Uncle Sam = Tomb Raider? What You Need to Know About the Federal Death Tax

usa-49909_640Nobody gets out of this life alive. Unfortunately, you can’t take your money wherever you go next. Instead, you (or at least the people you leave behind) have to contend with The Federal Death Tax. It’s money the government will want from your estate after death, provided you made a lot of money while you were living. Most estates won’t have to pay it, because it’s only levied on the wealthiest of the wealthy.

According to the IRS, the exemption for 2015 is $5.43 million per person, meaning only assets over that amount would be taxed. If you’ve got assets beyond that, congratulations! But you still probably want to know how to avoid the tax, right?

Here’s what you need to know about the Federal Death Tax:

1). Out of 1,000 estates, only two will owe the tax

Most people aren’t exceedingly wealthy, so 99.8% of the estates in the US each year won’t owe any estate tax, according to the Joint Committee on Taxation. You might be worried about the tax, but in reality you probably won’t have to pay it. You can have a whole lot of money, and still not need to pay the tax.

2). There are big loopholes to avoid paying the tax

If you have the level of wealth that could mean paying the Federal Death Tax, there are still lots of ways to get around it. One of those is through trusts that can be passed down to others on a tax-free basis. Bloomberg reports that the grantor retained annuity trust (GRAT) is the best way to do that, but you have to do it right. Attorneys and accountants can help you legally avoid estate taxes.

3). Most countries tax estates more heavily than the US

While it might seem like the US Federal Death Tax takes a lot of money away from the estates of wealthy individuals who pass away, the reality is that the US doesn’t tax wealthy estates as heavily as many other countries. Isn’t it a good thing you live here, and not somewhere else? The money the US takes in estate and gift tax revenue is well below the average taken by the other 34 member countries of the Organization for Economic Co-Operation and Development. Wealthy individuals in the US who pass their estates down to their heirs actually get off much lighter than others.

4). It’s progressive, but it’s not that progressive

The Federal Death Tax is considered to be the most progressive part of the US tax code, but the code itself really isn’t that progressive. State and local taxes are actually regressive, helping the estate tax stand out. It’s considered progressive because it only affects those who have a higher ability to pay, and isn’t a tax that’s levied on everyone regardless of their income level. Essential programs like national defense, healthcare, and education are funded from the Federal Death Tax, but with some careful legal maneuvering, your relatives won’t have to pay it when you die.

What else happens after you die? Learn more about How to protect your Life Insurance Policy in this webinar

Can you Keep Your Current Lifestyle After You Retire?

a very funky elderly grandpa dj mixing recordsKeeping your current lifestyle in retirement can be very important to you, but will you be able to do it? That depends on the kind of lifestyle you’re leading right now, and whether you start taking steps to make sure you’re financially prepared for retirement. With some careful planning, starting today, you may be able to go right on living the way you are now, once you retire. The key is understanding what your current lifestyle truly requires, and then determining how you can get there through savings and investment strategies. A lot of people wait until it’s too late to start their retirement planning, but you don’t have to be one of them. Early changes are better changes.

Why Would You Lose Your Current Lifestyle?

Many people lose out on their current lifestyle in retirement because they didn’t realize what they needed to do when they were younger. They didn’t pay close attention to whether they were saving enough, or they assumed that the money they had coming in from a particular source would continue to come in forever. Those kinds of things can really hurt you when circumstances change and you’re left without the source of income you were expecting, especially if you’re already close to retirement age.

What Can You Do to Keep That Lifestyle?

To keep your current lifestyle when you retire, you have to keep the same level of income. How you do that can really vary, though, depending on whether you’re used to taking exotic trips and living in a mansion, or you live a life that’s considerably more modest than that. Working with a financial planner or other professional to determine how much you need to save toward retirement today is a great way to start understanding what it really takes to keep the lifestyle you’re accustomed to. The sooner you do that, and the sooner you start saving and investing, the more likely you’ll be to have the money you need to maintain your lifestyle in retirement.

What if it’s Just Not Possible?

