Estate tax planning is planning on how to pay the transfer tax the government imposes on you to give your assets to someone other than your spouse, such as children, grandchildren, friends, etc. Estate tax rates and exclusions change every year, therefore planning for the future tax is like hitting a constantly moving target. So the best approach is to plan with a big picture mentality.
Estate tax planning involves the planning of how to eliminate, reduce and/or pay the estate tax. The easiest way to calculate how much will be due is to take how much you are worth and divide by 2. This will normally give you a very high end estimate of the tax.
Now once you know the amount of the tax you can take steps to reduce or eliminate the tax. One of the only ways to eliminate the tax is to give everything to charity. This is a fair and noble cause. You can reduce the tax by a number of sophisticated planning techniques. These include the proper use of trusts, family limited partnerships and many other valuable planning techniques. When you reduce the tax owed, you still have to pay the remaining tax in most instances 9 months after your date of death.
The absolute best way to fund the tax liability is through a properly structured life insurance policy. If you do not want to do all the planning, simply buy a bigger life insurance policy. There are many policies designed specifically to pay estate taxes. Insurance costs only pennies on the dollar and no other vehicle pays the dollars exactly at the time the cash is needed. Property has to be sold, stocks and bonds must be sold, and businesses must be sold. Only life insurance pays cash immediately and the government only wants cash.
© R. Allen Greer, Jr., 2007
