How large of an estate can pass federal estate tax free?
The government allows every individual a credit against estate taxes. In the year 2009, the Applicable Exclusion Amount from estate taxes is $3.5 million in assets. This means that, in 2009, estate taxes will not be owed at the time of an individual's death unless the net value of the estate exceeds $3.5 million. However, the Applicable Exclusion Amount is scheduled to revert back to $1 million in 2011.
What is the marital deduction?
An individual is entitled to leave an unlimited amount of assets to his or her spouse without taxation either during the individual's lifetime or upon death. At the death of the surviving spouse, however, all assets in the estate over the Applicable Exclusion Amount will be included in the survivor's taxable estate; assets above the Applicable Exclusion Amount are taxed at a rate of up to 48 percent.
How can I leave my estate to my spouse tax free?
An outright gift at death qualifies for the unlimited marital deduction for estate taxes and, therefore, there will be no tax paid on the amount left to the surviving spouse. However, the Applicable Exclusion Amount on the estate of the first deceased spouse is lost when the second spouse dies unless something is done to preserve it. Through careful estate planning using a Revocable Living Trust the Applicable Exclusion Amount for a married couple can effectively be doubled.
What is the annual gift tax exclusion?
The annual gift tax exclusion is an amount that can be given away annually without resulting in potential gift tax liability on the transfer. In the year 2009, the annual gift tax exclusion amount is $13,000 per recipient. There is no limit on the number of recipients to which qualifying gifts can be made.
What happens if the tax law changes? Is my Trust still valid?
In the event of a tax law change, the Trust is still valid. However, amendments to the Trust may be necessary to fully take advantage of the new law.
What is a step-up in basis?
A step-up -- or step-down -- in basis is an adjustment of the “basis” of the asset for tax purposes to an asset's fair market value at the date of the death of the owner of the asset. For example, if you bought a share of stock for $1,000 that had increased in value to $5,000 at the time of your death, your tax basis was $1,000 but increases to $5,000 at the time of death. This increase is known as a step-up in basis. This means there would be no capital gains tax payable on sale of the stock if the sale occurs soon after your death. If you bought the stock for $5,000 and it was worth $1,000 at the time of your death, it would be a step-down in basis.
Do my assets get a step-up in basis if they are titled in my Trust when I die?
Your share of the assets held in the Trust does get a step-up -- or step-down -- in basis upon your death. There will be another step up -- or step-down -- in basis of your spouse's share of the Trust assets at the death of your spouse.
When is an estate tax return due?
An estate tax return is due nine months after the date of death and may be extended for six months. A return is required if assets are in excess of the Applicable Exclusion Amount, even if the net estate is less than the Applicable Exclusion Amount. However, filing may be recommended even if the estate is less than the Applicable Exclusion Amount, to start the statute of limitations running.
How do I know if my estate has enough liquidity?
Liquidity planning is part of estate planning. Generally, it is necessary to look at the estate and see if there is enough cash to pay taxes, administrative expenses, and support dependent family members. There are generally two ways to deal with the liquidity issue, either by reducing taxes and expenses which require cash, or by increasing the cash and liquidity of the estate. Techniques which reduce taxes include fully using the Applicable Exclusion Amount at death, making annual gifts, and using planning techniques such as charitable trusts. Other techniques which reduce expenses include avoiding probate and using trusts. Increasing the liquidity of the estate can also be accomplished through life insurance held in a properly formed Irrevocable Life Insurance Trust.
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