Legal ways to pass on property with minimal taxes

Posted: 02/09/2007--25/11/2008 || Rate this Article: 3 || Views|| Sign In || Register ||Hello Guest

Passing on property to your loved one after death can be a very tricky ordeal. Even trickier is passing on the property with a minimal of taxes to burden your loved ones. However, with some planning, it is possible to pass on property without passing on a major tax burden.

Do Nothing

This may seem like very bad advise, but for some, the answer to passing on property with minimal taxes is to simply do nothing. Each year, the IRS sets an estate tax exclusion on property and assets passed on after death. If the total value of your estate is less than the exclusion, no estate taxes will be assessed.

The following table shows the estate tax exclusion:

2005 $1.5 Million

2006 $2 Million

2007 $2 Million

2008 $2 Million

2009 $3.5 Million

Of course, it is important to keep in mind that people tend to underestimate the value of their estates. For tax purposes, the IRS will calculate the value of property, liquid assets, stocks, etc. If the value of everything is more than the estate tax exclusion, then the overage will be taxed.

In addition, this method of passing on property is not as simple as truly doing nothing. A Will would still be needed to designate who is going to get the property. In addition, assets transferred through a Will are subject to Probate, which usually has fees associated with it.

Gifting

Another way to pass on property in small amounts over a period of time is by gifting it to someone else. Currently, the IRS allows an individual to give property and assets to another person up to $11,000 without facing a gift tax. For parents, this could mean that they could give up to $22,000 a year under the current guidelines to a child without facing taxes.

This way of giving property and assets away is a little more tedious because there is a smaller limit on what you can give. In addition, distributing property in this manner takes some planning, especially if you want to give away property or assets that is worth a lot of money.

In addition, when using this method to distribute property, it is important to check with a lawyer or financial expert to make sure that the distribution is within current IRS limits. Otherwise, the giver of the property or assets will be taxed.

Family Limited Partnership

If an individual has a large estate, a family limited partnership may be a way to avoid the high cost of estate taxes. Family limited partnerships have come into vogue in the past few years as a way to establish a business-like entity to protect assets, with many of the same rights and responsibilities associated with a business.

In family-limited partnerships, the person establishing the partnership places assets into the partnership. That person then can name other individuals to be limited partners. This means that they own a percentage of the partnership, but have no real control or rights over the decisions made about how the assets are handled.

If a couple wanted to establish a family limited partnership, they might name their children as limited partners. Then, each year, the parents can gift to the minors a percentage of the partnership, and still have control over how the assets are handled.

Of course, a family limited partnership works in much the same way as a business entity that elects limited partnership status. Give ownership to the children can have unexpected tax consequences if not done properly. In addition, the terms of the partnership must be established to take into account untimely deathespecially if the death of the parents were to occur while the children are minors. This is way an experienced lawyer should be retained to establish and maintain this kind of entity.

The bottom line on any method that is used to transfer property is that an experienced financial advisor or attorney should be consulted. Every situation is different, and no specific method is right in every situation. This is definitely where knowledge can save a lot of headaches down the road.