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Keep Your Estate Plan on Track

For today's business owner, death can mark the beginning of a significant tax problem. The investment and sweat that went into building your business year after year could add up to a whopping federal estate tax bill for your heirs – up to 40% in 2016 of the combined value of your company and other assets.

With careful estate planning however, there are still ways to reduce the estate tax burden on your loved ones, while keeping the business intact. The following gives an overview of some available estate planning options.

Marital Deduction

One common estate tax reduction strategy is the so-called "marital deduction." This allows you to leave an unlimited amount of assets to your surviving spouse tax-free for federal estate tax purposes. Marital deduction bequests may be outright or in trust. A trust may be needed if significant assets are involved and professional management and administration are desired. Also, a trust may afford protection against the demands of relatives and creditors. This deduction must be used carefully, however, as using it to the fullest extent possible may adversely affect the surviving spouse's estate tax situation. Note also, if you and your spouse are non-U.S. citizens, special requirements must be satisfied for the marital deduction to apply.

The Estate Tax

With proper use of the marital deduction, no estate taxes need be owed upon the death of the first spouse. But there's a limit on what can be passed estate tax-free to other heirs, either as gifts during your lifetime or from your estate. In 2016, the estate tax credit allows each spouse to exclude up to $5.45 million in value from a taxable transfer. The gift tax exemption for 2016 is also 5.45 million.

Sizing Up Your Estate

At first blush, the amount which is exempt from estate taxes – currently $5.45 million – may sound like a huge sum. Many business owners mistakenly assume they have less than that and figure no special estate tax planning is needed. Unfortunately, they tend to undervalue their assets or fail to take all of them into account. You may have accumulated several hundred thousand dollars of equity in your home. The value of your company, rental properties, your pension plan and other savings are also part of your estate, as is your life insurance policy if you own the policy or have incidents of ownership in the policy (such as retaining the power to change the beneficiary) at your death.

Even if you don't consider yourself wealthy, it's easy to see that $5.45 million-plus in assets is quickly accumulated. If you and your spouse had combined assets of less than $5.45 million when your will was first written, but now exceed that amount, it's likely you'll need some estate planning.

Credit Shelter Trust

Credit shelter trusts still remain relevant in some situations, from their usefulness to shelter future growth from taxation for very high net worth couples and to preserve the Generation-Skipping Tax exemption (which is not portable), to their utility for state estate tax planning. In addition, the use of trusts in general will remain relevant for many non-tax reasons, especially asset, divorce, and spendthrift protection. The bottom line is that with the estate tax laws, especially portability of the estate tax exemption, it may be time to bypass the Credit Shelter Trust for the majority of Americans.


In 2016, a surviving spouse can utilize his or her own $5.45 million estate tax exemption along with any of the $5.45 million not used by the deceased spouse. This exemption could not be shared in the past. Before this change in the law, the only way a couple could use each other's exemption was by creating a credit shelter trust in advance; these trusts also required that couples hold property separately, while most couples own property jointly. With portability, it does not matter if assets were held jointly or separately. But to qualify for portability, you have to promptly file an estate tax return no matter how little the first spouse had. The surviving spouse then receives any of the unused $5.45 million exemption under the new portability rules even if the first spouse had no estate, a valuable tax break for the surviving spouse if he or she either had $10.9 million in his or her own name or later acquired that much.

Transferring Gifts

Another way to reduce estate taxes is by making lifetime gifts. You can reduce the size of your estate by giving $14,000 worth of assets each year to as many people as you want, without eating into the $5.45 million exemption. A husband and wife can transfer $28,000 this way every year – $14,000 per donor – to each recipient. The tax law adjusts the $14,000 annual exclusion for inflation.

Once you make such a gift of cash or other assets, any future appreciation is also removed from your estate and escapes federal estate taxes. That's why you may want to consider giving assets away that are expected to increase in value between now and your death. It may mean a bigger estate tax savings.

Life Insurance Trust

Life insurance proceeds become part of your estate and are subject to estate taxes if you own the policy or have incidents of ownership in the policy at your death. But by setting up an irrevocable trust and making it the original owner and beneficiary of your insurance policy while you're still alive, the proceeds may be kept out of your estate – which means estate tax savings.

After the trust is established, you can make yearly payments to the trustee who, in turn, can pay the premiums. The proceeds of the policy may be held in trust and made available to provide income to your spouse and children, or anyone else whom you designate in the trust document. The cash in the trust may be used to pay estate costs on a very tax-efficient basis.

Entrepreneurs tend to be do-it-yourselfers. But estate planning is an area where the solo approach could be risky. There are many ways to run afoul of the rules. In planning your estate, seek the advice of an experienced financial planner who is knowledgeable about closely held businesses.


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