What are Death Taxes?
In addition to the expense and delay of probate, your family may also be liable for death taxes. There are two types of death taxes: the federal estate tax and the state estate/inheritance tax. State inheritance taxes vary dramatically from state to state. The federal estate tax is one of the largest taxes a family will ever have to pay. It’s a tax on your right to transfer property to others at your death. Currently, the federal estate tax rates on a taxable estate start at 18% and quickly rise to 46% of every dollar in your taxable estate. The following table is an example for one dying in 2005.
Q: Do all estates pay Federal Estate Taxes?
A: No. The federal government has given every person in the United States an exemption for estate tax purposes. PLEASE NOTE: Congress, in The Economic Growth and Tax Relief Reconciliation Act of 2001, made changes in the exemption such that the exemption amount increased from $1,500,000 in 2005 to $2,000,000 in 2006 and in 2009 will increase to $3,500,000; with full repeal of estate taxes in 2010. However, if no new tax legislation is passed to extend the 2001 Act, the exemption will return to $1,000,000 in the year 2011 and remain the same until new legislation is enacted. See the table below. The Act also made changes in the gift and estate tax rates. That means that if your estate at the time of your death is less than the exemption amount there will be no federal estate taxes due. In deciding whether your estate is greater than or less than the exemption amount, the government includes everything you own, even the face value of your life insurance policies.
THE 2001 LAW: The exemption is increased to $3,500,000 over a five year period. This increase will be phased in as follows:
Q: Is there an Estate Tax Deduction for married people?
A: Yes. In addition to the personal exemption that everyone gets, the federal government has exempted all transfers of wealth between a husband and wife. This is called the Unlimited Marital Deduction and it means that regardless of the size of your estate there will be no federal estate taxes levied when the first spouse dies and leaves the estate to the surviving spouse.
Keep in mind, however, that this is merely a postponement of tax. There will be a tax on the estate when, at the second death, it passes to the children or other beneficiaries. Since in all probability the estate will continue to appreciate in value, taxes may be paid at a higher rate.
WARNING: Recent changes in the tax law have eliminated the unlimited marital deduction for surviving spouses who are not U.S. citizens. Without special planning, all non-citizen spouses are restricted to the tax-free transfer of the personal exemption amount from their deceased spouses.
Q: What if you have a small estate; do you need to worry about estate planning?
A: Yes. While an estate under the exemption is free from federal estate taxes, you will probably not avoid a living probate if you become disabled or a death probate when you die. Remember, probate and federal estate taxes have nothing to do with each other. Estate taxes are paid to the federal government for the right to transfer property at your death. Probate fees and costs are paid to the probate court, attorneys and the personal representatives of your estate for supervising the administration of your estate and distributing assets to your beneficiaries.
How can I create a Living Trust?
The first step is to make an appointment for a free, no obligation meeting with one of our estate planning professionals. You should be prepared to discuss the following issues:
- How your assets are to be distributed after your death, and
- The names of the people you want to manage your assets if you become mentally disabled and after your death.