Estate Tax-Federal Estate Tax

Federal tax laws exempt property up to two million dollars from estate tax. They also allow a one million-dollar lifetime limit for gifting property without attracting any gift tax. However, there is a rider that the value of the gift must not exceed twelve thousand dollars to any one person during a single calendar year. Estate tax exemption is set to rise further to $3.5 million in 2009 and stands to be repealed in 2010, which will be a year free from estate taxes. Thereafter, in 2011, the Congress is expected to confirm a full repeal of estate taxes failing which, the old estate tax structure would return with an exemption limit of $1 million.

There is a supplementary provision to estate tax that is known as Marital Deduction. This allows one spouse to leave any amount of property at death to a remaining spouse without creating any estate tax liability. This provision is applicable only if the remaining spouse is a US citizen. If not, then the benefit of marital deduction can be availed only if the property of the deceased spouse is left in a QDOT or qualified domestic trust. This position has been effective since the passing of the Technical and Miscellaneous Revenue Act (TAMRA) in 1988. Among other requirements, a qualified domestic trust needs to have at least one US trustee who is citizen of the United States or is a domestic corporation. If the value of the assets of the deceased exceeds $2 million, the QDOT needs to be a US bank.

In order to avoid soaking of a substantial portion of ones assets in estate taxes, and to let a greater share be available for the benefit of loved ones, people form bypass or family trusts. These are excellent means to lower estate taxes. Such trusts can have a character of a lifetime trust or a testamentary trust. In a lifetime trust, the property is passed on to the trust either during the lifetime of the grantor or owner of the property. In a testamentary, trust the property passes on to the trust through a will after the grantors demise.

The trust is a separate legal entity that enjoys the status of an owner. The property it holds is not recognized as part of the estate of the grantor. No estate tax can be imposed on the grantors death as the owner i.e. the trust still survives. The trust property is managed by trustees for the benefit of designated beneficiaries.

When a married couple forms a bypass trust as part of their estate plan, each leaves property up to their estate tax exemption limit (currently $2 million) to the trust. On the first death, the rest of the property of the deceased can pass on to the surviving spouse under marital deduction without paying any estate tax. The assets in the bypass trust can be made available to the surviving spouse for upkeep, health and other needs. The survivor may even be authorized to draw a certain amount of the principal every year. On the death of the surviving spouse, the trust assets would pass on to beneficiaries named in the trust deed without attracting any tax. This is because the trust was created with assets within estate tax exemption limits to which the creator of the trust was entitled. The assets of the last to die spouse would be taxed subject to the exemption limit of $2 million.

This way, the whole estate (of both the spouses) gets the additional exemption benefit of $2million of the first to die spouse also which leaves more money for their surviving children/heirs/beneficiaries.

It should be noted that if the first to die spouse does not create a bypass trust and just lets the whole property pass on to the surviving spouse through marital deduction, his/her entitlement for the $2million estate tax exemption would simply fizzle away. Fewer assets would pass on to loved ones after the death of the second spouse in this case.



By: Kris Koonar

About the Author:

Kara Santore

The government provides estate tax as a levy against the taxable estate of a deceased person. Taxable estate is gross estate that is reduced by some allowable deductions. The value of an asset is determined on the basis of “fair market value” or the amount that it would fetch if sold in the open market. Every benefactor needs to have a personal representative who will be choosing the date for valuation to ascertain the asset’s value.

It can either be the date when the benefactor dies or six months later. The date of alternative valuation is followed only if there is lower tax incidence. The estate’s liability for taxation starts with the death of the benefactor and it is paid out of the estate before the property is distributed to the beneficiaries. Unless there is an extension the estate tax needs to be paid within nine months from the day the benefactor dies.

Estate tax planning is essential if you want to preserve your wealth for the coming generations. In order to start planning, you need to know the potential estate tax liability. According to the law that was enacted in the year 2001, whatever you own will be subject to the federal estate tax when you die, until 2010. There will be no federal taxation on the estate till 2010. This law will expire by the end of 2010.

No financial plan can be considered complete without estate planning. It is the best method of preserving the assets you have for your future generations. Many people think of estate planning as legal wills. They need to know that it is not a will but a series of legal steps through which they can allow beneficiaries to avoid the probate and minimize the incurred taxes. Estate planning helps you get a direct control on how you will like your asset to be treated when you die.

