion with the value of your estate you are going to come up with a number. If this amount exceeds the unified gift/estate tax exclusion amount, the amount in excess of the exclusion is taxable.

So, let’s say that you take stock of your assets, find that you have more than you need, and would like to give a significant gift to each of your children. Even though these assets are what you have left over after paying taxes, these assets may be taxed yet again as gifts. So, you may want to consider the tax implications before just writing out checks.

Indeed, there is more to generosity than meets the eye given the realities of the tax code. If you are interested in making substantial gifts to loved ones in a way that protects your family, contact an experienced Ashland KY estate planning lawyer.

The Potter Law Firm is a member of the American Academy of Estate Planning Attorneys.

Being taxed is not something anyone particularly relishes. But when you are taxed more than once on the same money it can be especially disconcerting. This is what we are looking at with the federal gift tax and the estate tax.

The possessions you have were accumulated with resources that you had left over after you paid income tax, self-employment or payroll tax, sales tax, property tax and any number of additional taxes. The same can be said of gifts. So a lot of people view the estate tax and the gift tax as instances of double taxation.

Getting taxed twice on the same resources is bad enough, but if you were to leave an inheritance to your children and they subsequently left the resources to their children, another round of taxation could be imposed.

One way to mitigate this steady asset erosion is by the creation of a generation-skipping trust. To a large degree the name explains the trust: You name your grandchildren as the beneficiaries rather than your children, “skipping” a generation.

However, your children can still benefit from assets that have been conveyed into the trust. They can receive distributions of income derived from the trust and they can use property that is owned by the trust. However, the assets in the trust are protected from claimants against the children.

Upon the death of the children the grandchildren assume ownership of the trust and in the end two generations enjoyed trust benefits while just this one instance of taxation was imposed.  But what out for the generation-skipping transfer tax as you are doing this planning.

The Potter Law Firm is a member of the American Academy of Estate Planning Attorneys.

The subject of the estate tax is hotly debated in some circles and there are those who feel as though this federal levy should be repealed. In fact, there have been several bills introduced into the House of Representatives recently that call for a repeal of the estate tax.

 This tax is often called the “death tax” and when you look into it you can see why. The resources that are going to comprise your estate were accumulated after you paid taxes. If you take some of your after-tax earnings and place them in the bank they are not taxed again during your lifetime just because you have it.

 But if your savings are sufficient, when you die and pass them on to your loved ones they are subject to the estate tax. The only thing that changed is that you died. So in a very real sense this is a tax that is imposed upon you because you passed away, thus the term “death tax.”

Aside from the fact that the estate tax is imposed on resources that have already been taxed, it carries a rate that many people find to be excessive. Right now that rate is 35%, but it is scheduled to rise to a rather jaw-dropping 55% in 2013. Plus, it is selectively imposed rather than being a tax everyone must pay and this is another reason why many people call for a repeal.

 Those who would like to see the estate tax repealed make a pretty strong case. However, the estate tax has been around for quite some time and there have been those who have called for a repeal all the while.

 The reality is that the tax exists and you have to prepare for it in advance to mitigate your exposure. The best way to do that is to get together with an experienced Ashland or Northern Kentucky estate planning attorney to devise a plan that provides you with maximum estate tax protection.

The Potter Law Firm is a member of the American Academy of Estate Planning Attorneys.

Many people are truly amazed when they hear about the details of the federal estate tax. For one thing, this is a tax that is only imposed on some people and who they are varies in a rather random manner.

This is due to the fact that there is an estate tax exclusion, the amount of which changes regularly. At the present time it stands at $5 million, but under current laws when 2013 rolls around the estate tax exclusion will go down to just $1 million.

Right now the rate of the tax is 35%, but in 2013 it is scheduled to go up to 55%. So if you pass away on New Year’s Eve in 2012 with $5 million your family will pay no estate tax on the federal level. But if you pass away on the next day with the same $5 million, $4 million of that will be taxed at a rate of 55%.

As you can see, it is very important to be proactive about gaining estate tax efficiency. If your home is pushing your estate above the exclusion amount, you may want to consider the creation of a qualified personal residence trust.

