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 left to anyone other than your spouse; and once your estate tax exemption is used up, the estate tax rate begins at 37% (and rapidly increases to 55%). 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 people 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 give any amount of property to a spouse and up to a total of $675,000 of property to persons other than a spouse (such as your children), without paying any estate taxes. This amount is scheduled to increase in increments through 2006, when it will be $1,000,000. It is planning for the use of this exemption that 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. 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 $270,750...HOW CAN THIS UNNECESSARY TAX BE SQULCHED?
Your $675,000 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 or 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 every thing 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 all the property passes to the surviving spouse, and the estate tax rules provide a marital deduction for all property passing to a spouse.
However, when the surviving spouse dies, the family's combined assets are all subject to estate tax---to the extent that their value exceeds $675,000 under current law. The first spouse did not utilize the $675,000 estate tax exemption for property passing to persons other than a spouse---thus, the exemption died with the first spouse. Assuming that the family's combined assets are worth $1,000,000, based upon current estate tax rates, Uncle Sam will grab an estate tax of $125,250, and at $1,350,000 combined family assets, Uncle Sam will take $270,750---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 $650,000 (or more) of assets as possible.
- Your spouse's will and your will or your living trusts would be worded to provide that upon the death of the first spouse, a portion of that spouse's assets ($675,000 in 2000 and 2001) 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 because the amount placed in the family trust does not exceed the amount you can give away 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 and 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.
Act Now!
By utilizing the family trust concept, your family can obtain substantial estate tax savings. Levun, Goodman & Cohen can provide you with more information about this type of estate planning or you can see your legal advisor.