Pete Pichaske, The Daily Record Newswire
Some call it tax avoidance; others prefer the term tax compliance. By whatever name, finding ways to ensure that more of your assets go to your heirs and less to the government is a popular industry.
Ways of reaching that goal range from the simple to the complex, according to local wealth management advisers and estate attorneys. The simpler are fairly common, the more complex tend to be the province of the one percenters.
The most basic tactic is the annual gift exclusion, which allows everyone to give each of his children or grandchildren — or anyone else he cares to — up to $14,000 a year tax-free. That’s $28,000 per child per couple, and the money can be placed in a trust for use later.
“If you start the process early in your life, a whole lot of your estate can be passed that way, without taxes,” said Tom Byers, a tax partner at Ellin & Tucker, an accounting firm.
Another relatively simple and popular maneuver is to pay for a child’s education or medical expenses. If the money is paid directly to the school or to the hospital, there are no limits on how much can be spent. While the bills paid are typically a child or grandchild’s, they could be anyone’s.
Similarly, you can fund someone’s college costs by putting money in a 529 plan — post-secondary savings plans that are not subject to federal and most state taxes. Donations are limited to $14,000 per year, but you can put in five year’s worth — $70,000 — in one year, according to Howard “Buddy” Goldman, a wealth management adviser with Northwestern Mutua.
Then there are the more sophisticated and complex maneuvers — what estate attorney Robert Horne, with the aw firm of Adelberg, Rudow, Dorf & Hendler, called “an alphabet soup of trusts.”
Among them: ILITs (irrevocable life insurance trusts), special trusts that protect life insurance proceeds from estate taxes; GRATs (grantor retained annuity trusts), which allow you to make large financial gifts to family members without paying a gift tax; FLPs (family limited partnerships), in which, typically, parents give children a minority portion of a business or property and, because that share lacks control or marketability, the gift tax paid on it is lower than its dollar value; and, QPRTs (qualified personal residence trusts), used to move a residence out of your estate at a low gift tax value.
“These are tried and true tactics that really work,” Horne said.
What does not work, estate planners say, is keeping too much money in qualified retirement plans such as an IRA or 401(k), which are subject to both income and estate taxes.
“Qualified plans are a wonderful place to have money in while you’re alive, … but it’s a terrible place to have money when you die,” Goldman said. It’s not unusual to see an IRA or 401(k) that’s subject to a 70 or 75 percent tax, he said.
One way around that, Goldman said, is to move excess IRA or 401(k) money into an ILIT, which will go to your heirs free of such taxes.
Some estate avoidance maneuvers are especially popular in Maryland, experts say, because it is one of only about 15 states with an estate tax. It also is one of only two states in the country with both estate and inheritance taxes, according to Goldman.
For those reasons, he said, some especially wealthy people take the extreme tax avoidance measure of moving to another state.
“One of the reasons people may move to Florida is the weather, but another reason is it’s more of a tax-favorable state to die in,” Goldman said. “You could save hundreds of thousands of dollars — if you’re really wealthy, maybe millions of dollars in taxes.”
One final tip for those who want to reduce the taxes on the assets they leave behind: Take a nice, long, expensive vacation.
“I tell people to spend their money,” Goldman said. “They worked hard for the money, so enjoy it. The more they spend, the less is in their estate.”
