How do I minimize all kinds of taxes?

As they say, “consult your tax advisor and other paid professionals, and don’t do this at home without help”.  Other warnings about these being “forward looking statements that are subject to revisions without notice” are probably in order as well because tax planning has many vagaries and will be very dependent on your own financial circumstances.

Having provided the important caveats, there are some basic directional tenants that one can apply in getting to the right ball park.  First, we must recognize that there is an interaction between income taxes and estate taxes in as much as you must pay the government now or pay them later.  For instance, if you give assets now as part of an estate plan, the income will go to the beneficiary of the gift and be (income) taxed to them.  In another instance, taking a capital gain now rather than allowing that asset with the gain to stay in an estate will cause tax to be paid now rather than potentially, never.  So, you can see that the two kinds of taxes have some relationship and minimizing taxes involves considering both issues.  The outlook for tax policy as well as economic growth is also an important element doing tax planning.

Let’s take a specific case: Saving for College.   One has several choices in funding college (see Investing for the Future section); (1) keep the assets in reserve in the parent’s accounts or a sub-account for that purpose in the parent’s or grand-parent’s name.  (2) hold funds in a uniform transfer to minors act account, contributing under the annual gift tax exclusion amount of $13,000 (2009) per year per person, or $26,000 from both parents, if the spouse agrees (typically this would require a gift tax return with no tax due, if the entire amount came from just one parent).  (3) Using a 529 plan for one or more children.  This alternative allows several year’s maximum gift tax exclusions to be contributed up front (each state’s plan rules is different), which would be advantageous from an estate planning point of view because grandparents (who might be able to afford to give a significant amount) could get money into the children’s account where it could grow outside of their estate, while the annual exclusions would be counted each year against their up-front contribution and not the subsequent value after the growth had taken place.  If the donor dies before all of the contribution is excludible, the remainder will be counted in the estate (of the grandparent in this example). (4)  Some states have pre-paid tuition programs that can be used.  These are typically handled like an annuity, where the future value of the cost of college is discounted to the present and can be paid now.  This could be effective if the restrictions on where the child can attend are not too narrow, and the assumed rate in the discounting calculation is favorable.  Otherwise, one could do just as well with a disciplined saving program.  Discipline is the key factor to saving for college under all of these alternatives, and that would include other deferred income tax alternatives such as an education savings account (ESA), also known as a Coverdell ESA.

Hartline takes each issue that our client’s need to tackle and we develop a recommendation that is applicable to the particular case as applied to their personal goals and objectives.  Taxes are a fact of life and we consider them as an integral part of the planning process.