With these trusts you name a beneficiary who will inherit the property eventually and you state a term during which you will continue to live in the residence. By creating the qualified personal residence trust you remove the value of the home from your estate.

The taxation does not end there unfortunately. There is a gift tax in place that carries the same rate as the estate tax, and funding the trust would constitute a taxable gift.

However, this strategy is effective because the taxable value of the home is reduced by the interest that you retain in it during the period of time that you reside there after placing it into the trust. In the end the taxable value will be much less than the fair market value of the home, and considerable tax savings will be the result.

The Potter Law Firm is a member of the American Academy of Estate Planning Attorneys.

One of the things that you should keep in mind when you are planning for the future is that everything is connected. Estate planning is by its very nature connected to retirement planning because your legacy is going to be impacted by your expenses and the overall financial decisions that you make after you retire. With this in mind, you have to get a handle on the expenses that you anticipate, evaluate your projected income, and create an intelligent, holistic plan for the future.

To this end it is a good idea to be aware of the goings-on in Washington that may have an impact on senior citizens. Right now there is a congressional super committee in place that is hatching a plan for reducing the federal debt by $1.5 trillion over the next 10 years.

A lot of people are not aware of the fact that over a third of federal spending goes toward funding Social Security, Medicare, and Medicaid. All of these programs are relied upon by senior citizens. So if the super committee has to make cuts, these programs may be in the cross hairs.

Another thing to consider with regard to austerity measures is the future of the estate tax. As the laws stand at the present time the estate tax exclusion is going to be reduced to $1 million in 2013, and the rate of the tax is set to rise to 55%. Because of the fact that we are indeed in debt, it may be difficult for people who are in favor of a reduction in the estate tax to make their case, especially when they may be pushing for cuts to these popular programs for seniors at the same time.

These are indeed interesting times in the estate planning community and there is a good bit of uncertainty regarding the future of the estate tax and entitlement programs for seniors. The best way to proceed is to work with an estate planning attorney to devise an intelligent and informed plan and be prepared to make adjustments as relevant changes come down the pike.

The Potter Law Firm is a member of the American Academy of Estate Planning Attorneys.

Time marches on, and as it does changes invariably take place and a lot of them are going to impact your estate plan. Some of these twists and turns are specific to you and your own life. Divorce and remarriage are prime examples, and these are very common occurrences during our current era.

But there are other events outside of your personal control can be relevant to your ongoing estate planning efforts. One of those is changes to the estate tax.

As of this writing the maximum rate of the estate tax is 35%, and the estate tax exclusion is $5 million. These parameters are in place due to the enactment of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010.

This act is going to sunset at the end of next year. Under the existing laws, the estate tax exclusion is going to be reduced to just $1 million after the expiration of this tax relief act. Accompanying this reduction in the exclusion amount will be an increase in the estate tax rate. Instead of the 35% that we are faced with on this day, the maximum rate of the estate tax will go up to a whopping 55% at the beginning of 2013.

What this means to you is that if Congress does not act, your estate is worth more than $1 million, and you have no reason to expect that you will be passing away before the end of next year, you may want to take action to gain estate tax efficiency. To gain an understanding of the options that are available to you in response to these pending estate tax changes, make an appointment to speak with an experienced, licensed estate planning attorney.

The Potter Law Firm is a member of the American Academy of Estate Planning Attorneys.

Under current law, the present is a wonderful time for the wealthy to gift.  Many wealthy people are taking advantage of current legal conditions to pass along significant wealth now as opposed to waiting until death.

However, there is an important caveat:  you should only gift assets that you’re completely sure you will never need.  If in doubt, do not gift.

For those with excess wealth, current law provides excellent incentives for gifting now.