In some cases, keeping your current lifestyle once you retire may simply not be possible. You may be too close to retirement to save enough for that lifestyle, or there may be other extenuating circumstances that you have to consider. If that’s the case, the next best option is to choose a lifestyle that’s as close as possible to the one you had, and downsize a bit on your expectations and your spending. When you do that, you can build a good retirement life for yourself that you can maintain. And you should still get started right away. Don’t put off retirement planning, because your retirement will be here before you know it!

Start Early for Best Results

The best time to start planning for retirement is when you’re young, as soon as you get your first job. It gives you many more years to save. The next best time is right now. Don’t wait another day to get moving on saving for your retirement goals and lifestyle. If your lifestyle is very important to you, take it seriously and make sure you invest enough through the years to maintain that lifestyle once you choose to retire.

Learn about how you can Climb to Financial Freedom with this Video.

The Secret that All Millionaires Know

Man talking to a clone of himself

What are your options when a steep decline in the stock market and the interest rate on all of the “safe” investments is next-to-nothing? You don’t want to panic, but leaving all of your cash in equities and “riding out” the coming storm is not the smartest thing to do.

If the market drops by 30 percent, it will have to go up by nearly 50 percent in order for you to recover your loss. The people who rode the market all the way down to its lowest point in March of 2009, and did not sell, eventually recovered their losses and actually made some money. However, it took about five years to get back in the black. The most astute investors parked their money on the sidelines and watched as the market slipped into bear territory. They did very well by buying stocks near the lows and riding the recovery to new heights.

What is the Secret that All Millionaires Know?

Millionaires understand how important it is to have a sound financial education. They take calculated risks that can pay off in big profits. They do research, analyze data, and stay away from hasty investment decisions. Millionaires have the curiosity and desire to always want to learn more.

Luck may play a part in becoming a millionaire, but almost all millionaires make their own luck by investing in themselves and gaining the knowledge and skills to make the smartest financial decisions. Millionaires invest time to keep abreast of the long-term and latest trends that can influence the suitability of an investment.

Alternative Investments

Millionaires are apt to look for alternative investments when traditional investments are not a good option. When stocks are not doing well and you can’t earn a decent return on certificates of deposit or bonds, you can still generate profits through alternative investments. Following is a short list of some of the many alternative investments that you may want to consider.

  • Real Estate – Real estate investments build equity over time and property values generally appreciate. You may also be able to generate a stream of income by renting or leasing the property that you own. Great wealth has been built by investing in real estate. Bob Hope, Ted Turner, and Donald Trump are just a few of the people who made fortunes by investing in real estate. According to the 2015 Forbes list of billionaires, there are 1,826 billionaires in the world. Included in that total are 157 individuals who made their billions in real estate.
  • Collectibles – Collecting can be both enjoyable and profitable. To turn collecting from being just a hobby into a serious financial investment, you need to be knowledgeable about the fine art, fine wine, or rare coins that you are collecting. Buyers can be hard to find and value can go up or down with changing market conditions. change.
  • Commodities – Commodities include all types of homogenous goods that are bought and sold in volume. Most commodities like agricultural products, oil, and building materials are traded on the futures market. Precious metals , such as gold or silver, are often purchased and held by investors in the form of bars or bullion coins.

If you want to become a millionaire, invest in yourself. Learn how to read a financial statement and learn how to analyze the value of a business. Understand what you are investing in before you invest. Be willing to assume some risk for a chance to make a great return on your investment.

How else can you be successful with your money? Take a look at this article Banking on Long Term Success

What Happens When the $1.3 Trillion Student Loan Bubble Bursts?

Portrait of beautiful young brunette teenage girl blowing pink bubble gumEdvisors.com reports that students graduating college in 2015 left university with an average debt of $35,051. Both the average debt and the number of students graduating with debt grow each year, and many students don’t earn enough just out of college to make a dent in those debts. Forbearances, defaults, and slow payments are a growing trend, even among students with good jobs and a desire to make good on the loans. When it comes down to food and shelter versus student loans, most people are going to choose survival.

While that survival instinct makes sense, the current system can’t continue forever. Eventually, the student loan bubble will burst just like the housing bubble before it. When that happens, it will likely be much harder to get a loan for college, leaving those without substantial savings scrambling to cover costs of education. It could also lead to loans coming due in faster or more expensive ways that expected: some individuals are already experiencing such issues, as loans are consolidated or sold and new terms put in place without the student’s knowledge.

