DECEMBER 2002

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Don’t Be Late!
From Poleznaya Gazeta (the Useful Gazette)

By Eliza Greenberg and Elliot Sheinerman, lawyers

You have worked your whole life and saved up for retirement. Most people probably want to leave something for their children and grandchildren. But did you know that inheritance is subject to a huge tax after which you may only be left with half of your life's savings? You think that your savings are perfectly safe? Or maybe you are sure that the amount is not large enough to be taxed?

Yes, perhaps many of you are right. It’s true that in order for your inheritance to be subject to taxation in the year 2002 your capital must comprise over one million dollars. You think that your savings are significantly more modest? Let’s try to appraise them together.

First, many members of the Russian-speaking community reside in their own homes. Everyone knows how much real estate can cost in the New York.

Second, you have life insurance. It, too, is part of the capital subject to taxes.

Perhaps you have your own business? You have put your soul into developing it, and now it is probably worth quite a bit.

Look how easily we could hit the one-million mark, and maybe even exceeded it. Now it is easy to understand that without proper planning, the government will be your most fortunate successor.

Although the inheritance tax is supposed to decrease steadily and disappear totally by 2010, no one can guarantee that this, in fact, is what will happen. Even if the current law remains unchanged, beginning Jan. 1, 2011 the old rules will again be in effect, and the amount due for taxes will again be $1,000,000. By 2010 a new Congress will have been elected four times; the presidency will have changed at least once, and no one in the world can predict which laws will be in effect in a few years. This is why you should not depend on fate. Now is the time to think about how to protect your savings for your loved ones.

There are several ways to minimize, or even avoid, inheritance taxes. None are universal, and each demands a unique approach. One of the most effective approaches to tax planning is to make gifts of money or valuables while you are still alive.

Up to a certain point, you can give gifts without filling out tax forms. In other words, in 2002 the worth of the gift must not exceed $11,000 if you would like to avoid taxes. The rules of taxation on gifts are complicated and certain formalities must be observed. The gifts may not be in cash, but it is important to remember that sometimes the worth of the gift will not be obvious, and in these cases one must have sound reasons for the estimation.

In addition, one can avoid taxes by paying for someone’s education or medical costs. In this case one must pay directly to the educational institution or medical company. Meanwhile, the person for whom the bills are being paid can retain his right to welfare and Medicaid.

The big questions are what to do with the house, the life insurance and the business?

If you are already seeking answers to these questions it is time to take up some serious planning. The earlier you start to plan, the better you will protect your capital for your children.

How important is it to you who specifically owns your business, so long as you have control and governance of it? For instance, if the business does not belong to you personally, but rather to a "Family Limited Partnership," with good planning it can pass down to members of your family without subjection to taxes and without interruption to business as usual. An additional benefit of such a partnership is that the business will be protected from law suits if you personally face sentencing.

If you have an expensive house it can, for instance, be part of a trust. Moreover, various kinds of real estate ownership allow you to retain usage throughout your lifetime. An additional benefit here is that you can retain your right to receive Medicaid and other government assistance. Such a transfer of ownership must, however, be conducted by a professional in order to avoid the risk of having to tax it as a gift.

Your insurance plan can also belong to a third person. In this case this money will not be considered part of the taxable capital. Quite often a legal guardianship is created specifically for ownership of this plan. Anyone can inherit such a plan.

Even in those cases when the total inheritance is not large enough to be taxable, the abovementioned measures can help you avoid probate court. Before the successor can gain his inheritance this court freezes the transfer until it has been determined, for instance, that there are no other successors. Here you have to hire lawyers and pay for court fees which can comprise from 5 to 15 percent of the total inheritance. Such court proceedings can last a very long time. By planning today you can avoid paying fees in the future.

In addition, one should not forget that your IRS capital includes furniture and even clothing that’s in your house, your retirement fund, your car and many other things which you have not considered.

All tax planning should be conducted with maximum care and attention and take into consideration a myriad of details. Otherwise, the end result may be just the opposite of what you were hoping for.

Translated from Russian by Katya Kumkova-Wolpert

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