August 4, 2008
The Basics of the Federal Estate Tax
At first, most clients that meet with me think that they do not have a large enough Estate to be concerned about it being taxed when they pass away. When I have completed asking them questions they are amazed at the true value of their Estate. The reality is that many people need to start planning for the possibility of their estate being taxed.
To put it simply, if you pass away in 2008 and the value of your estate exceeds $2,000,000, anything over $2,000,000 will be taxed at the rate of 45%. If you pass away in 2009 and the value of your estate exceeds $3,500,000, anything over $3,500,000 will be taxed at the rate of 45%. Passing away in 2010 provides the greatest benefit; your estate can be of any amount and it will not be taxed. More than likely in 2011 the excluded amount will be back down to $1,000,000; affecting many more clients.
How does the Federal Government determine the value of your estate? They will look at every asset that you own whether you own it in your name alone or together with someone else. The assets include (but are not limited to) your home, rental property, stock accounts, checking accounts, savings accounts, IRAs and 401Ks. In addition, they will take into account the value of any life insurance you own. Yes, I know, this really isn’t your money, but that does not matter, and that discussion I will leave for another Blog all its’ own!
There are numerous methods that can be used to protect an Estate from being taxed. Avoiding taxes is legal; evading taxes is not! If you are married, you are permitted to pass all your property to your spouse without incurring any Estate tax, regardless of the amount that is passed. Any potential Estate Tax will be imposed on the estate of the second spouse to die. Trust me, when the children hear this they are all on board spending the extra money today to have the proper documents in place!
For example, a married couple can take advantage of what is called an AB Trust (or also known as a Credit Shelter Trust). Without getting too detailed, when the first spouse passes away, a certain amount of assets is placed into a trust for the benefit of the surviving spouse. The remaining assets pass directly to the surving spouse. When the second spouse passes away the trust assets are left to the children. This allows for legally avoiding an Estate Tax.
It is so important to speak with an attorney to make certain that you utilize any resources and methods that will allow for the maximum amount of your assets to pass to your family.
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