But there are ways to get through a four-year degree without a mountain of debt along with your diploma. In fact, those who are willing to research and work for it can graduate debt free and avoid some of the potential hassle of student loans.

Complete the FAFSA

While many students who complete the FAFSA qualify for student loan programs, some students qualify for financial aid that doesn’t have to be paid back. Since you aren’t obligated to take advantage of any offer based on your FAFSA form, it’s worth completing to see if you’re eligible for non-loan assistance, especially since such programs will likely still exist in some form if the loan bubble bursts.

Seek Scholarships

Even if your family’s income leaves you out of the running for grants, you can pay all or part of your college bill with scholarships. Scholarships are awarded for all types of activities, not just sports and academics. Search for scholarships related to any of your interests, including chess, music, or community service. Pay special attention to scholarships offered locally. Local scholarships often limit eligibility to certain zip codes or cities, which means the competition is greatly reduced. You can stack scholarships, winning a few smaller scholarships to help pay for an entire semester.

Work Your Way

Working your way through college is probably one of the most difficult ways to do education debt free, but it is doable. A minimum-wage job won’t cut it if you have to pay for living expenses plus tuition and books, so this method is more likely to work if you come out of high school with viable skills for an entry-level career. Consider investing some time in technical classes during high school for a chance at jobs in computer, mechanical, and office sectors rather than fast-food or retail.

Start with Community College

In many locations, community colleges collaborate with four-year universities to provide more affordable degrees. Students begin at the community college, working through general requirements and lower-level courses at a discounted price for approximately two years. Students who meet requirements are able to transfer to four-year colleges to complete degrees, and there is no difference when it comes to the final diploma. As an added perk, students who complete the community college requirements are usually awarded an Associate’s degree or certificate that helps them find better work as they continue their education.

Enter College with Credits to Reduce Expense

It’s easier to pay for something that you have to buy less off, and every credit you enter college with is a credit you don’t have to pay hundreds of dollars for. Most high schools in the country offer advanced-placement or college-placement courses, letting students prepare for testing out of certain math, English, and science courses. Some schools even work with local or state colleges to help students earn credits through dual enrollment in a variety of courses. In some cases, these classes cost nominal fees, but they are a fraction of standard college tuitions.

By planning early, seeking all assistance and scholarship options, and being willing to work while you learn, you can pay for your college education before you graduate. Since the student loan bubble won’t last forever, anyone planning to attend college within the next decade should get a leg up on savings and plans for paying for education.

Planning for the future? Learn how you can Get Ready for Retirement at any age from this Webinar.

Is Your Money Safe?

Senior man protecting piggy bank, savings from being stolenWith volatile markets and shaky economic conditions around the globe, knowing where to keep your hard-earned money can be confusing. There is an almost endless array of options when it comes to managing, investing, and saving your money. But finding places to keep your money safe while still receiving a decent return can be problematic. The following discusses the best strategies for keeping your money safe and ways to make sure it goes where you want it to go after you’re gone.

Diversify Your Finances
You’ve probably already heard more than once that it’s not wise to put all your money in one place, even if it is a great investment. But it’s advice that’s worth repeating. The following are some safe investment options.

  • Bonds – Every portfolio should have at least some bonds for diversification and stability. The wildcard with bonds, however, is that interest rates have been kept artificially low for several years. Your best bet with a bond is to buy it at issue and keep it to maturity. This can provide protection against interest rate risk.
  • Money Markets – These accounts are relatively safe, especially when the stock market is volatile. They also provide a fair amount of liquidity. On the other hand, inflation and fees can chip away at profits.

Investment Options
If you’d like to do more than just protect your money, there are alternatives that are relatively safe and still have the potential for earnings. Putting in the research and learning everything you can about your investment option is perhaps more important than what you actually choose to invest in.

  • Real Estate – Even with the turbulent housing market, real estate is almost always a good long-term investment.
  • Precious Metals – While this investment option is controversial with some, it’s an asset you can actually keep in your possession.
  • Art & Antiques – Collectibles become profitable during dollar weakness. But only invest in items because you want them and will enjoy them.