Till the year 2005 there was no estate tax levied on the first 1.5 million dollars of the net estate, but there will be an increase in the basic exemption level in 2009 to 3.5 million dollars. Although this tax will be removed in 2010, it will be reinstated to an exemption of 1 million dollars in 2011. There are many ways through which you can bring about a reduction in estate tax. One technique is to gift the asset during your lifetime. Since 2006, the federal tax law permits every individual to gift approximately 12000 dollars every year to as many people as possible without incurring gift tax.

Another option would be to give such gifts every month when alive instead of giving a lump sump after death so that the taxable estate can be reduced. Stocks, business or a percentage of ownership in real estate can also be given as a gift till it is below the 12000 dollars amount. There is no estate or gift tax applicable if you are transferring assets to your spouse in your lifetime, irrespective of the amount. But the surviving spouse should marry again and transfer the property to the new spouse in order to be able to enjoy the unlimited marital deductions.



By: Kris Koonar

About the Author:

Young Trostle

The word ‘Tax’ raises brows as nobody loves to pay taxes; each one keeps finding ways to evade it. Estate taxes are the most frowned upon and avoided tax payment as it eats away a substantial amount of the estate if you don’t initiate necessary steps. Estate tax planning should be done once you acquire a property above two million dollars, as this is the current limit up to which no estate tax is applicable. In case you avoid it then your beneficiaries or your heir may have to shell out 45 cents on every dollar of your estate value. There are chances that the excluding tax limit may increase by 2009.

Initially you may feel that your estate is not big enough for paying estate tax, but you may be surprised at the number of people, who own properties beyond the exemption limit even after considering life insurance death benefits, saving on 401(K) etc. If this is the situation you are facing, then you should ensure that your loved ones get the maximum from the property that you have saved for them. So implement some simple estate tax saving strategies and let them enjoy the fruit of your hard labor instead of it going into the government treasury.

. Life insurance proceeds are subjected to estate tax. Set up an irrevocable life insurance trust that can own your policies. This strategy saves you from paying estate tax. However if you wish to transfer any existing policy to the trust then you would be liable to pay estate tax for the next three years from the date of transfer.

. Marriage can also save you from tax deduction. You can transfer your estate to your spouse name and save on tax, this is called marital deduction and this leaves you free to leave up to $1 million for your grandchildren or to others without shelling out a single penny as gift tax. You can leave a legacy behind which can amount to $2 million by taking advantage of the tax exemption limit. The theory behind this tax code is that the wealth should be treated equally among married couples.

But this marital deduction is not considered permanent; it just postpones it. On the death of a spouse, the surviving spouse has to pay estate tax to the level that he or she retained the property until death.

. You are permitted to shell out an unlimited amount during your lifetime as education fees or for medical expenses not covered under insurance. This payment should be made directly to the institution. These payments are exempted from tax and it does not affect your $1million gift tax exemption. You can give an additional gift to your ward of around $12,000 towards books, or other expenses without paying tax. If your spouse is under the tax bracket then he or she is also eligible to get such privileges.

. Married couples, who pay taxes are entitled to estate tax exemption of about $2million individually, which amounts to about $4million! Even though in this case the property passes through tax exemption during the initial stages, later on the death of a spouse, one part becomes taxable.



By: Kris Koonar

About the Author:

Abby Dodsworth

Estate taxes eat away a substantial portion of your estate if you are not careful to take necessary steps in time. It is absolutely essential for you to start planning at once if you have property valued above two million dollars. This is the current limit up to which no estate tax is applicable. Your heirs/beneficiaries will have to cough up 45 cents on every dollar that is over $2million dollars of your estate value. The good news is that this limit will rise to $3.5 million in 2009.

Even though it may at first appear that your estate is not big enough to land under the estate tax net, you may be surprised how many people like you can have property above the exemption limit when you take into account life insurance death benefits and savings in 401(K) accounts. If this is indeed your case also, you can make sure that your loved ones get the maximum of the outcome of your lifetime labor just by implementing some simple estate tax planning strategies now. Dont let the fruits of your hard labor go needlessly in government coffers.

