Estate planning can involve many layers of consideration. This is especially true if you have been particularly successful throughout your life.
There is a federal estate tax in place that carries a maximum rate of 40%. The estate tax exclusion amount was set at $5 million in 2011 with ongoing adjustments for inflation. Because of these adjustments the exclusion in 2013 was $5.25 million.
It should be noted that we also have an estate tax on the state level in the state of Connecticut, and the exemption is just $2 million.
Concerning yourself with the estate tax is one thing, but you also have to ask yourself how a large inheritance may impact some of your younger family members. You would not want to remove incentives for personal achievement.
One thing that you could do to gain estate tax efficiency while paving the way for a loved one would be to make this individual the beneficiary of a 529 plan.
A 529 plan is a college savings account, and they are offered by states and specific institutions of higher learning. When you convey assets into the account you are making a taxable gift in the eyes of the Internal Revenue Service. And, there is a gift tax in place that carries the same 40% top rate as the estate tax.
However, there is a $14,000 per year, per person annual exclusion. You can give gifts totaling as much as $14,000 to any number of people every year tax-free.
So, you could utilize this exemption to contribute funds into a 529 plan. The contributions would be tax-free, and the growth would not be taxed either as long as the student wound up using the funds for qualified purposes.
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