Protect Your Money After You’re Gone
Most people would rather see their money go to their children or other designated relative after they die, not their wealth advisor. Estate planning is essential to making sure your money goes exactly where you want it to.

  • Bank Accounts – Make sure your bank accounts are either in a trust or held jointly. It’s important to make sure any children or a spouse has legal access to your accounts.
  • Will – Having a current will is a necessity. If you don’t have a will the state determines what happens to your minor children and your estate.
  • Living Trust – According to NextAvenue creating a living trust while you’re still alive will allow you to control the distribution of your estate. This works by transferring all of your assets into the trust. Probate can then be avoided because technically the trust owns all the assets after you’re gone. Only property in your name must then go through probate.

Want to make sure your kids collage money is safe? Take a look at this Webinar about How to Safely Fund Your Kid’s Collage.

Why Compounding Interest WON’T Make You a Millionaire

business, people, bankruptcy and failure concept - close up of businessman showing empty pocketsEvery mathematician, accountant, and financial advisor will tell you that compound interest is a powerful force. Albert Einstein famously referred to compound interest as “the eighth wonder of the world” and the “most powerful force in the universe.” So, if someone were to tell you that compound interest won’t make you a millionaire, why would you believe them?

Maybe you tried doing the calculation yourself?
Unless you can plug in the right variables to the formula for compact interest, you will see that your money will not grow to a million dollars. Time is a key component, as is the amount you invest, and the interest rate you earn. If any of those variables are off, compound interest will not make you a million.

Suppose you could invest $10,000 today, have interest compounded daily at an 8% interest rate, and not touch that money. If you did the calculation, you would have about $50,000 after twenty years, which is nice but nowhere close to a million dollars. After paying taxes on your gains and factoring in the loss of purchasing power due to inflation, your investment would not look so good.

The above illustration shows that if you don’t start out with a large enough sum of money, don’t earn a high enough interest rate, and don’t have enough time to let your money grow, compound interest becomes a far less powerful force.

Life happens and plans change
Very few of us go through life without experiencing some type of financial crisis that forces us to draw down our savings. It could be that you are diagnosed with cancer and need money to pay for expensive treatment and cancer-fighting drugs. You could lose your job and be out of work for two years. Anything can happen at anytime and you may have no choice but to access the nest egg you had been building up for the last 20 years. That will set you back and make it more difficult for the power of compounding to work its magic.

Your rate of return can change
If you are invested in the stock market, and are happily watching your portfolio go up year-after-year. That can end suddenly. One bear market, where you lose 30% of the amount invested in your portfolio, can halt your climb to a million dollars. If the value of your portfolio dropped from $100,000 to $70,000, you would need your portfolio to rise by close to 50% ($70,000 x 150% = $105,000) just to get back to where you started. You’ll have to reset your compound interest calculator and hope for a great bull market and years of above-average returns.

An Alternative Investment that can make you a millionaire
Real estate is the path that many people follow on their way to becoming a millionaire. Over time, you build equity and property prices appreciate in value. Additionally, you can increase the rate of return on your investment by collecting rent while you wait for the right time to sell.

Want to learn how to save money more effectively? Download this Infinite Banking Infographic.

$1 Million Isn’t What It Used to Be

only pennies leftA century ago, individuals who claimed to be millionaires were part of a rare and exclusive club, but a million bucks today doesn’t go as far—and isn’t nearly as impressive—as a million dollars in 1915. Using a basic annual inflation rate of 3.2 percent, calculations indicate that you’d need over $23 million today to get the same value as you would with a $1 million in 1915.

Retire as a Millionaire Today

For decades, $1 million was a common retirement goal for many Americans. Hitting 65 years with a net worth of $1 million meant you were well-off, that you’d played the game and won, and that you would be comfortable for your remaining years as long as you managed things with a bit of sense. While a million dollars at retirement still protects your independence throughout later years, it doesn’t offer you entrance into the upper class. Most basic calculations figure you’ll end up with $30,000 to $50,000 per year for 20 years of retirement based on a million bucks. For most, that’s enough to pay the medical bills, cover insurance premiums, put food on the table, and buy the grandkids an occasional treat. It’s probably not enough to travel the world or buy your dream retirement car and home. You can boost your value with those numbers by ensuring you enter retirement without debt.

