The Estate Tax Burden
The federal estate tax has often been referred to as the sneak-up-on’em tax. It applies to all your property interests—home, investments, IRAs, business assets, personal property and life insurance—to name several.
This tax is imposed on the value of all property that one owns at death (other than property left to your spouse). In 2008, once your “applicable exclusion amount” of $2,000,00 is exceeded, the estate tax rate is 45%. In addition, common asset-holding devices, such as joint tenancy, can have devastating estate tax consequences, if used in excess.
Let’s take a closer look at a common problem that causes families to pay unnecessary estate taxes and then explore a key planning technique, utilizing what is known as a family trust, to reduce the estate tax bite.
Don’t Pay More Than You Have To
Everyone is currently entitled to leave at death any amount of property to a spouse, and up to a total of $2,000,000 of property to persons other than a spouse (such as your children), without paying any estate taxes. This amount is scheduled to increase to $3,500,000 for individuals who die in 2009. The estate tax is scheduled for repeal in 2010, but reappears in 2011, with the lifetime exemption reduced to $1,000,000. Given that many estate tax professionals believe that the estate tax will never be repealed, planning to utilize the lifetime exemption properly is a key focus in estate planning— and it’s easier to have an estate in excess of the available exemption amount than may appear at first glance.
Homes bought years ago have often appreciated substantially. Life insurance policies are counted at face value—not merely current cash surrender value. Stock portfolios, IRAs and IRA rollovers, pension and profit sharing interests and Keogh plan assets, if invested wisely, have a way of increasing nicely in value.
…Uncle Sam will grab an estate tax of $510,000…How can this unnecessary tax be squelched?
Your $2,000,000 Exemptions—Use Them! The key to reducing a family’s estate tax burden is to have your spouse and you each utilize your right to eventually “give away” as much of your property to the next generation as the law will allow without incurring gift or estate taxes and without inappropriately losing control of your property during your lifetimes. This right to give away property estate tax free is often lost where spouses have wills leaving everything they have to each other or hold all their property in joint tenancy.
Under either circumstance, no estate tax will be due on the death of the first spouse. This is because there is no estate tax due with respect to property that passes to a surviving spouse, as a result of the estate tax marital deduction that reduces a person’s estate by the value of all property passing to a spouse.
However, when the surviving spouse dies, the family’s combined assets are all subject to the estate tax—to the extent that their value exceeds $2,000,000 under current law. Because the first spouse did not utilize the $2,000,000 estate tax exemption for property passing to persons other than a spouse, the deceased spouse’s exemption died with them. Assuming that the family’s combined assets are worth $3,000,000, based upon current estate tax rates, Uncle Sam will grab an estate tax of $450,000—all of which could have been avoided.
How To Reduce Your Estate Taxes
How can this unnecessary tax be squelched—without the surviving spouse losing the benefits of any portion of the combined assets? There are various techniques, but the most common works something like this:
- TITLE TO THE FAMILY’S ASSETS would be split between the spouses, so that each individually owns (not in joint tenancy) as close to $2,000,000 (or more) of assets as possible.
- EACH SPOUSE’S WILL OR LIVING trust would be worded to provide that upon the death of the first spouse, a portion of that spouse’s assets (up to $2,000,000 in 2008 and $3,500,000 in 2009) would be placed in a trust for the benefit of the surviving spouse. This trust, often called the family trust, does not qualify for the marital deduction, but no estate tax is triggered by the first spouse’s death because the amount placed in the family trust does not exceed the amount you can transfer estate tax free. Any assets in excess of this amount can be given to the surviving spouse without any estate tax because of the marital deduction.
The Family Trust
The family trust can provide for significant control of its assets by the surviving spouse. The surviving spouse can be the trustee of this trust, can receive all its income and can receive principal distributions from the trust if necessary for health, welfare or support in reasonable comfort. Yet, with all these rights, the assets held by the trust are not subject to estate tax upon the death of the surviving spouse, and pass estate tax free to the family’s children or other designated heirs on the death of the surviving spouse (no matter what the assets are then worth). Only the surviving spouse’s own assets in excess of the then available exemption amount are subject to estate tax on that spouse’s death.
By utilizing the family trust concept, your family can obtain substantial estate tax savings. Levun, Goodman & Cohen, LLP can provide you with more information about this type of estate planning or you can see your legal advisor.
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The materials contained herein have been prepared to provide information relating to the covered subject matter. The authors are not rendering legal, accounting, tax or other professional advice. If such advice is required, a professional advisor should be engaged.
© 2008 Levun, Goodman & Cohen, LLP