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Estate Tax and Gift Taxes

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What Is Estate Tax?

There is a lot of confusion over estate taxes, and whether a person's estate will be taxed when they die. Estate tax (sometimes called "death tax" or "federal death tax") may or may not be owed to the Federal government.

Estate taxes depend on two things:

  • How much the estate is worth, and
  • How much planning you have done before-hand

For the year 2003, there is a $1 Million dollar exemption on estate taxes. This is called the exemption equivalent amount, and this amount will consistently go up each year. In general, that means, if your estate is worth less than $1 Million when you die, there is no federal estate tax owed by your family.

What If I'm Married?

If you are married, your estate will normally pass to your spouse if you die. Because of a tax law known as the "unlimited marital deduction," there is no estate tax when property passes to your spouse.

However, when your spouse dies, the full value of the estate will be assessed and will be hit with very steep estate taxes on anything above the exemption equivalent amount.

Without special planning, you and your spouse can only pass the exemption equivalent amount for a single person without an estate tax ($1 Million in 2003). The estate tax on the first dollar over the exemption equivalent is almost 40% !

What Does My Estate Include?

Many people are shocked to learn that their estate will be taxed when they die. They didn't think they had that much in assets. Your estate includes the house, all other real estate, the bank accounts, stocks, bonds, collectables, household items, retirement accounts (including IRAs), life insurance, the value of your business, and everything else you can think of. You may well have a taxable estate and consider yourself a member of the "middle class".

My Life Insurance is Part of My Estate?

Without special planning, YES. These days, its not uncommon to have life insurance policies that have a death benefit exceeding the estate tax exemption all by themselves. It is a common misconception that life insurance is not taxed. This comes from the fact that the family does not pay any 'income' tax on the life insurance, but it usually is part of the estate for death tax purposes.

Can't I Just Give Away My Estate Before I Die?

You may only gift away up to $11,000 per person per year. Otherwise, you'll be hit with very steep gift taxes on any amounts over that.

What Are The Ways to Avoid Estate Taxes?

There are several. To name a few:

Using tax-free gifts, you can give up to $11,000 per calendar year per recipient without paying gift tax. You can also give to charity, or pay for tuition, or pay for medical bills, without paying gift tax on the amounts. This will reduces the value of your estate and the estate taxes assessed.

You can also use a Revocable Living Trust with an AB provision, where a spouse leaves up to the exemption amount of their property in an irrevocable trust for the surviving spouse and children. The surviving spouse has the right to use it when needed. This can make a dramatic difference in the amount of estate tax owed when the second spouse dies, because the exemption amount of both the first and second spouse are used instead of just that of the last spouse to die. The AB trust is usually established using a Revocable Living Trust.

Using various other trusts - Q.T.I.P. Trusts enable couples to avoid problems that occur when one spouse dies and the surviving spouse remains. Charitable Trusts, which involve making a sizable gift to a tax-exempt charity. Life Insurance Trusts, which let you take the value of life insurance proceeds out of your estate.


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More Information on Estate Tax Planning Tools

Lee's ebook, Protecting Your Financial Future, gives you all the basic information of estate planning, including important information on saving thousands in estate taxes.

For gaining an incredible amount of knowledge in your planning, and establishing your own proper estate plan, the Estate Planning Course, (The Accumulation and Preservation of Wealth System), gives you all the knowledge and proper legal documents to properly set up, fund, and maintain your own Revocable Living Trust and other "tools of wealth". It also includes the AB trust and QTIP trust as described above.

With the Accumulation and Preservation of Wealth System you'll save thousands of dollars in attorney's fees and end up with a better estate plan than over 99% of other people in the country.


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Lee R. Phillips
Lee Phillips - estate planning attorney and speaker

Estate planning attorney and renowned national speaker Lee R. Phillips reveals the valuable information that will protect you and your family from costly probate, estate taxes, lawsuits, and other mishaps of our legal and financial system.

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