Tuesday, October 21, 2008

Estate Taxes..........Yeah, They Suck

New Estate Tax Changes Target Three Million Millionaires

Once upon a time, if you had a net worth over US$1 million, you gained entrance into a very exclusive club.
It's not so exclusive today: According to the World Wealth Report 2008, at the end of 2007 there were about three million millionaires in the United States, or approximately 2% of the adult population. That really shouldn't come as a surprise, especially if you live in a state like California, where even a modest home can have a value approaching US$1 million.
Even if inflation has made entering the Millionaire's Club less selective than it once was, qualifying might make you eligible for something considerably less desirable - the U.S. estate tax.
Absent congressional action, on Jan. 1, 2011, the U.S. estate tax exclusion reverts to its 2002 level - US$1 million. If you're a U.S. citizen or permanent resident, the balance of your estate will be subject to estate tax at a maximum rate of 55%. Everything you own is included, anywhere in the world, valued at its "highest and best use." Your heirs may also have to pay estate tax in the state where you lived.
Dying in 2010...for Tax Purposes
But between now and 2011, courtesy of Congress, the estate tax pulls a disappearing act - but only for one year.
For 2008, you have an estate tax exclusion of US$2 million and a top rate of 45%. In 2009, the exemption increases to US$3.5 million. And then in 2010, it disappears completely.
But alas, only for one year. Unless Congress takes remedial action, the estate tax resurfaces in 2011 with US$1 million exclusion and a top rate of 55%. While it would be wonderful if Congress eliminates the uncertainty surrounding estate tax after 2011, I wouldn't count on them doing so. The easiest course of action for Congress would be to do nothing.
And that may be exactly what Congress will do, especially given the prospect of a US$700 billion Wall Street bailout and annual budget deficits approaching US$1 trillion per year. Not to mention that the current budget projections assume that the estate tax will return to 2002 levels in 2011.
Three Winning Strategies for Offshore Estate Planning
Fortunately, many tools are available to reduce estate tax.
Indeed, if you make advance preparations, estate tax is truly a voluntary tax. Moreover, if you're seeking enhanced protection for your wealth against legal predators, or simply want to take advantage of international investment opportunities, you can construct your estate plan offshore.
Several offshore estate-planning techniques exist that you and your professional advisors may wish to consider. Three of the best strategies include:
Offshore limited liability companies. One of the most popular estate planning techniques involves partnerships: e.g., limited partnerships (LPs) and limited liability companies (LLCs).
Let's say you form an LLC in Nevis (one of the most popular offshore jurisdictions for this purpose) and contribute the bulk of your estate to it; say, US$3 million. You then begin making periodic gifts of "membership interest" in the LLC to your children.
At your death, your interest in the LLC is only worth US$2 million. Your heirs file an estate tax return that shows a membership interest in an LLC worth US$2 million. However - with proper planning - they can claim a "valuation discount" on this interest for estate tax purposes. Generally, a 25% valuation discount is considered very conservative.
That means this simple structure could reduce the size of your taxable estate by at least US$500,000, resulting in a whopping US$225,000 savings in estate tax! And, thanks to the stringent asset protection provisions of Nevis law, the funds within the LLC will be protected from lawsuits.
Offshore trusts incorporating a "marital bypass" provision. If you're married, a simple trust called a marital bypass trust (sometimes referred to as an "A-B trust") can double your estate tax exemption.
While this kind of trust often stands alone, you can also incorporate it into an offshore trust formed in any suitable offshore jurisdiction (Nevis and the Cook Islands are two of the most popular choices). That way, you'll obtain state-of-the-art asset protection for your wealth, and also double your estate tax threshold.
Offshore variable universal life insurance. Life insurance enjoys uniquely preferential tax treatment under U.S. law. With proper structuring, the proceeds can flow to beneficiaries free of both estate and generation-skipping taxes. Essentially, you avoid tax on portfolio income and transactions in exchange for the cost of insurance.
If you're a member of the "Millionaire's Club" - or may become one in the future - you need to consider estate tax in your wealth preservation plan. And while a strictly domestic estate plan may suit your needs, if you're looking for enhanced asset protection and greater investment choice, numerous offshore estate-planning options are available.
One final note: Proper structuring of your estate plan requires substantial legal expertise. There are many potential pitfalls. Be certain to retain a qualified attorney before you put any of these strategies into place.

1 comment:

Anonymous said...

I argue with tax liberals about this all the time. I used the analogy that it hurts the famly farm. He said no that a gov study showed only a handful of farm affected. Where he was wrong is that small businesses and the family farms have to purchase special life insurance policies to pay the taxes. This is a business expense which could be better used for increased productivity. It is not enough to say it is a deduction. The key to proper spending by a small company or farm is to spend in areas that drive sales and profits. All other spending, deduction or not, is not optimal. That is why moutains of regulation and complex federal tax and accounting create deductions but they do nothing to expand business.

The tax liberal that I am referring is an LLM out of Gainesville. He is an idiot and never had any experience with business ownership. His remark as to why this very inefficient estate tax should be continued is because we don't want a society full of "paris hiltons." Obviously these arguments are stupid class warfare. The hilton's of the world have trusts. It undermine creative genius to crack it in the teeth upon death.