After evaluating your present estate plan, establishing your personal and estate planning goals, and beginning familiarity with the various methods and terminology, there are other considerations, including:

  • What are my (our) goals for property and personal management during lifetime?
  • How and when should my (our) assets be distributed after death?
  • Is there any possibility that my (our) total estate exceeds the current amounts exempt from estate taxes, thereby incurring possible state taxes and Federal Estate Taxes?
  • Who should serve as my (our) fiduciary?
  • Do I (we) have any beneficiaries with special needs?
  • What documents are best to carry out my (our) plans?

Tax Considerations

The information outlined above may help clarify many of these decisions. However, the issue of Federal Estate Taxes can factor into your personal estate planning, especially if your estate, or your estate combined with your spouse’s estate, exceeds the Federal Estate and Gift Tax Credit Amount. This credit, when applied to Federal Estate Tax Rates, provides for an individual exemption of $5,000,000 (as of January 2, 2013) which is indexed for the year 2018 to $5,600,000. This exemption amount of Five Million Dollars became permanent under the American Taxpayer Relief Act (“ATRA” of 2013), indexed annually.

The permanent status of this law is beneficial since the pervious rules concerning Estate Taxes were subject to reversion (under the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 signed by President Obama on December 17, 2010). Appropriate personal and estate planning may allow for exemption of twice the Federal Estate and Gift Tax Credit for married couples and create peace of mind in avoiding or reducing Federal Estate Taxes to the greatest amount possible.

Examining what may facilitate exclusion or elimination of estate taxes on combined gross estates if the anticipated values exceed the exemption is imperative while both spouses are able to make appropriate planning. Without prior estate planning, needless estate taxes may be incurred at the death of the second spouse at rates that have been up to 55%. However, if your estate, or the combined estate of both spouses, does not exceed $5,600,000, you will not incur estate taxes at death under the present law.

Estate Planning created under previous laws with lower or unpredictable rules may now be unnecessarily complicated. It is important to periodically review your plan to ensure compatibility with present circumstances or wishes.

Why are Federal Estate Tax consequences undesirable?

Federal Estate Taxes are assessed on amounts exceeding the “exempt” amounts established by Congress. For 2018 the law authorizes an individual exemption of $5,600,000 with indexed increases in the exemption for future years. Estate taxes on any amounts exceeding the exclusion are taxed at rates up to 40%. However, the laws passed on January 2, 2013 and in December 2017 don’t necessary identify the future of Estate Taxes, and the increasing exemption amounts and decreasing tax limits in 2018 and future years may dramatically decrease the amount of property exempt from estate taxes.

Unfortunately the word “repeal” may lead you to assume that there is no need for planning to reduce or eliminate estate taxes. This is far from the truth, with the current status of the law leaving many issues in a state of uncertainty. 

Previous and Current Estate Tax Exclusions:

Value of Estate at Death Estate Tax Exemption
$3,500,000 2009 cap at 45%
2010 Tax Repealed (free year)
2011 Sunset Provision provided for $1,000,000 exclusion with cap at 55% but temporary law allows $5,000,000 with 35% cap
2013 and beyond 2013 Permanent Exclusion $5,000,000. Future Estate Tax exclusions indexed with 2018 at $5,600,000

Personal and Estate Planning for a married couple whose combined estates exceed the exclusion amount may reduce or eliminate estate tax consequences with appropriate trust directives which involve the creation of two shares of Trust or at least one Trust for the surviving spouse. If planning is completed for reduction or elimination of estate taxes, a Joint Trust may, at the death of one spouse, divide into two shares with one share of Trust assets equal to the current exemption of the deceased spouse so these assets are not calculated into the estate of the surviving spouse. The assets of the deceased spouse which exceed the current exemption may pass directly to the surviving spouse without estate tax consequences. In other words, instead of making an outright bequest of these “excess assets” to the surviving spouse, the parties may have elected co create a second Trust to qualify for the marital deduction.

As depicted in the graphic below, the surviving spouse has access co all income and principal, if necessary, in both shares of Trust assets. Trust principal is available if needed for the surviving spouse’s health, support and maintenance. Upon death of surviving spouse, all remainder goes to Beneficiaries.

estate plan example graphic

Other than Federal Estate Tax, other taxes which should be considered when drafting an estate plan, may include:

  • Gift Tax. An outright gift (other than a gift to a spouse eligible for the marital deduction) must be tested to see if it qualifies for the annual exclusion of $15,000 per year per person (law continuing in effect after January 2018). The annual gift tax exclusion is increased to $30,000 if your spouse joins in the gift. (The annual exclusion does not apply to gifts to custodians under the Uniform Gift to Minors Act or other certain types of Trusts meeting specific qualifications.)
  • Generation Skipping Transfer Tax. The Generation Skipping Transfer Tax may apply to certain estates where a trust has beneficiaries in two or more generations younger than the Grantor(s). The Generation Skipping Transfer Tax may also be imposed on gifts or bequests to grandchildren or great-grandchildren.

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Thank you for visiting the website of Advantage Estate Planning and Attorney Lisa A. Reeves. While we hope you find the information beneficial, please be aware it is not intended to constitute legal advice as each individual client is unique. Information on our website may create links to other sources in which this firm has no influence. Exchange of information with our firm does not create an Attorney-Client relationship.