Estate tax is proposed to be totally abolished from 2010. However, it is a sunset provision and needs legislative confirmation in 2011 otherwise the tax returns. As you can never be sure of political promises in view of perpetual economic and political changes, it is advisable to take proper steps to reduce the size of your taxable estate now.

Since your life insurance proceeds are subject to estate tax, set up an irrevocable life insurance trust which can own your policies. This can help avoid payment of estate tax. However, any existing policy transferred to the trust would still be counted in your estate till three years from the date of transfer.

Marital deduction allows you to transfer unlimited assets to your spouse without any tax implications to your estate. This leaves you free to move up to $1million to your grandchildren or to others through gifts without paying gift tax. Or you can bequest them up to $2million taking advantage of the estate tax exemption limit.

You are also individually entitled to give away any amount during your lifetime to pay for tuition or for medical expenses not covered by insurance. The payment has to go directly to an educational institution or a medical service provider. For example, you can pay say $20000 to a private college directly to cover only tuition expenses of your grandchild. This attracts no tax and does not affect your $1million gift tax exemption. You can additionally gift another $12000 towards his board, room, books, and other expenses without paying any gift tax. If your spouse is also a tax payer, the same entitlement would be available for him/her. So together, both can gift up to $24000 in a calendar year without paying gift tax.

Taxpaying married couples are entitled to estate tax exemption of $2million individually, which is $4 million together.

Many people fail to understand and take advantage of the full estate tax exemption. Since marital deduction lets property without any value limits to be transferred on death from one spouse to the other, they take no steps and lose the $2million exemption available on the first death. Even though the property passes without estate tax on the first death, it is taxable in the estate of the other spouse who dies at a later date. At that time, only one $2million exemption is available.

This position can be avoided if a bypass trust is formed on the death of one spouse. Through similar stipulations in separate wills of each spouse it can be ensured that the trust would come into existence on the death of any spouse who dies first.

The first death will lead to the creation of the bypass trust and transfer of assets up to the estate duty exemption limit of $2million to the trust. The corpus is to be distributed among kids who are to be the ultimate beneficiaries. The surviving spouse would have full access to the benefits/income from the trust during his/her lifetime and can even withdraw principle up to a certain limit each year. On the second death, the assets of the bypass trust are not counted in the assets of the second to die spouse and are not taxed. This way both exemptions are availed through a bypass trust.

Any residual property above the exemption limit can escape estate taxes by forming a Qualified Terminal Interest Property Trust(Q-TIP). This is formed along with the bypass trust and the whole thing is generally referred to as an A-B trust.



By: Kris Koonar

About the Author:

Noelia Boehning

If a person dies possessed of property, the law imposed estate tax if the property has a fair market value above $2 million. Property valued less than that is not subject to estate tax. Estate tax is levied both at the federal and state levels. The high rate of taxation takes away nearly forty-five percent of the estate of the deceased. Most people suffer such high taxes because they are unaware of the ways and tax planning techniques that can avoid or help to considerably reduce the estate tax burden.

There are no federal estate tax structure of two million dollars in 2007 will rise to 3.5 million in 2009 and will be totally eliminated in 2010. 2011 may find estate tax back with an exemption limit of $1000000 if the Congress does not pass a law for a full repeal.

At present, there are some steps that a person can take to effectively reduce estate taxes that may be applicable to his estate after his demise.

a) Take advantage of the estate tax exemption twice- If married, each spouse is entitled to an exemption of $2 million dollars on estate tax. This means that the total exemption available to a couple is $4 million. Usually people do not take any steps before the death of one partner and all assets automatically pass on to the other at the first death by virtue of the provision of marital deduction. Since there is no limit on marital deduction, there is no estate tax payable whatever be the size of the estate. However, the exemption of $2 million is wasted .

