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Business Matters: Estate planning a game of chess

February 16, 2011

By Staff Reporter

By Adrienne Grimes

I have been told that I need to do some estate planning, as I am not a citizen. I am married to an American citizen and we have our own business, a laundromat, but it is not worth anything. We both have 401k rollovers from previous jobs. What is estate planning? We have nothing you could call an estate. — P.M., Hoboken, N.J.

The Federal Estate Tax and the Gift Tax are both excise taxes on the right to transfer property, the first at date of death, the second while you are living. And if you thought income taxes were bad, just read someone’s IRS Form 706, which is the actual estate tax return.

You may not think it now, but during your lifetime you will accumulate many assets. These assets and others may become part of your gross estate, and might include the fair market value of your business, your home, your pension plans, 401k plans, life insurance policies, stamp collections, works of art, etc. The rate starts at 37 percent for assets in your taxable estate exceeding $625,000 in value. (The FET is graduated and can reach 55 percent). This $625,000 is called the Unified Credit and will gradually go up to $1 million by the year 2006. In other words, if you have $625,000 worth of stuff in your name and $625,000 in your spouse’s name, no FET.

If you are a non-resident alien, your Unified Credit offset will be $60,000 for both Gift Tax (IRC section 2523) and Estate Tax (IRC section 2056) an unlimited deduction is allowed for the value of transfers (gifts) between spouses. Many people make a big mistake with this. The Unlimited Marital Deduction does not eliminate estate taxes but has the effect of deferring estate taxes until the second death, whereupon the children have a mad scramble to come up with the cash. If the surviving spouse is not a U.S. citizen, the Marital Deduction will not be allowed unless the assets pass to a Qualified Domestic Trust that meets four conditions:

1. At least one U.S. trustee who approves all distributions.

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2. Surviving spouse must receive all income at last annually or have an interest which would otherwise qualify for the Marital Deduction if he or she were a citizen, e.g. Estate Trust.

3. Must meet Treasury requirements designed to ensure collection of tax at surviving spouse’s demise and

4. Executor makes irrevocable election on FET return of donor to defer the tax.

QDOT requirements are very technical and should be reviewed with your lawyer and your tax advisor. A non-citizen spouse who becomes a U.S. citizen before the estate tax return is filed, and was a resident from the decedent’s death through the filing of the return is eligible for the Marital Deduction.

As to your business not being worth anything, do you claim for soap powder every year? Do you use water that can be measured? The IRS has your returns (hopefully) and can estimate the volume of projected estate taxes.

There are a few ways you can take care of these taxes: You can spend down your estate, but you might be living on a park bench. You can give it away at $10,000 a year gift tax free to each person you know . . . the park bench again. Your heirs can liquidate everything you own — but very often this is a fire sale and full value is not received. Your heirs can borrow against your property — but payback, as we all know, is tough, even if they did manage to get the credit. They pay 100 cents-plus for every $1 of expense.

Also, you can save the required amount, but premature death might prevent you from saving enough. You could put all your money into an immediate annuity, which guarantees you a lifetime income even if you live forever. This would preclude the dreaded park bench scenario. Or you can get special life insurance plans called estate savers which guarantee that required cash will be available when needed. Annual cost is a fraction of total protection. Proceeds are received income-tax free and possibly estate-tax free.

All federal estate taxes are due within nine months of your date of death and must be paid in cash. There are severe penalties for filing a fraudulent FET return. The IRS has the right to appraise your estate and dispute the value which your executor has placed on this property and all other property which you owned at the time of death, unless your executor elects the alternate valuation date, which is generally six months after date of death.

Your estate is permitted a deduction for all gifts which you make to qualified charities, dare we imagine that Ted Turner is doing his planning at this time? A generation-skipping tax may be imposed on property which you transfer to beneficiaries who are considered two or more generations below you. Currently this is imposed at a rate of 55 percent and is in addition to any FET payable. An excess retirement accumulation tax may be imposed on assets in your qualified plans. This is a 15 percent tax on accounts in all your qualified plans which when added together exceed the allowable limits specified in the Internal Revenue Code.

From all the above you can see that financial planning is really like playing chess, and estate planning is trying to think like a grand master. Think of your family unit as a going concern. Estate planning is simply the white knight you put in to prevent a hostile takeover.

The information contained herein has been obtained from sources believed to be reliable, but we cannot guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.

International investing presents certain risks not associated with investing solely in the U.S., such as currency fluctuation, political and economic change, social unrest, changes in government regulations, differences in accounting and the lesser degree of accurate public information available.

Adrienne Grimes, CLU, is a life underwriter with Metropolitan Life. She helps her clients create wealth, keep it, and pass it on. She conducts a seminar, "How to Find Your Way Through the Financial Jungle," at the Metlife office in the Bulova Corporate Center in Astoria, Queens. She specializes in 401k plans and deferred compensation for highly paid individuals. She may be reached at (718) 334-7421.

If you have a question related to business or personal finance, mail or fax it to the Business Section, Irish Echo, 309 Fifth Ave., New York, N.Y. 10016; (212) 686-1756 or (888) 446-4743. The Echo cannot guarantee it will publish answers to every question it receives.

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