The Penta-Millionaire

According to NBC, brokers across the country are seeing investors reach for higher than $1 million as a financial objective. A growing number of people are aiming at, and achieving, the $5 million mark. Experts say a million dollars isn’t the benchmark that separates the wealthy from the normally financed anymore, and the $5 million mark has become that point. Even so, $5 million isn’t as an exclusive club as you would think. The Spectrum Group reports that the number of families with $5 million in assets has grown by a factor of four in about two decades. As of 2014, over a million families met the mark.

Continuing Inflation

If $1 million doesn’t make you “rich” today, then what about those who expect to retire in ten or twenty years? If inflation remains at the historical average of around 3 percent, then DailyFinance notes that $1 million will provide the same value as about half that amount today. The takeaway? Whatever you think is enough to retire on today, add at least 50 percent if you’re planning to retire down the line.

If you’d like to learn how to increase your retirement income, download our free ebook Infinite Wealth: A Different Kind of Retirement.

Do No-Cost Mutual Funds Really Cost ZERO?

The short answer is NO!

Let’s get the basics out of the way first:  No-cost mutual funds, also called no-load mutual funds, do typically cost less in terms of fees than mutual funds that charge a sales commission – or load.

But you will pay fees.  Fees are cleverly hidden in a number of cases, so it’s important to educate yourself about mutual funds before you invest your hard-earned money.  Though you won’t pay commission, you could pay:

  • Custodial fees
  • Managerial fees
  • Administrative fees
  • Shareholder servicing fee
  • Revenue sharing fee
  • Transaction costs

The fees are disclosed, of course, though it’s often nestled in the very fine print, and the way they’re assessed – by quietly taking the funds from your account annually – means it’s easy to miss the dollars trickling out of your investment account.

So is a No Cost mutual fund best option for your hard earned money?  According to Dalbar, over the past 20 years, the S&P 500 returned 9.2%. The average investor, however, made only 2.3%.

Fee’s aside, the average investor is not making enough in these types of funds to even keep up with inflation.   The fees discussed above are not even the biggest cost associated with most investments.   The biggest loss for the average investor is “opportunity cost.”

An opportunity cost is the loss of potential gain from other alternatives when one alternative is chosen.  Every dollar that you allocate to a so-called no load mutual fund does in fact have hidden fees, subpar outcomes for most investors, and worst of all, opportunity cost.

Your alternative?  A cash value focused, “banking” policy.  A properly structured policy will lower your actual cost, and give you the opportunity to combat the hindering effects of inflation by giving you the ability to utilize the value of your capital through policy loans.

With a policy loan you will have the unique ability to effectively have your capital doing two jobs simultaneously.   What could you achieve if your dollar could accomplish both your short term and long term financial goals?

Remember when considering your investment options that “No Cost” does not really mean what it appears.  There are always real costs and opportunity costs.  Let us help you discover the possibilities of what Infinite Banking can do for you.

What Percent of Your Income Goes to All Types of Tax?

Ttax2-595axes: How Much You Really Pay

We all hate it, but it’s a fact of life, as certain as death, as the old saying goes. There are federal income taxes, state income taxes, sales taxes, city taxes, property taxes, and even death taxes (see [insert Link to Death Tax Blog]). When you combine all the taxes, it may be surprising to learn just how much of your hard-earned income you actually get to keep—and how much is handed over to the Tax Man.

First, the federal government taxes your income, and assuming you are not self-employed, conveniently takes its share right out of your paycheck.  It takes anywhere from 10% – 39.6% of your total income, depending on your filing status, number of dependents, and total household income. The average person pays 17% of their gross income to this federal tax.

Next comes the Social Security and Medicare taxes, which are also a payroll deduction if employed.  This eats away at your income by another 7.65% for employees, or 15.3% for those who are are self-employed.

