Terry Coxon, co-editor of The Casey Report, is president of Passport Financial, Inc., and for over 30 years has advised clients on legal ways to internationalize their assets to optimize tax, wealth protection and estate planning goals. Read here how you can take advantage of a U.S. tax act and save a lot of money in the process…
Just when you thought there was nothing more the U.S. government could do to motivate you to ship your financial life offshore, they came up with another one. And if you have a sizeable net worth, it’s a big one; you could save your family $2.2 million in taxes by acting on the opportunity during the next 21 months. A husband-and-wife effort could save twice as much.
Included in the 2010 Tax Act passed by Congress late last year are gift and estate tax rules that apply only in 2011 and 2012. Compared to the rules they replaced, and compared to the rules that will take effect in 2013, they are especially permissive. The tax savings come from exploiting those interim rules before they expire.
For this year and next, you are granted a $5 million exemption from gift tax. If your bank account can handle it, you could write a check today for $5 million to someone in the next generation and incur no gift tax.
But it’s a use-it-or-lose-it opportunity. Starting in 2013, the exemption from gift and estate tax drops to $1 million, and the top tax rate on gifts and estates rises to 55%. (That’s substantially a reversion to the rules in effect in 2002.) So if you do nothing, you lose a free opportunity to reduce your taxable estate by a net amount of $4 million – which, at a 55% tax rate, means your family loses an opportunity to avoid $2.2 million in estate tax.
Estate tax has always been an avoidable levy. Regardless of the level of wealth, for those who planned well and planned early, the tax eventually incurred was trivial. The 2010 Tax Act doesn’t change that fact, it just makes it easier, until the end of next year, to exploit the fact. Even so, most people will let the $5 million opportunity slip by, as people always do with estate-tax saving opportunities. Because I hope you won't be one of them, let’s look at the practical impediments to effective estate planning, the things that get in the way and eventually cost the survivors so much in unnecessary tax.
Haven’t Gotten to It. Estate planning is not the kind of topic that draws most people in. And it’s generally about the far future, so it’s easy to tell yourself there will be plenty of time to deal with it later. If that sounds like you, maybe the $5 million opportunity that Congress is offering for just the next 21 months will spark some action.
Already Did It. If you’ve already done your estate planning homework, you probably don’t want to reopen the matter. But if you have a large estate, making that effort could save your heirs $2.2 million in estate tax.
They’ll Waste It. The thought of your 16-year-old grandson touring America on a $50,000 motorcycle likely does not live up to your highest hopes for posterity. Many wealthy individuals hold back from making gifts to younger generations because they don’t want to see the money wasted. Concern that gifts would remove capital from the control of the family’s most astute investor and cunning financial manager also discourages gifts. But such concerns are easily dealt with by using a trust. You can make a gift to an irrevocable trust of which you are the trustee. The property escapes the reach of estate tax, but you continue to decide how the money is invested and when it turns into spendable cash for the beneficiaries.
I Might Need It. You don’t want to do such a thorough job of estate planning that you plan yourself into the poorhouse. It’s pleasant to contemplate the financial head start you can provide for future generations, but not if you see yourself at the margin of the picture signing up for food stamps.
Those are the four reasons the government is able to collect billions of dollars in otherwise avoidable estate taxes every year. There's a way to shrink every one of those reasons and keep your family from eventually contributing to the government’s annual take: use an offshore trust. Here's what happens when you put an offshore trust at the center of your financial planning.