Estate (Taxes Imposed upon Decedent's Estate)
Tax Rates Are Based on Valuation of Estate
You should periodically review the value of your estate with a Certified Public Account (CPA).
The Internal Revenue Service values your estate by adding together the value of all of your assets (i.e., residence and other real estate, cash accounts, investment accounts, business interests, personal property, such as jewelry, art, vehicles and boats, retirement accounts, life insurance) and subtracting the value of your liabilities (i.e., mortgages and other debt).
The tax rate for 2007, 2008 and 2009 is 45%.
Exclusions from Tax
Each person receives an individual exclusion from estate tax. The Estate Tax Exclusion rates are as follows:
- 2006, 2007 and 2008: $2 million
- 2009: $3.5 million
Each dollar that exceeds this exclusion is taxed at a rate of 45%.
How Trusts Preserve the Estate Tax Exemption
-
Unless Congress takes action, the tax exemption will return to $1.0 million per person and the maximum estate tax rate will be 55% in 2011. As you are likely aware, the federal tax exemption is expected to be revised before December 31, 2010, including the possibility of a retroactive change affecting the tax exemption for 2010.
Under current law, property received from an individual who dies in 2010 will not automatically receive a step-up in basis for the purpose of a capital gains tax. In the past, the beneficiary of an inheritance received a “stepped up” basis in the property which was generally the value of the property at the time of the donor’s death. Therefore, a subsequent sale would only be subject to capital gains from the date of death.
Under current law and absent further action by Congress, only the first $1.3 million of property will be distributable with a step-up in basis. If your estate exceeds $1.3 million, you should consider how the Trustee is to allocate the step-up in basis among your beneficiaries. Any amount exceeding $1.3 million will be subject to tax on the increase in value from the date the decedent first acquired the property.
- When the first spouse passes and leaves their entire estate to the surviving spouse, the federal government does not tax the estate due to the "unlimited marital deduction." However, when the second spouse passes the entire estate is subject to the estate tax and the surviving spouse is limited to their individual exclusion amount, currently $3.5 million.
- By creating a living trust with specific provisions to protect against the estate tax, married couples can preserve the estate tax exemption of the first-to-die and effectively doubles the estate tax exemption. Therefore, with a living trust, married couples can currently increase their federal estate tax exemption to $7 million.
Example of taxation without living trust
(Space held for PP graphic)
Example of taxation with living trust
(Space held for PP graphic)
- Other Benefits of Trusts
a) Immediate transfer of administration of assets to Successor Trustee
b) Broad powers to act as authorized by the trust
c) Ability to put restrictions on gifts (i.e., age of beneficiary before outright distribution is made, amount of gifts to beneficiaries, etc.)
Also see: Advanced Tax Planning Strategies for Large Estates
Back to Top
|
