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Last year we performed a survey to find the top ten reasons why
people prepare a Revocable Living Trust. What we found was what
we expected. The number one reason people are interested in a Living
Trust is to minimize estate taxes.
Much of the estate planning process focuses on reducing or eliminating
taxes. The U.S. government imposes a tax on the transfer of your
property to others both during your lifetime and when you pass away.
This tax is known as the Unified Gift and Estate Tax.
In 1976, 1981, 1986 and then in 2001, Congress extensively overhauled
the federal estate and gift tax laws. With the exception of a law
providing for a marital deduction in 1948 these were the first major
changes in these laws since 1942. As a result, death tax payments
were assessed only against the wealthy and the moderately wealthy.
With these laws, the majority of the population benefited since
smaller estates did not have to pay estate taxes.
As explained above, not everyone has to worry about paying federal
estate taxes. If your estate falls under the government exemption
your trustee/executor does not have to file an estate tax return
(Form 706) and pay the required tax within 9 months of your death.
Unfortunately, many people feel confident that their estate will
pass without the threat of paying estate taxes. However, most do
not adequately calculate the value of their estate. With careful
calculation many find that their estate values are over the exemption
rate.
It is important for you to realize what property will be included
in your estate for federal estate tax purposes. The estate includes
all property owned by the decedent at the time of death: investments,
cash, real estate, vehicles, personal property, life insurance proceeds
from policies owned by the decedent within three years of death,
life insurance paid to the estate, retirement assets and business
interests. The gross estate also includes assets passing through
probate as well as assets inherited directly by joint owners or
beneficiaries. This includes part interests, intangible property,
property placed in a revocable living trust and other interests
transferred by a decedent who retained control or an interest in
the property.
As you can imagine, once calculated you may be surprised to find
your net worth.
Your estate will have to pay estate taxes if the net value (gross
assets minus debts) when you die is more than the exemption amount
set by Congress. The exemption equivalent is available to each U.S.
citizen or resident. However, under the new tax law signed June
7, 2001 by President Bush, the estate tax will be gradually decreased
until it falls to zero in 2010. Then on January 1, 2011, the estate
tax law will revert to current tax laws unless Congress revisits
the issue. See table ET-1 for the exemption equivalent. For
your benefit we compared the old law to the new law.
| Table ET-1 (Estate and Gift
Tax Rates and Unified Credit Exemption Amount) |
| Old |
New |
| Year |
Exemption Equivalent |
Top Tax Rate |
Year |
Exemption Equivalent |
Top Tax Rate |
| 2001 |
$675,000 |
55% |
2001 |
$675,000 |
55% |
| 2002 |
$700,000 |
55% |
2002 |
$1,000,000 |
50% |
| 2003 |
$700,000 |
55% |
2003 |
$1,000,000 |
49% |
| 2004 |
$850,000 |
55% |
2004 |
$1,500,000 |
48% |
| 2005 |
$950,000 |
55% |
2005 |
$1,500,000 |
47% |
| 2006 |
$1,000,000 |
55% |
2006 |
$2,000,000 |
46% |
| 2007 |
$1,000,000 |
55% |
2007 |
$2,000,000 |
45% |
| 2008 |
$1,000,000 |
55% |
2008 |
$2,000,000 |
45% |
| 2009 |
$1,000,000 |
55% |
2009 |
$3,500,000 |
45% |
| 2010 |
$1,000,000 |
55% |
2010 |
No Tax |
Repealed |
| 2011 |
$1,000,000 |
55% |
2011 |
$1,000,000 |
55% |
The new law increases the exemption amount and reduces the top
tax rates over the next several years. For example, if you die in
2006 with a net worth of $1,300,000. Your heirs will not pay any
estate tax. If the law had not changed, then your heirs would have
had to pay tax on $300,000 ($1,300,000 minus the old 2006 exemption
of $1,000,000). However, if Congress does nothing to extend the
law before January 1, 2011, it will revert to the existing tax law.
On the state tax level the state death tax credit allowed against
estate tax will be reduced by 25 percent in 2002 (from present law
amounts), 50 percent in 2003 (from present law amounts), 75 percent
in 2004 (from present law amounts), and in 2005 completely repealed
after which there will be a deduction for death taxes. To find out
more information on state death taxes, we recommend speaking with
a CPA in your area.
The gift tax will not be repealed. Instead, the new law creates
a $1 million lifetime gift tax exclusion, beginning in 2002. And
gift tax rates will gradually decline. In 2010, the maximum gift
tax will be 35 percent‚ the top individual income tax rate. |
