For the last several years, most Louisiana residents have not had to be concerned about the estates getting whacked by the federal estate tax when they die. Estates of people who died in 2011 and 2012 were entitled to benefit from the $5 million estate tax exemption.
However, that all is scheduled to change on January 1, 2013. The federal estate tax exemption will be $1 million starting next year. This will cause many more Louisiana families to be hit by this tax - which can cause as much as 55% of your estate to go to the IRS when you die. Of course, Congress and the President can change this but if there is no change, the exemption will be $1 million starting in 2013.
Here are a few key points about the federal estate tax that you should know:
- It's All Counted. Everything you own is counted as part of your estate for estate tax purposes when you die. This includes all your: IRAs, life insurance you own, annuities you own, vehicles, antiques, stock, 401(k)s, bank accounts, real estate, business interests, etc. Just because life insurance is a non-probate asset and your life insurance is exempt from income tax does not mean it is excludable from your estate for estate tax purposes.
- IRS Form 706. If you really want to know how the estate tax works, take a look at the United States Federal Estate Tax Return. You can google: IRS Form 706, and then take a look at the form and its vast instructions.
- Avoid Estate Tax at First Spouse's Death: Generally speaking, you can avoid federal estate tax when the first spouse dies by leaving your spouse the lifetime usufruct of your estate (in your Last Will) or leaving your estate in trust in a manner so that your spouse receives the income for life from your estate after you die. It's a little more complicated than this, but if you have no estate legal documents in place, your estate will pay tax at the first spouse's death if the first spouse to die's estate exceeds the exemption.
- Gifting to Reduce the Estate. You can donate $13,000 to as many people as you want to every year to remove assets from your estate before you die. Some families aggressively pursue this planning option, while others with large estates don't want to give up the control over the assets that's required when you donate your assets. Others - instead of donating outright to children or grandchildren - will gift into trusts to further protect the gifted assets.
- What the Super Rich Do. It's been widely reported that Bill Gates and Warren Buffett will leave the bulk of their vast estates to Bill Gates' charity. What you leave to a charity does not get hammered by the estate tax.
- Hiding It in the Back Yard. Please don't ask us to help you hide your assets in the back yard in an attempt to avoid estate tax - this is illegal. We only work with families that are in compliance with the appropriate IRS rules and regulations.
Estate tax planning is complex. You must work with someone who understands both the federal tax laws and how they are intertwined with Louisiana estate laws. The families that will win this game are the families that plan ahead, education themselves, and take the appropriate action to avoid this 55% estate tax.