• For example, in 2011 and 2012, you can gift $5,000,000 using your exemption and without incurring any transfer tax (i.e. gift tax.)
• This is $10,000,000 for married couples.
• The lifetime exemption amount returns to only $1,000,000 in 2013 and may not return to an amount as high as $5,000,000 any time soon.
• In all states that have abolished the rule against perpetuities, assets can remain in family dynasty trusts for generations.
  • This means that family dynasty trust assets will not be subject to federal estate tax or generation skipping tax in future generations.
  • Often life insurance is owned by family dynasty trusts which leverages the federal estate tax and generation skipping tax.
  • Assets held in trust can be shielded from the claims of beneficiaries’ creditors.  In other words, the vast wealth accumulates without the same risk from lawsuits.
  • The Obama administration’s 2012 budget proposes that family dynasty trusts be limited to 90 years; but, trusts already in existence will be grandfathered under current law.
  • It is wise to take advantage of legal and tax benefits when available because they can be taken away at any time.

The family dynasty trust is not for everyone, but you don’t need to be a Rockefeller or Gates to have one.  If you have significant assets that you would like to gift to loved ones now, consult with a qualified estate planning attorney.

The Potter Law Firm is a member of the American Academy of Estate Planning Attorneys.

No one wants to lose half of the value of their life insurance to the federal estate tax.  But that is exactly what can happen if you don’t plan carefully.  You’re in luck because the federal estate tax is often a voluntary tax.  You volunteer to pay by not planning.  We suggest that you plan and avoid the federal estate tax.

• Unified Credit – Each individual can pass a certain amount during his lifetime or at death without paying federal estate tax.  This amount is called the unified credit.

• 2011 and 2012 – In these two years, the unified credit is $5,000,000 per individual.

• 2013 and beyond – Then, the unified credit returns to $1,000,000 and many families will be affected unless Congress takes action to protect families.

• Your Estate – The federal estate tax is a transfer tax on all the assets that you own at your death, including your real estate, retirement accounts, bank accounts, investment accounts, business interests, and life insurance.

• Tax Rate in 2011 and 2012 – 35% of every dollar over $5,000,000.

• Tax Rate in 2013 and beyond – More than 40% of every dollar over $1,000,000.

• The Solution – Because your estate includes everything you own at your death, you can protect the proceeds of life insurance by keeping the policy and the proceeds out of your estate.  You do this by having an Irrevocable Life Insurance Trust own the life insurance policy.

• How it Works in a Nut Shell

• Your estate planning attorney designs and drafts an irrevocable life insurance trust
• You execute the trust, and the trustee of the life insurance trust applies for life insurance on you and opens a checking account
• You make a gift to the trust by depositing money into the trust’s checking account; the trustee notifies trust beneficiaries of their right to withdraw the gift (known as Crummey notices), and uses the gift that is not withdrawn to pay life insurance premiums.
• When you die, the proceeds are out of your estate and pass in trusts to your beneficiaries.

If you have questions about how to protect life insurance proceeds from the federal estate tax, consult with a qualified estate planning attorney.

The Potter Law Firm is a member of the American Academy of Estate Planning Attorneys.

Federal estate taxes are transfer taxes due when the assets of a deceased person pass to another person or entity. If you’re like most people, you’ve heard estate taxes referred to as the death tax and you know that there’s a new estate tax law, but you don’t know what the new tax law means to you. Will you have to pay any estate taxes?

The new estate tax provisions of the Tax Relief, Unemployment Insurance Act became law on December 17, 2010. Everyone is affected by the new estate tax law, but that doesn’t mean that you’ll have to pay estate taxes.

Actually, in 2011 and 2012, very few people will have to pay estate taxes because each individual gets a free pass (or an exclusion) on the first $5,000,000 transferred to another person. The amount is $10,000,000 for a married couple.

If you are in charge of the estate of someone who died in 2010, consult with a qualified estate planning attorney before filing estate tax returns and settling the estate. There are important tax decisions that must be made with the guidance of a professional.

The true challenge awaits us all in 2013 and beyond. The new estate tax law sunsets, the exclusion amount reverts back to only $1,000,000, and that amount is not doubled for a married couple without sophisticated estate planning. With the exclusion on the estate tax set at $1,000,000, a lot of people will be paying estate taxes if they don’t have good estate planning that takes into account the changing rules.

For most people, estate taxes are a voluntary tax. Only those who don’t plan pay them. Consult with an estate planning attorney to see how you and your estate will be affected by estate taxes.

The Potter Law Firm is a member of the American Academy of Estate Planning Attorneys.