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. Its 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? Lets try to appraise
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 someones 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 thats 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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