Thanks to the Economic Growth and Tax Relief Reconciliation Act, which was signed into law in June 2001, the estate tax is being phased out over the next several years and by 2010, no estate will be taxed. But unless new legislation is passed, the estate tax will return in full force in 2011.
"We believe that estate tax in some form will be in place in 2011," says Darci Congrove, director of tax and business advisory services at GBQ Partners LLC.
Congrove advises clients to start transferring assets to heirs as soon as they accumulate significant wealth.
"There are straightforward, easy things to do that people often don't," says Congrove. "It can be as simple as having a will."
According to Congrove, a common mistake is assuming your life insurance will pay estate taxes.
"Life insurance is taxable," says Congrove. "But if you have an irrevocable trust insurance, the insurance payment goes through the trust and is tax-free to the heirs."
Eileen Bower, tax attorney with accounting and consulting firm Schneider Downs, agrees that gifting as much as possible during your lifetime is advisable for protecting your wealth.
Currently, only estates of more than $1 million are taxed, and that exclusion amount increases over the next seven years. So, says Bower, the goal is to maintain an estate that meets the exclusion amount by gifting the maximum amount possible each year.
"Every year, you may give each of your heirs $11,000 with no penalty," Bower says.
In addition, says Congrove, you may give a total gift of $1 million during your lifetime or at death.
When it comes to your business, there are a number of ways to transfer interest to your heirs without transferring control.
"You can create a limited partnership," says Bower. "The limited partner cannot have control in the business, but there is a lot of flexibility to the arrangement."
For instance, you can transfer a part interest in a commercial property to an heir, which reduces your estate in two ways, says Bower.
"You can discount the value of the property, because transferring part of it decreases its marketability," she says.
Another option Bower recommends is creating, then gifting, nonvoting shares of stock in the business to your heirs. How to reach: Schneider Downs, (412) 261-3644