Also included as a deduction on your paycheck are state or local personal income taxes, which vary by state.  The average person pays 10.1% for state income taxes.  These three deductions take 34.75% of the average person’s income if they are employees, or 42.4% for the self-employed.  For a person earning 200,000 per year, this means bringing home $130,500 of your hard-earned money, or $115,200 if you are self-employed.

The average American employee pays

Federal Personal Income Tax of 17%

FICA of 7.65%

State Personal Income Tax of 10.1%

TOTAL TAX 34.75%

And just when you thought it was all over, your take home pay is subject to still more taxes.  Assuming you are an employee rather than self-employed, you take the $130,500 of your income that actually belongs to you and, let’s say you spend it.  Vehicles are taxed. Your meal at Panera is taxed.  Yes, even the coffee at Starbucks is taxed.  Your home? All are taxed.

Let’s take property taxes first.  If you gross $200,000 per year, you can probably afford a home valued at $442,000.  In Utah, based on the state median tax rate, you would pay $2,652 in taxes each year on this home.  So you can take another 1.3% off your original $200,000, leaving you now with $127,848 to spend.

Then comes the sales tax.  The average sales tax rate is 9.7% across all states, but the rate is highly variable depending on where you live.  Some states do not levy sales tax at all (Alaska, Delaware, New Hampshire, Montana, and Oregon), while others charge a high rate (Tennessee, Arkansas). Further complicating the figure, some items are taxed at a higher rate.  John Mikesell in The Disappearing Retail Sales Tax calculated that as of 2011, approximately 34.46% of a person’s total income will eventually be subject to sales tax.  Let’s assume this to be a fair representation.  So of your $200,000 earned, $68,920 would be subject to sales tax.  That $68,920, on average, would be taxed 9.7%, taking another $6,685 out of your pocket, and into the pocket of the Tax Man.

This leaves you with $121,163.  This is onlly 60.5% of what you earned.  So let’s summarize where your $200,000 is really going:

AverageTax rate Total Tax Remaining Income
Federal Personal Income Tax 17% $34,000 $166,000
FICA 7.65% $15,300 $150,700
State & Local Income Taxes 10.1% $20,200 $130,500
Property Tax 1.3% $2,652 $127,848
Sales Tax 9.75% on 34.46% of gross $6,685 $121,163

$78,837 taxed of $200,000 = 39.4% effective tax rate

Finally, upon your unfortunate death, there may be even more taxes such as the Death Tax.

Fortunately, there are ways to mitigate your tax burden and keep more of your hard earned dollars. This may include tax credits (hybrid cars, green home improvements), making charitable contributions and other tax-deductible actions, lowering your tax rate by earning income from stocks and real estate, shifting income to those in lower tax brackets (children), and life insurance policies.

Many people believe that they will be in a better position by making tax deferred contributions to Qualified Retirement Plans like IRA’s and 401k’s.  This may be true only if tax rates go down or if your income goes down substantially in the future. These vehicles provide only a temporary tax benefit.  If you contribute the bulk of your savings to a tax deferred vehicle and if tax rates go up in the future you may find yourself in a higher tax bracket as you distribute the funds as future income.  Those distributions could also cause other income, like Social Security, to be taxed as well.

Give us a call and we’ll help you implement a strategy that will provide permanent tax savings.

What Will Uncle Sam Take from Your Grave?

Death Taxes
The Federal Death Tax Explained

Never has a single tax been as notorious as the Death Tax, properly known as the Federal Estate Tax. The IRS defines this tax as “a tax on your right to transfer property at your death.” The controversy surrounding the Death Tax spans from those paying this tax and those fighting for it, citing that “this tax prevents an oligarchic concentration of wealth to a few families, and is the best way to encourage the wealthy to contribute to charities and foundations. They say estate tax is the only way to prevent wealthy families from passing down their wealth tax free, generation after generation.”
Regardless of the equitable or inequitable nature of the Death Tax, there are some Death Tax facts that everyone should know before they finalize any plans about what you will leave, who you will leave it to, and how you leave it to them.

What assets are included?

