3 ways to soften the blow of estate taxes Reports of the death of the federal estate tax have been greatly exaggerated. True, as of this writing, the Because the estate tax appears to be here to stay, you and your family need to be aware of the tax-reducing strategies that can be implemented during one’s lifetime and even after one’s death. Here are three postmortem moves an executor can make to reduce an estate’s tax bill. 1. Use the alternate valuation date Normally, for estate tax purposes, assets are valued as of the date of death. However, an executor can elect to use the alternate valuation date, which is six months later. This strategy may reduce estate taxes if the estate includes property, such as stock or real estate, which declines in value during that time. This irrevocable election applies to all of the estate’s property — it can’t be applied selectively. The strategy is unlikely to be used unless doing so would make the estate’s overall tax burden lower. 2. Use a special-use valuation If real property used in a family business or farm makes up a significant portion of a decedent’s wealth — 25% or more of the gross estate, subject to certain adjustments — the executor may be able to reduce estate taxes using a special-use valuation. Typically, real property is valued for estate tax purposes at its fair market value, which in turn is based on the property’s “highest and best use.” Fortunately, federal tax law allows an executor to elect to value real property based on its actual use, provided several requirements are met. Among other things, the decedent or other family members must have owned the land and materially participated in the business for at least five of the eight years immediately preceding the decedent’s death. Also, the property must pass to a qualified heir (such as a spouse or child) who materially participates in the business for at least 10 years after the decedent’s death. 3. Defer estate tax payments If an interest in a qualifying closely held business makes up more than 35% of an estate, the executor can elect to defer the portion of estate taxes attributable to that interest. The estate pays interest only for four years and then pays the tax in 10 annual installments. Qualifying closely held businesses include sole proprietorships, partnerships and corporations that meet certain size or ownership requirements. The tax code also contains special rules for determining which assets are counted in applying the 35% test. Consider other strategies Dealing with the death of a loved one is difficult. In addition to the emotional aspects, there are the financial elements involved in settling an estate. Fortunately, there are a number of strategies, including some not mentioned here, that can be employed after one’s death to reduce the estate tax bite. • |