TAX Alert! Big Change Coming January 1, 2011 … How Can You Legally Disinherit the IRS?

From the Desk of San Diego Trust Attorney, Kristina Hess…

Hey Californians and San Diego families, Kristina Hess here, on estate planning, and I have a really important message for you.

You ready?

Coming January 1, 2011, the Bush estate tax cuts will have expired…. what that means for you, is that beginning in January, when someone dies, 55 cents of every dollar over $1 million will go to Uncle Sam (the U.S. government).


Yes, it is a significant tax!

So, when you die, or your loved one dies, the IRS could stand to inherit a lot of money from you and your loved ones.

I don’t know about you, but if there was a way to legally, ethically avoid giving the IRS over half of my estate, I would be interested!

Are you?

Ok, so here goes…

The first line of defense for married couples in the state of California is to have a joint living trust that is set up properly.  When you establish a joint living trust and it’s set up the right way — you can double the amount you can pass to your children or loved ones tax free.  So, what this means for married couples is that instead of being able to pass only $1 million tax free, and paying 55 cents on every dollar over that amount, you and your spouse can pass $2 million to your children or other loved ones tax free!  Double the amount you give to loved one with a joint trust!

Yes, that’s right, just by setting up a joint living trust the right way (buyer beware, I have reviewed trusts created online that don’t do this!) you eliminate $550,000 in estate taxes!

Ok, so it’s worth saying that you cannot do this with a simple will.

Ok, so that’s step number one, and that’s critical to have a joint living trust set up the right way!

Now, if you have done step number one, and you and your spouse  have assets over $2 million (or if you’re single, you are over $1 million) then the good news is that with some advanced estate planning, you can further minimize and in some cases eliminate the estate tax altogether!

The proper path for you is going to depend upon the nature of your assets and the value but there are various irrevocable trusts that you can set up, and using your annual gift exclusion (currently $13,000 per year) you can begin to fund those trusts tax free…

There are family limited partnerships…

And, we will go into greater detail about life insurance trusts in another post, but if one your assets that puts you over the estate tax exemption amount (the amount you can pass tax free) is life insurance, then you can set up an Irrevocable Life Insurance Trust, (also known as an ILIT).  A properly set up ILIT that is properly maintained can remove your life insurance from your taxable estate.

This is an advanced estate planning technique, but one of the easiest and most popular ways to disinherit the IRS.  Plus, even if you need some life insurance to pay the estate tax (for very large estates), you accomplish a couple key things:  1) you pay pennies on the dollar… you don’t ever pay $1 million in premiums for $1 million in insurance, and

2) life insurance can provide necessary liquidity to pay any tax, so that other assets do not have to be sold!  The government does not wait for payment!

But for parents with minor children who have life insurance for income replacement and to provide for their minor children, an ILIT is a great way to make sure they get more of your money.  After all, how much college could your trustee pay for with an extra $550k in your children’s trust?  I know you could find better uses for the money.

So, the estate tax is coming back with a vengeance and it’s time for you to get ready!  No one is promised tomorrow and with a little planning,  you too, can preserve more of your hard earned assets for your children and loved ones.

Create Legacies that Last,

San Diego Trust Attorney,

Kristina Hess