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
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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