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Avoiding Estate Taxes - Updated May, 2011
What is the status of the Federal Estate Tax?
Absent portability, when the Husband dies there is no need to use his exemption, because all of the couple’s assets are titled jointly. The deceased Husband may transfer his share of these assets to the Wife, and the estate will not incur additional federal estate taxes. This is because of the unlimited marital deduction.
Later, the Wife passes away, and the exemption amount is still at the current $5 million level, and the estate tax rate is 35%, as it is now. The estate itself is still worth $6,000,000.
The Husband’s exemption would be gone (absent portability), and so when the Wife passes, she may only use her own individual exemption amount of $5,000,000. The estate would thus be left with a tax bill of $350,000 once she passes away.
To summarize, a $6,000,000 estate is reduced to a $1,000,000 taxable estate after an individual’s exemption of $5,000,000. The $1,000,000 estate, taxed at the 35% estate tax rate, would lead to a taxable amount of $350,000 at the Wife’s death.
With Portability, the following would result instead:
Since the Husband did not use his $5,000,000 estate tax exemption, the Wife’s exemption will be increased by this unused amount. Effectively, the Wife’s estate would enjoy a $10,000,000 exemption, and the estate worth $6,000,000 at her death would owe no estate taxes.
How should Executors of decedents who passed in 2010 approach the Estate Tax?
On December 17, 2010, President Barack Obama signed important tax relief laws.
Section 301 reinstates the estate tax.
Executors of decedents who passed in 2010 may either file Form 706 or apply the 2010 laws, or in the alternative, they may choose to use the new $5 million exclusion and the 35% estate tax rate.
Are there any special considerations for decedents who may have passed away in early 2010?
Since the required due date for decedents who passed in early 2010 has expired, the required due date for the tax return or payment of such taxes will be nine months after the date of enactment. The filing date for the Generation Skipping Transfer Tax (GSTT) returns will also be nine months after enactment (October 17, 2011).
If you are married and you leave everything to your spouse upon your death, your estate will not have to pay any estate taxes due to the effect of the unlimited marital deduction. However, upon the death of your spouse, all amounts in excess of the unified credit amount will be subject to the Estate Tax.
One way to minimize this tax problem is to establish an estate plan so that upon the death of the first spouse a “Family Trust” (also called a "Credit Shelter Trust" or "ByPass Trust" or “B Trust”) is created. Typically, the purpose of the Family Trust is to provide support for the surviving spouse during his or her lifetime, with the remainder of the trust then going to the children upon the death of the surviving spouse.
If you are interested in an estate plan using a Family Trust, more details can be discussed at your first appointment.
For Additional Information:
What is Probate?