2011: Estate Planning Strategies For Changes in Estate Tax in San Diego

In San Diego, as part of California and the United States of America, the federal government’s estate tax affects us in San Diego. As most know, there was no estate tax in 2010. Due to federal fiscal shortfall in revenue and the enormous federal deficit, the United States government is looking for ways to increase revenue. One way they are intending to raise revenue is with the revised estate tax for 2011. This is still uncertain as to the application and law however this article will address some pending issues for San Diego residents who would like to implement estate planning strategies to minimize their estate tax upon their death.

As of January 1,2011, the tax cuts enacted by President Bush expired. As such, beginning January 1, 2011, the estate tax will begin for estate over $5,000,000. The calculation of the value is only for the gross amount and not the net. For example, a house with a value of $500,000 and a mortgage of $400,000 would be valued at $500,000. This also includes all other assets such as vehicles, all real property, all personal property, all bank accounts, individual retirement accounts, 401K, retirement accounts and others. As such, to reach the $5,000,000 amount will affect some San Diego citizens. The tax is thirty five percent [35%] so, if the estate value is $6,000,000, the estate tax would be $350,000. This will expire on January 1, 2012 and changes may be made as to the amount. It is very important to have a current and updated estate plan.

A revocable living trust has the advantage to double the amount which can pass tax free to your beneficiaries when properly set up for married couples. As such, the sums from $5,000,001 to $10,000,000 would not be subject to the estate tax. This can mean a savings to the beneficiaries of over one $5,000,000 at the 55% rate. This cannot be done with a will and the revocable living trust has to meet all legal requirements in order to have this benefit. If you do not have a revocable living trust, please contact us for a consultation and we can often have your revocable living trust completed in approximately 30 days.

Gifting, during your life, can also reduce the value of your estate with the effect of reducing the estate tax. For 2011, you can gift up to $13,000 per person and use an irrevocable trust to fund the gifts. For example, if you have two children and two grandchildren {for 2011} you can gift up to $52,000 per year. Over a period of 10 years, this gifting can be over $500,000 reducing the gross value of the estate which will reduce the estate tax considerably.

Another strategy is irrevocable life insurance trusts which are often referred to as ILIT’s. In this strategy, a life insurance policy is purchased and placed into an irrevocable trust. An irrevocable life insurance trust can have the effect of not including the amount from the life insurance included in the gross value of your estate for estate tax purposes. The irrevocable life insurance trust must be properly set up and maintained to have this benefit. Another benefit of this strategy is that the life insurance proceeds can be used to pay any estate tax which may be due.

There are additional strategies and many are advanced estate planning strategies. Our law office can assist you with making the best choice for you. None of these strategies is designed to evade the tax laws and only to provide legal strategies within the law to reduce the estate tax upon your estate.