Most people think only about cash and property when they think about the Death Tax. But for the purposes of this tax, all assets are included in the calculation, including property and cash, as well as securities, trusts, annuities, business interests, retirement accounts, and some death benefits from insurance policies (With regard to life insurance, a life insurance policy that is payable to a living beneficiary is not included, but life insurance that is payable to the deceased person or the deceased person’s estate is included). To calculate the Death Tax, assets are assigned a fair market value instead of what was paid for the asset or what the value was when you paid for the asset.

Who pays?

The Death Tax is assessed based on the gross amount passed on, but there are a few exceptions. If the estate is left to a surviving spouse or a tax-exempt charity, the Death Tax does not apply……yet. Unless the estate is left to one of these excepted parties, your estate will be subject to the Death Tax if upon your death, the net value of your estate is more than the exempt amount.

One important thing to note is that dividing the estate between multiple parties has no effect on the amount of tax due. Whether the estate is gifted to a single individual or ten people, the tax due is calculated on the amount the decedent leaves behind, not the amount received by each inheritor.

How can you avoid it?

Unless you do some prior planning, 100% of your assets will be added together for a total net value. The estate tax amount is then calculated based on the net value of property owned by a deceased person on the date of death. There are many ways to plan ahead to prevent this massive tax for those with significantly large estates. Some of those include the annual gift allowance prior to death, or establishing trusts that remove assets from your estate, such as irrevocable life insurance trusts, dynasty trusts, qualified personal residence trusts, and grantor retained annuity trusts. Other methods may include transferring assets to an LLC or buying whole life insurance.

Not just for the rich

Although the exemption for the Death Tax seems large, many people erroneously assume that the Death Tax is only for the exceedingly wealthy. Although it’s true that only a small number of estates exceed the estate tax exemption, it is possible for some traditional middle-class individuals to be subject to this tax due to a large insurance policy, a healthy retirement account, an inheritance, significant real estate, or business interests. It has been estimated by the Tax Policy Center that 3,800 estates had to pay estate taxes in 2013.
Today’s exemption is $5.43 million, which means that the first $5.43 million of any estate is not subject to the tax. For any estate exceeding $5.43 million in value, there is a graduated scale to determine tax due, which tops out at a whopping 40% tax rate.

A farmer, for example, may have significant assets. They have significant real estate, multiple buildings, inventory, and costly equipment. They likely have a retirement account and most assuredly have a life insurance policy in place to protect loved ones. Upon death, all of these are included when calculating the appropriate Death Tax due.

What happens if an Estate is Taxable?

What happens if the estate exceeds the federal estate tax exemption for the year of the decedent’s death? Then the estate will have to file a federal estate tax return with the IRS within nine months of the decedent’s date of death. Along with this tax return, Form 706 and corresponding payment is due. An automatic extension can be applied for, but the payment itself cannot be delayed without accruing interest.
For historical changes to the federal estate tax exemption and rate from 1997 to current, refer to the following chart:

Screen Shot 2015-08-10 at 4.14.50 PM

State Death Taxes
Aside from federal estate taxes, a handful of U.S. states collect a death tax at the state level as well (currently 20 states have an additional state death tax).
In some states the tax is based on the overall value of the estate, which is referred to as an estate tax, while in other states the tax is based on who inherits the estate, which is referred to as an inheritance tax.

How do I plan for all of this?

Everyone with a sizable estate needs to plan ahead. In 2010 the estate tax exemption was on schedule to drop to $0, and again in 2013, the exemption was scheduled to drop from $5 million to $1 million, which would effect a very large number of families.
While we know what the current federal estate tax rules are and that they are supposed to be “permanent” going forward, as the saying goes, “A law is only permanent until Congress decides to change it.” So as the struggle in Washington continues to keep incoming revenues up to speed with the exorbitant amount of government spending that is occurring, Congress may very well be forced to close some of the “loopholes” that the wealthy have benefited from in the past in order to decrease the values of their estates for estate tax purposes.
Since it is very likely that some of these exemptions will be eliminated or reduced in the future, it is important to keep current on the our administration’s revenue-generating proposals and the ongoing discussions about completely overhauling the Internal Revenue Code to avoid being blind-sided by a change that will affect your income tax liability and estate planning goals.

I highly recommend a great estate attorney as well as knowledgeable financial advisors that keep current on the laws and tools to protect your family and the assets you have created during your lifetime.