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Probate fees: Probate is a court-supervised process of distributing your assets. If you do not have any estate planning documents or only have a will, the court may distribute your assets for you and may charge your estate a fee. Probate fees typically range from one to four percent of the property passing through probate, depending on state law.

Transfer taxes: The federal government may impose three types of transfer taxes: gift tax, estate tax, and generation skipping transfer tax (GST tax)1. The gift tax may be applied to transfers made during your lifetime, and the estate tax may be applied to transfers made at your death. The GST tax may be applied to transfers made during life or at death to persons two or more generations younger than you, such as your grandchildren. In addition to these federal transfer taxes, many states impose separate gift, estate, inheritance, and GST taxes.

Marital deduction: Amounts transferred during life and at death to a U.S. citizen spouse are not taxable transfers. A married individual is allowed an unlimited marital deduction for the value of any property transferred to a U.S. citizen spouse. If you distribute assets to your surviving spouse, the spouse receives them free from gift and estate taxes. However, those assets may be included in the taxable estate of your spouse at his or her death.

Lifetime gift tax exemption: In 2013, you are able to gift up to $5,250,000 (in addition to your annual gift tax exclusion amount) without incurring any federal gift tax because of the lifetime gift tax exemption. The $5,250,000 lifetime gift tax exemption is the total amount that each person can transfer to individuals, other than a spouse, during lifetime without incurring gift tax. After the lifetime gift tax exemption has been reduced to zero, you may then pay gift taxes. Any use of the lifetime exemption reduces the estate tax exemption available at death.

Annual gift tax exclusion: In 2013, any person is allowed to give any other person gifts in a calendar year that have an aggregate value of up to $14,000 per recipient2. This annual gift tax exclusion amount will be increased for inflation. Annual exclusion gifting is a valuable estate planning tool because it allows you to transfer assets free from gift tax during your lifetime and it is in addition to the assets transferred using your lifetime gift tax exemption and estate tax exemption. Also, making annual exclusion gifts does not utilize any of your lifetime gift tax exemption.

Portability: Starting in 2011, married couples have had the option of using their last deceased spouse's unused estate tax exemption amount. In order to transfer one's unused estate tax exemption amount to a surviving spouse, the executor of the deceased spouse's estate must make a timely election on the deceased spouses estate tax return.

Estate tax exemption: The federal estate tax affects individuals who die leaving a taxable estate of more than the estate tax exemption amount. For 2013, the federal estate tax exemption amount is $5,250,000. The highest estate tax rate in 2013 is 40%2. If you are married, the estate tax will most likely be an issue when the second spouse dies because the marital deduction will ensure that assets left to the surviving spouse pass free from estate tax.

Generation-skipping transfer tax exemption (GST tax exemption): The federal GST tax applies to transfers made during life or at death to persons two or more generations younger than you, such as grandchildren. Your GST tax exemption allows you to give or leave assets to grandchildren without imposing this additional transfer tax. For 2013, the GST exemption is scheduled to be $5,250,000. The structure of the GST tax will follow the same exemption amount and top tax rate as the estate tax.

 

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1According to the American Taxpayer Relief Act of 2012, the federal estate, gift and generation skipping transfer (GST) tax exemption amounts are all $5,000,000 (indexed for inflation effective for tax years after 2011); the maximum estate, gift and GST tax rates are 40%.

2As of January 1, 2013, the annual gift tax exclusion is $14,000 per donee (indexed for inflation).

For more information on this subject, and professional guidance in selecting the right kind and amount of insurance coverage, contact your life insurance producer.

This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state or local tax penalties. This material is written to support the promotion or marketing of the transaction(s) or matter(s) addressed by this material. Pacific Life, its distributors and their respective representatives do not provide tax, accounting or legal advice. Any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products are issued by Pacific Life Insurance Company in all states except New York and in New York by Pacific Life & Annuity Company. Product availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues. Insurance products and their guarantees, including optional benefits and any fixed subaccount crediting rates, are backed by the financial strength and claims-paying ability of the issuing insurance company, but they do not provide the value of the variable investment options. Look to the strength of the life insurance company with regard to such guarantees as these guarantees are not backed by the broker-dealer, insurance agency or their affiliates from which products are purchased. Neither these entities nor their representatives make any representation or assurance regarding the claims-paying ability of the life insurance company. Variable insurance products are distributed by Pacific Select Distributors, Inc. (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company, and an affiliate of Pacific Life & Annuity Company, and are available through licensed third-party broker-dealers.

Pacific Life's Home Office is located in Newport Beach, CA.