Estate Planning News

Estate Taxes

The old saying goes nothing in this world is certain but death and taxes — and the federal estate tax ensures that even your death can be taxed. Under current federal law, property transferred at death (i.e., to your beneficiaries) may be subject to the federal estate tax. The same property also may be subject to state inheritance or estate taxes.

The estate tax is set on a gradual scale which increases with the value of the estate. After all available deductions have been made from your gross estate, your remaining assets make up the taxable estate. Obviously, the more deductions you have the better because it lowers the value of your taxable estate, which also lowers the amount of estate taxes you may be subject to. Some of the deductions that are allowed from the gross estate include:

• Funeral expenses
• Administrative costs
• Certain types of property left to the surviving spouse

Under current law, the first $2 million of the taxable estate — the value that remains after all available deductions have been made from the gross estate — is excluded from the estate tax. Any assets beyond the $2 million will be subject to the estate tax, which could swallow up as much as 45% of your assets, the current highest estate tax rate. In 2009, the exclusion will be raised to allow people to shelter the first $3.5 million of the estate.

The current $2 million exclusion may seem like a lot, but you have to consider the type of assets that make up your taxable estate, which may include:

• Qualified retirement plan proceeds (401ks, IRAs)
• Life insurance proceeds
• Jointly held property and accounts
• Assets held in revocable trusts or trusts with "significant strings attached"
• Assets payable to a designated beneficiary (payment-on-death accounts)
• Annuities
• Stocks, bonds, cash
• Real estate
• Business interests

While most Americans may not have this large of an estate at their death, many will have life insurance and retirement plans — which easily can reach the limits of the $2 million exclusion.

The federal estate tax is set to expire in 2010. However, the estate tax will be reinstated to pre-2001 levels if Congress does not act to make the expiration permanent. This means that in 2011, if the estate tax is reinstated, the top rate of estate tax will be 55% and the amount of the exclusion will diminish from $3.5 million to $1 million.

Given the uncertainty in the law — whether the estate tax will go away for good, or if it will come back, and if it does, at what rate — it is important to work with an experienced estate planning attorney. He or she can review your estate with you, explain how the estate tax may or may not affect you and help determine the best strategies for minimizing your tax consequences.

Preparing to Meet with Your Estate Planning Attorney

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Preparing to Meet with Your Estate Planning Attorney

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