Small Business Accounting:

Coming Up With a Plan to Beat the Death Tax

In part due to the more than nine years of US stock market gains coupled with the fact that the economy is in the midst of its longest running expansion ever, the growth of millionaires is creating a new class of Americans who need to be concerned with estate taxes and the infamous "Death Tax." The fast rise in computer-related stocks has also enlarged the group of Americans whose net worth makes their assets potentially subject to estate taxes. The growth of US wealth is reflected in the number of estate tax returns being filed to the IRS.

To cut your estate tax bill, financial planners recommend donating some of it to charity. Though heirs will not directly benefit from donations, charitable donations will reduce the size of a future estate. One option worth looking into is a charitable remainder trust. This trust provides an income stream for the donor during his lifetime or for a specified term of years. Upon the death of the donor or the end of the specified term, the remaining assets become the property of the charity. The donor then has an income tax charitable deduction for the present value of the charity's remainder interest.

Another similar option is a charitable lead trust. With a charitable lead trust, an income stream is provided to a charity, with the remaining portion of the trust being passed on to people chosen by the donor.

Taxpayers may also use a remainder trust to diversify their stock holdings. This is because a charity can sell donated stock and acquire shares in other companies without incurring income taxes.

Married couples should examine how to use their estate and gift tax credits to maximum advantage so that a surviving spouse can minimize estate taxes upon death. Married couples can also greatly reduce or eliminate estate taxes by taking advantage of the marital deduction. Property passed to a spouse is generally free from estate or gift tax because of an unlimited marital deduction.