Question

Imagine that you are a Certified Public Accountant (CPA) and your client has asked for your help in mitigating or eliminating the potential estate tax liability for the property the client owns, in order for the taxpayer to pass the property to heirs at the lowest possible tax rates. Analyze the options that may be open to your client and propose a strategy to mitigate or eliminate the client's potential tax liability.

Answer 1

Estate taxes are levied when one person transfers the right that he has on an asset to someone else.

In this case estate taxes are to be levied because the right of the client that he has in the asset is to be transferred to his legal heir.

The estate taxes are always calculate at the fair market value of the asset that is being transferred and the price at which the asset is purchased is not considered.

Below are the ways by which client can reduce the estate taxes.

• Give gifts: - giving gifts is a one way by which one can reduce the tax liability. There is no limit on the no. of persons to whom the gifts from you property can be made.
• Setup irrevocable Life insurance trust: - setting up an irrevocable trust is another way one can save the estate taxes. Life insurance proceeds are taxable hence the estate should be transferred by an irrevocable trust. This will lead to change in the ownership of the estate.
• Establish a family limited partnership: - if you have a family than you can start a partnership that will be limited. In such a way your children will continue to have share from your estate and this will reduce you net assets that you owns.
• Transfer to third generations:- instead of transferring the assets to the children it should be transferred to the grandchildren, this way client will save the estate tax cost that might be involved in transferring the asset from your children to grandchildren