The Importance of Estate Planning and using a Safe Money Trust

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When it comes to financial planning, determining an estate plan is important. After all, it's the means by which someone passes on their property to their loved ones. And there are many factors associated with this. Especially the tax liabilities which may impact how much of your estate is given to your designated inheritors.

At a fundamental level, estate taxes are technically taxes that are levied on a person's right to transfer property upon death. There are many of these tax liabilities at the federal level, but all states have varying tax liabilities as well. And they can play a vital role in how you plan your estate. Let's cover these in more detail.

Estate Tax Basics
In general, there are two types of estate taxes:

•    Transfer taxes – taxes which are imposed when someone gives property to someone else. They arise when the party making the transfer is alive or deceased. Transfers made when a person is alive are referred to as gifts. On the other hand, a transfer made at a person's death is a legacy or a bequest. Under these definitions, gift taxes are levied during a person's lifetime and, when owed, are paid annually. Estate taxes are applicable to assets which are given upon when a person has passed away.

•    Income taxes – taxes which are completely different from transfer taxes. A deceased person's estate is classified as a separate legal entity for federal tax purposes. The executor of the deceased's estate may have to file an income tax return for the estate, as well as a final income tax return for the deceased party. Sources of income within an estate can include interest earned in an estate bank account, real property within the estate, or salary that wasn't paid to the deceased person prior to death.

At the federal level, most American households won't have to pay estate tax. The federal government imposes the estate tax only on estates worth more than $5.43 million (for deaths occurring in 2015). Estate taxes must be paid within a nine-month timeframe of the deceased party's death date.

Gift taxes and estate taxes are bound in a “unified” tax system so people can't avoid estate tax liabilities by giving away assets before they die. Upon death, all taxable gifts are added to the deceased's gross estate for calculation of estate tax owed. This occurs even though gift taxes may have been paid already during the decedent's lifetime.

Minimizing Estate Tax Impact
One way to minimize the impact of your estate tax burden is using an estate freeze technique. Simply put, this technique refers to a planning device which lets you freeze your estate's present value and then shift future growth to your estate's successors. There are a variety of estate freeze techniques available.

Estate tax liability can also be used with this technique, as the unified tax system allows for applicable exclusion amounts that reduce gift tax or estate tax liability. For gift tax purposes, the applicable exclusion amount is fixed at $1 million, while for estate tax purposes, it increases. Estate freeze techniques greatly range in terms of complexity. Examples include vehicles such as installment sales, private annuities, gifts, or sales-leasebacks.

Estate Planning: More Important Information
There are a few types of transfer and income taxes levied by federal and state governments:

•    Federal generation-skipping transfer tax – a tax imposed on property when property is transferred to someone who is two or more generations behind the decedent. Its purpose is to keep people from avoiding estate tax burdens by skipping an intermediate generation in estate allocation.

•    Federal income taxation of trusts – taxes levied on a trust within an estate plan. If an estate plan makes use of a trust, the trustee may have to file an annual income tax return and pay taxes on the trust's income.

•    Federal decedent's final income tax – If someone earns income during their year of death, their personal representative will need to pay taxes on that income. This will count as the deceased's final income tax return, and the funds for payment will come from the estate. The tax year ends on the death date.

•    Federal income taxation of estate  – Under the IRS tax code, estate are classified as separate taxpaying entities. The decedent's executor has to file a return and pay taxes on any income which the decedent's estate earns. This includes interest earned from bonds or dividends from stock holdings.

•    State gift tax – state government-imposed taxes on asset transfers made during your lifetime. In these transactions, the giver is referred to as the donor, and the recipient the done. A gift is an asset given for nothing in exchange, or for property of lesser value. Should your state have a gift tax requirement, confer with your attorney or state's department of revenue or taxation for more information. Most states don't have gift taxes – according to recent data, Connecticut and Minnesota are the only two states to impose them.

•    State generation-skipping transfer tax – this is the same as the federal GSTT, but imposed by a state government. It's best to contact an attorney or the state department of taxation or revenue for more information. Be sure to find out which transfers are subject to this tax, when they are subject, and how to file a return on them. At present, just a few states impose a state GSTT.

When engaging in any estate planning, it's important to keep one fundamental principle in mind. You're looking to give away the assets which you leave to your successors. To that end, it involves minimizing the expenses brought about by federal and state level estate taxes.

Be sure to check out our Estate Planning Basics page for more information. Should you be ready for personal attention with your planning needs, meeting with a financial professional can help you. can assist you and connect you with someone to discuss your needs, goals, and overall financial picture.

Use our Find a Licensed Advisor section to connect directly with an independent financial professional, and to request a personal strategy session to discuss your needs and goals. And should you have any questions or concerns, call 877.476.9723.

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