On the death of the surviving spouse, the entire estate is taxed, allowing an exemption of just the $2million attributable to the last dying spouse. With due planning, one can form a family trust which will allow availing the benefit of the $2 million exemption available to the spouse who died first giving a total exemption of $4 million.

b) Form a life insurance trust- Proceeds from a life insurance policy are subject to estate tax. By establishing a life insurance trust, a person other than the insured is made the owner of the policy. Usually it is the spouse or child or any other beneficiary. When the insured dies, this owner/beneficiary/trustee invests the trust funds i.e. the insurance proceeds and manages the trust for the benefit of other beneficiaries. Forming an insurance trust can cost below $1000 but can save substantially on estate tax, which can take away nearly half the proceeds if the size of the estate is above the exemption limit.

c) Gift part of your estate- If you are in an advanced age and have lifestyle and expenditure that is within your means, it may be sensible make gifts out of your estate to the people you intend leaving your estate to when you are no more. This would greatly reduce the size of the estate and may bring it within the limits of exemption. This technique may not be proper if you are still young would like your kids to benefit from inheritance in other ways.

d) Form a family liability company- This technique can be combined with the exemptions on gifts to effectively provide a solution to avoid paying estate taxes. If you have a business or property valued at say one million dollars, you can create a Family Limited Liability company where you contribute the property exchanging it for limited liability ownership units. If you break it into one hundred and fifty membership units each is valued at about $6667. These units would be eligible for marketability and/or minority discounts. When you gift these units, you can bring down the value of annual gifts within the exclusion limits by applying these discounts.

For example, when you gift two units to a child, the child would come to have a minority interest in the company. In addition, unlike publicly traded shares there is no real market for the units. Therefore discounts can be applied to the gift to bring their value within the exemption limit of $12000 even though the total value of the gifted units would appear be (6667 x 2) $13,333. These are advanced techniques and should be considered only in consultation with an expert in estate taxes.

These are just some of the ways to save estate taxes. Your estate lawyer would be able to provide you with more/apt solutions that may be suitable to your situation.



By: Kris Koonar

About the Author:

Mauricio Tongue

There are many reasons that make an estate plan very important. When you are unable to take decisions regarding your healthcare due to illness or accident there needs to be someone who can legally take such decisions on your behalf. Alternatively, if you require long-term care, which is not covered by medical insurance, you have to make alternative arrangements beforehand. There may be many responsibilities that would need to be performed in case of your incapacity or death. Your estate plan can cover all arrangements in case of the above-mentioned eventualities. To find out how it can do this, read on.

a) Planning for incapacity:- It is important to have arrangements that can ensure that you are taken care of in the event of your incapacity. To do this

. Make a living will:- This legal instrument documents your intentions about using life-sustaining measures when you are in a state of terminal illness. It expressly states your wish in this regard and acts as a bar for anyone to speak on your behalf.

. Prepare a health care power of attorney:- This document is to authorize a specific person to decide upon your healthcare measures when you fall in an unconscious or vegetative state or are unable to take your own health care decisions on account of any other reason(s). Laws in all states are not uniform on this issue but many state laws can permit you to include instructions about continuing or withholding life-sustaining care in this document.

. Buy Insurance for long-term care:- As things presently stand, health insurance does not cover the cost of long-term care. As such, in case when such care becomes necessary it is your spouse or other family members who have to foot the bill. The remedy is to take out a long-term insurance policy.

. Form a revocable living trust:- A revocable living trust will enable you to appoint a trustee who can succeed you in order to manage the trust when you cannot do this due to injury or illness/death and avoid any probate court guardianship issues.

. Create a durable power of attorney:- This a legal document that lets you appoint an ‘attorney-in-fact’ or ‘agent’ who can perform various responsibilities on your behalf. There are many responsibilities involving banking transactions, safety deposit boxes, insurance claim settlements, filing of tax returns, matters related to government benefits, purchase, sale and management of real estate etc. that have legal implications. The durable power of attorney will vest your agent with authority to carry out all the work on your behalf, legally.

b) Avoiding probate:- You can avoid you heirs going through harrowing probate proceedings, which are also very costly and can consume a big part of your estate in legal costs and fees. ‘Transfer on death accounts’ avoid probate proceedings letting you maintain sole ownership of assets as long as you are alive. Designate beneficiaries for annuities, individual retirement accounts, life insurance, and retirement plans. Note that these designations have precedence over other claims arising out of trusts, wills etc. Revocable living trusts also help avoiding probates as your trustee takes charge to manage/distribute your property in accordance to your wishes in the event of your death or incapacity. Titling your assets as ‘joint ownership with rights of survivorship’ can also avoid probate.

