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HOW TO EFFECTIVELY REDUCE
FEDERAL AND STATE DEATH TAXES
Both federal and state taxes can be imposed on the transfer of
property in an estate planning context. These include:
Federal Estate Tax
on property transferred at death,
if the total value transferred exceeds the exemption amount in effect in the year of
death. (As discussed below, the federal estate tax is currently eliminated for decedents
whose death occurs in calendar year 2010.)
Federal Gift Tax
on property gifted during
life, if the total of all lifetime taxable gifts exceeds the allowable lifetime
exemption. There is also an annual exclusion, currently in the amount of
$13,000 per donee, for gifts of present interests in property.
Federal Generation-skipping transfer (GST) tax
imposed on transfers from grandparents to grandchildren or more remote
descendants, if the total amount of such transfers exceeds the applicable
exemption amount.
Pennsylvania Inheritance Tax
imposed both on property
transferred at death (with no exemption amount) and property
gifted within one year of death if the total of such gifts per donee
exceeds a set exemption amount. This state tax is imposed separately from
the federal estate tax.
Other
State Estate Taxes
If you are domiciled in another
state or own realty or tangible personal property in other
states, death taxes may also be due to those states.
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Double Taxation on Retirement Benefits
and Other Income Tax-Deferred Assets |
Assets that consist wholly or partially of
tax-deferred income are subject to two types of taxes when they pass to
beneficiaries on account of death. (Examples of such tax-deferred
assets are qualified retirement accounts, annuities, and certain United
State Savings Bonds.) First, there will be federal and possibly state death taxes
imposed on the date-of-death value of those assets. In addition, federal income tax
will be payable by the beneficiaries on the amount of tax-deferred income
they receive from the inherited asset in any calendar year.
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What Property Is Subject to Death Taxes?
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The definition of the "gross estate" for transfer tax purposes is much broader
than the definition of the probate estate.
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What Is the Current Law on Federal Estate
Taxes? |
Recent History : The following table
shows the exemption equivalent amounts and tax rates that were in effect for
decedents dying
in 2008 and 2009.
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Calendar Year |
Estate and GST Tax
Deathtime Transfer Tax Exemption |
Highest Estate and
Gift Tax Rates |
| 2008 |
$2 million |
45%
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| 2009 |
$3.5 million |
45%
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Current Law (as of January 1, 2010): The 2001 federal law
known as EGTRAA has provided for the:
Elimination of the
federal estate tax for a decedent whose death occurs in the
12-month period starting on January 1, 2010 and ending December 31, 2010, but
the
Reinstatement of the estate tax for all decedents dying after December 31,
2010, with the exemption cut back to $1 million, and the highest rate
increased to 55%.
Some
commentators are predicting that Congress may yet impose a federal estate
tax on decedents whose deaths occur in 2010, and make it retroactive to
January 1, 2010, but the feasibility (let alone constitutionality) of such
legislation is uncertain.
A Long-Term Solution?
Beyond 2010, it is unclear, given the current political stalemate in Washington,
whether Congress will enact legislation that
would either: (1) permanently eliminate the estate tax, or (2)
continue the tax after 2010 but with an increase of the exemption amount to
$3.5 million, $5 million, or an even higher amount.
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CAPITAL GAINS TAX INCREASE |
Estate tax
elimination in 2010, if not repealed and made retroactive to January 1, 2010,
will have an adverse effect on the capital gains tax payable by affected
beneficiaries upon their later sale of inherited assets.
This tax could
be especially onerous if the current 15% capital gains tax rate cap is
removed, so that capital gains would be taxed at the same rate as interest and
other types of ordinary income.
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LIFETIME GIFTS
AND OTHER TRANSFERS |
Death taxes are most effectively avoided by
LIFETIME planning techniques. Some common
lifetime techniques include:
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Gifts made within the federal gift tax annual exclusion limit, which
for 2010 is $13,000 per donee per calendar year. (The annual
exclusion amount may increase in future years based on inflation.)
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Irrevocable life insurance trust
to hold ownership of life insurance.
● Charitable remainder trust
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Allows
tax-advantaged sale of highly appreciated assets
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Guarantees
income
● Charitable lead trust
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Reduces the taxable value of assets ultimately
intended for family members.
Valuation Discount Entities for Closely Held
Business Interests - can result in
reducing the valuation
of assets for transfer tax purposes. Form of the entity can be:
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Family Limited Partnership
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Limited Liability Company
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S Corporation
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Death -Time Tax-Savings Techniques
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Marital Deduction Planning |
An essential issue to consider when
planning for married couples is to decide whether their assets are
now (or are likely to become) large enough to suggest that they go
beyond the simple "all to my spouse" type of estate plan, and engage in
more sophisticated marital deduction planning.
For married clients
with combined assets in excess of the federal estate tax exemption
amount, good planning should
involve the utilization of the unified credit in the estate
of the first spouse to die.
This technique will entail placing assets in a special "credit
shelter" trust for the surviving spouse's
lifetime. The trust can benefit him or her, but will not be taxable
at the second death.
In the present
climate of uncertainty as to what the future amount of the federal estate
tax exemption will be in 2011 and beyond, planning can become difficult.
One alternative is to use the "Disclaimer
Trust"
approach for allowing the surviving spouse's "credit shelter" trust
to be created and funded after the first spouse's death. This affords
maximum flexibility in choosing how much if any of the assets should be placed
into trust for the surviving spouse.
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The problem of owning too much in
joint name |
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Marital deduction get applied first |
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Charitable Remainder and Lead Trusts |
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Same rules as with lifetime charitable
trusts. |
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