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- Estate Planning Basics
- Fundamental questions
- Will or living trust?
- Other facts about estate settlement
- Determining potential estate taxes
- Estate Tax Saving Strategies
- The marital deduction
- Life Insurance
- Annual gifting
- Charitable contributions
- Strategies for family-owned businesses
- Special strategies for special situations
- Community property issues
- Implementing and Updating Your Plan
- Where do you go from here?
- Estate planning worksheet
- Planning Levels Fee Schedule
DETERMINING POTENTIAL ESTATE TAXES
The next step is to understand some estate tax basics. First you need to get an idea of what your estate is worth and whether you need to worry about estate taxes, both under today’s rates and as exemptions increase over the next several years.
How much is your estate worth?
The first step is to list all of your assets and their value, including cash, stocks and bonds, notes and mortgages, annuities, retirement benefits, your personal residence, other real estate, partnership interests, life insurance, automobiles, artwork, jewelry, and collectibles. If you are married, prepare a similar list for your spouse’s assets. And be careful to review how you title the assets, to include them correctly in each spouse’s list.
If you own an insurance policy at the time of your death, the proceeds on that policy usually will be includible in your estate. Remember: That’s proceeds. Your $1 million term insurance policy that isn’t worth much while you’re alive is suddenly worth $1 million on your death. If your estate is large enough, a significant share of those proceeds may go to the government as taxes, not to your chosen beneficiaries, though the estate tax impact will decrease gradually under the 2001 tax act. (See Chart 1.)
- Planning tip 4
- Consider the Impact of State Death Taxes
Many states, prompted by changes to the federal estate tax (such as increases in the federal exemption amount and elimination of the credit for state death tax), now impose estate tax at a lower threshold than the federal government does. Previously, most states used a pick-up death tax system, by imposing a tax equal to the allowable federal credit for state death taxes paid. The state and federal estate tax systems were coupled, with the state, in effect, collecting a portion of the tax that would have otherwise been paid to the federal government.
Changes to the federal estate tax, however, have undermined the federal-state estate tax relationship. Although states have reacted differently to these changes, many have “decoupled.” In other words, the states have rewritten their death tax laws so they no longer reference or tie into the current federal rules.
Some states have decoupled by imposing a tax equal to the amount of the former federal credit for state death taxes, while still recognizing the scheduled increases in the federal exemption amount. Others have established their own (lower) exemption amounts, or they’ve referenced the federal exemption amounts that were scheduled to be in effect before the recent changes. So, even if you aren’t subject to federal estate tax, you may be hit with a state death tax.
Many state tax systems are currently in a state of flux, and the federal rules are likely to change. To be safe, design your estate plan with some flexibility so that certain taxrelated decisions can be made as events unfold.
How the estate tax system works
Here’s a simplified way to compute your estate tax exposure. Take the value of your estate, net of any debts. Also subtract any assets that will pass to charity on your death — such transfers are deductions for your estate. Then if you are married and your spouse is a U.S. citizen, subtract any assets you will pass to him or her. Those assets qualify for the marital deduction and avoid estate taxes until the surviving spouse dies. (If you are single or your spouse is not a U.S. citizen, turn to pages 24 and 25 for more information.) The net number represents your taxable estate.
You can transfer up to the exemption amount during your life or at death free of gift and estate taxes. This amount will increase until the estate tax is eliminated in 2010. (See Chart 1.) But note that the gift tax exemption does not increase beyond $1 million, and even in 2010, the gift tax is not repealed — so lifetime gifts of more than $1 million will be subject to tax. If your taxable estate is equal to or less than the exemption and you haven’t already used any of the exemption on lifetime gifts, no federal estate tax will be due when you die. But if your estate exceeds this amount, it will be subject to estate tax. The top rate will gradually decrease through 2007. (See Chart 1.)