c) Forming charitable trusts or making gifts to charity:- Depending on your goals, you can make gifts of IRAs, retirement plans, annuities, make charity a beneficiary to life insurance benefits or establish a charitable trust(s). There are ways through which you can avoid estate tax, capital gains tax, get a reduction on income tax payable etc. along with receiving lifetime income from assets that are to be distributed to charity after your death.

d) Avoiding estate tax burden:- Form other trusts to eliminate/mitigate estate tax payable by your heirs:- You can form bypass trusts, A/B trusts or other types of trusts to ensure that your heirs are not burdened by avoidable estate taxes. Your estate tax consultant will be able to guide you how to go about this.



By: Kris Koonar

About the Author:

Mariam Quiel

US laws heavily tax the estate of a deceased person if the value of the estate exceeds certain limits. For the year 2007 and 2008 this limit is fixed at $2 million. 2009 will see this limit climbing to $3.5 million. The rate of taxation for the amount above the exemption limit is a flat 45%. Every dollar above the limit will lose 45 cents to estate taxes.

There are many ways to avoid or mitigate estate taxes. Transferring property through gifts is one of them. As a general rule, all gifts excluding certain exceptions are subject to gift tax. The exceptions for are :-

Gifts made to ones spouse

Gifts to political organizations for their use

Gifts to charities.

Gifts to cover someones tuition or medical expenses paid directly to an educational institution or medical service provider.

Gifts up to $12000 to a person in one calendar year. This is known as Annual Exclusion.

The lifetime exclusion limit for each taxpayer is $1million. Therefore, any number of $12000 gifts would remain non-taxable even if made in one calendar year but to different persons. You can lower the size of your estate during your lifetime through gifts to escape the estate tax net.

Gifts can be used in estate tax planning by using the annual gift exclusion. Although the annual exclusion limit of $12000 may not appear to be much on the face of it, it can serve to substantially lower the estate size over a period of time. Let us examine how it can do this.

You give $12000 dollars each year to a son/daughter/any other person and pay no tax. In this case, no gift tax return is to be filed. If married, the amount doubles as your spouse is entitled to make a non-taxable gift of a similar amount. This amounts to $24000 a year to a married couple. Now for a person with four children, who receive similar gifts, the amount would total to $96000 every year. When the children are married and the spouses also receive similar gifts the amount of the total non-taxable gift in a year comes to $192,000. This way over a period of five years, one can make TAX FREE transfer of wealth from the estate and lower its taxable value by a figure close to $1Million!

Considering this $1million to be above the estate tax exemption limit, at present rates it would attract an estate tax of $450,000 if allowed to pass on to heirs by inheritance after death.

As already discussed, a married couple can make tax-free gifts of $24000 each calendar year. Even when the gift amount is not evenly contributed by them, they can still make a taxless gift up to that amount by taking advantage of the gift splitting provision.

Both partners must agree to take advantage of gift splitting and each will have to file a gift tax return by filling form 709. Both returns need to be filed even when Below the Exemption Limit Share of one partner does not require a return to be filed in the usual course. Let us examine how this works.

A married couple A and B together gift a total of $39000 to two persons. A gifts $21000 to his nephew C and B gifts $18000 to her niece D. Both gifts are above $12000 and liable for gift tax.

By filling Form 709 for Gift Splitting, As $21000 is treated as being given in equal amounts of $10,500 both to C and D which is within exemption limits. Similarly, Bs $18000 is again treated as being given in equal amounts of $9,000 each to C and D that is within exemption limits. This way a substantial gift tax that would otherwise have been payable on both the gifts is saved through gift splitting.

You can also make gifts without any limits to your spouse without any tax being applicable. This would lower your estate tax liability and can even eliminate it if it can lower the size of your estate to that extent. However, the amount would be taxable in the estate of your spouse on his/her death if the estate were larger than the exemption limit unless suitable plans are implemented before the second death to take care of applicable estate taxes. Other non-taxable gifts mention earlier can also help reduce estate taxes through proper use.



By: Kris Koonar

About the Author:

Elwood Rados