Inheritance tax problems are not just for the wealthy. If you own your home and have moderate retirement savings and a life insurance policy, your assets may already be greater than the estate tax exemption. Careful estate planning can save your assets from going to the IRS.
Inheritance tax laws are complex, and a good lawyer can help you protect your estate. But you should know the basics of the law and how it affects you.
The estate tax exemption is the amount of your estate that is not taxed upon your death. Anything more than the estate tax exemption ($1.5 million in 2004) is taxed up to 48 percent. If you can keep your taxable estate below the estate tax exemption, you can avoid making the IRS your beneficiary.
The estate tax exemption is per person, not per couple. You and your spouse can each leave up to $1.5 million to your heirs when you die. A kind of living trust called an "A/B trust" makes full use of the estate tax exemption upon both your and your spouse''s deaths, while still keeping the use of your estate until both of you have passed away.
Your spouse may not inherit your entire estate if you die without a will. In most states, the law requires that up to half of your estate go to your children if you die intestate (without a will). A will or a living trust ensures that your estate goes to the beneficiaries you choose.
Making a trust the beneficiary of your life insurance policy protects your life insurance from being taxable as part of your estate. A/B trusts help you and your spouse pass on the largest possible legacy to your children. Charitable remainder trusts provide for your old age, while enabling you to donate large amounts tax-free to your favorite charity. An estate planning consultant can help you write the will or trust documents you need to protect your estate from inheritance tax.