Considerations on tax minimization in estate planning, P.1

Tax minimization, as we often point out on this blog, is an important part of estate planning, and part of what is called asset protection. With respect to taxes, estate planning has the goal of minimization the liability of one's estate one's heirs and beneficiaries to estate, gift, income, capital gains, and other taxes.

The good news about the matter is that there are usually many opportunities to minimize estate tax if one engages in proper planning and has a clear sense of purpose with one's estate plan.

Lifetime gifting is something to consider with estate planning. Under current law, every taxpayer can gift another person $13,000 per year without paying any gift tax, and the recipient will not owe any taxes either, unless the gift is placed in a fund and earns interests, in which case income tax on appreciation would be owed. Married couples may both give each child or grandchild up to $13,000 per year without paying any taxes. Making use of yearly gifting can help reduce the size of one's estate and therefore the amount of estate tax due at one's death.

As far as gifting, one thing to keep in mind is that it is usually less expensive for the recipient to receive assets that have appreciated as inheritance rather than as a gift. This is because the cost basis of a gift is the original purchase price, and will make the amount of capital gains tax higher when the assets are sold down the road. If the property is inherited, it has a cost basis equal to the fair market value of the property at the time of inheritance.

In our next post, we'll continue looking at some other considerations with tax minimization.

Source:, "Spreading Around Your Retirement Wealth Tax Free," Michelle Lodge, May 29, 2012.

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