Tag Archives: Estate Taxes

Defeat of DOMA has major estate tax implications

The Supreme Court today made a decision to strike down DOMA (Defense of Marriage Act); this will dramatically expand the access of married gay couples to many federal benefits related to tax, health and pension that have been denied to them until now.  This decision affects same sex couples in the 12 states and the District of Columbia which allow gay marriage; these couples represent about 18% of the U.S. population.  With the addition of California, the percentage will shoot up to 30%.be even higher.

DOMA was signed into law by President Bill Clinton in 1996, and prevented the government from granting marriage benefits in more than 1,000 federal statutes to same-sex married couples in the states that allowed gay marriage.

One very important benefit of today’s Supreme Court decision is related to estate taxes.  Until now, same sex married couples could not benefit from married couple estate tax laws.  Now they will have the same benefits as all other married couples.

According to Yahoo News,  ” Eighty-three-year-old New Yorker Edith Windsor brought the DOMA suit after she was made to pay more than $363,000 in estate taxes when her same-sex spouse died. If the federal government had recognized her marriage of more than four decades, Windsor would not have owed the sum. ”

With the Supreme Court’s decision to strike down DOMA with a 5-4 vote, Windsor will finally be eligible for a tax refund, plus interest.

For more information about estate taxes and settling an estate, go to www.diesmart.com.

President Obama makes “permanent” estate tax temporary again.

President Obama proposed 2014 budget:  Changing the Estate Tax and Gift Tax Rates AGAIN!!!


From January 1, 2001 through December 31, 2012,  Congress seemed intent on making planning for death more complicated than it already is by  creating a series of “temporary” estate tax laws.   These temporary tax rates and estate tax and gift tax exclusion amounts created turmoil for software companies, lawyers, accountants and ordinary people.

As part of the 2012 “Fiscal Cliff” compromise, President Obama signed legislation that appeared to make permanent the 2012 estate tax exclusion amount of $5 million for estate and gift taxes and a top estate tax rate of 40 percent.    The exclusion amounts would be indexed for inflation.  The statements from Congress and the President made it seem we FINALLY had permanent rules regarding federal estate and gift taxes.  Software companies could stop revising code.   Families could make permanent plans for death.  

So much for compromise.  The Obama “Green Book” Budget for 2014 puts us back in the guessing game about estate and gift tax rules.     Page 138 of the budget has these words:  “Beginning 2018, the proposal would make permanent the estate, GST and gift tax parameters as they applied during 2009.  The top tax rate would be 45 percent and the exclusion amount would be $3.5 million for estate and GST taxes, and $1 million for gift taxes. There would be no indexing for inflation.”

You can find out more here:


Do you want to live or die in New Jersey?

Several years ago after my dad died in New Jersey, my brother and I were shocked when we realized how much money we were going to have to pay to the state in inheritance and estate taxes. The percentage was huge, especially compared to almost any other state in the US. Evidently, we were not alone in being shocked by New Jersey’s tax rules.

According to a study recently commissioned by Charles Steindel, chief economist of the New Jersey Department of the Treasury (and former senior vice president of the New York Federal Reserve Bank), 25,000 people moved away from New Jersey between 2004 and 2009. Why? In 2004, the state’s highest income tax rate was raised from 6.37% to 8.97% for those making $500,000 or more, and in 2009 a one year 10.75% tax rate was assessed on those making $1 million or more.

In addition to such high income tax, New Jersey is one of only two states (Maryland is the other) with both a state estate tax and a state inheritance tax; this is a problem for those who would like to leave at least the majority of their wealth to their loved ones when they die.

Steindel also conducted a survey of subscribers to the state’s online newsletter Tax Notes, which keeps professionals such as financial advisers, accountants and attorneys up to date on changes in law, rules and court decisions governing tax matters. Subscribers include advisers to high-wealth clients.

More than half of the respondents said that clients had recently left or expressed interest in leaving the state. Respondents said the top three reasons that clients gave for leaving were state income taxes (85.4 percent), local property taxes (77 percent) and estate taxes (67 percent). The next two reasons most-often cited were retirement (47.6 percent) and housing costs (43.7 percent).

So if you live in New Jersey and you have any assets, consider moving to a more tax friendly, or non-taxing, state like Florida.

Estate taxes: Who will pay?

If your heirs owe estate taxes to the government, they will have to find the money to pay them, probably before they can actually access their inheritance.

Q. If estate taxes are due, where will your estate get the money to pay them?
A. You should leave instructions in your will or trust authorizing the estate representative to pay the estate taxes for your heirs; you can even specify which assets should be used to pay the tax.  If you do not leave such instructions they will be paid for by the estate representative from assets held in the estate.

If you do not specify which assets to liquidate to pay the estate tax, your estate representative will decide how best to pay the taxes due.  When thinking about who gets what, consider the impact federal estate taxes and state inheritance taxes will have on your estate, and how this will change the value of bequests.

A Family Story: Inequitable inheritance due to estate taxes.
Vinnie had two children, Sophia and Brad.  When Vinnie died, the value of his IRA was $2 million and the value of his personal residence was $2 million, a total estate of $4 million.  Vinnie wanted to share his estate equally with Sophia and Brad.

Vinnie named Brad as the beneficiary of his IRA account, believing he had left Brad $2 million.  Vinnie’s will named Sophia the beneficiary of the house.  Vinnie assumed he had given Sophia a house worth $2 million and had treated each child equally.  Vinnie’s will also included typical default instructions requesting that the estate pay any estate taxes due.

Vinnie died in 2006.  The value of the estate for federal estate tax purposes was $4 million.  In 2006 Vinnie’s personal federal tax exemption allowance was $2 million, leaving a taxable estate of $2 million.  The estate tax due was $780,800.

Because the IRA had a named beneficiary, the IRA was not subject to probate.  Brad automatically inherited the funds in the IRA account, a total of $2 million.  The house Sophia inherited was subject to probate.  Sophia, the executor, had to hire a lawyer and open a probate case.  Sophia could not sell the house until the court was satisfied that estate taxes had been paid.  Sophia had to sell the house in order to pay the estate taxes due.  Sophia then had to pay $780,800 in estate taxes, plus probate court and legal fees of $35,000.  Sophia eventually inherited $1,184,000.  Almost half of what Brad inherited.

When determining who will inherit what, be sure to consider the impact of estate taxes and inheritance taxes on the value of the inheritance.

Marital A/B trust: Avoid the married couple estate tax trap

If you do not plan carefully, you may fall into the married couple estate tax trap.  A marital a/b trust could be the solution.

What is the married couple estate tax trap?
Why should married couples consider a marital a/b trust?

The married couple estate tax trap

Q. If you are married, are estate taxes due when the first spouse dies?
A. The first spouse to die may give all of his/her assets to the surviving spouse without paying any estate tax, even if the value of their property exceeds the estate tax exemption, so long as the surviving spouse is a U.S. citizen.  This is referred to as the unlimited marital deduction.

An estate tax calculation will be done when the surviving spouse dies, and will be based upon the fair market value of all the assets owned by the surviving spouse, including those inherited from the first spouse.

Q. What happens to the $2 million estate tax personal exemption of the first spouse to die?
A. If the first spouse to die leaves everything directly to the surviving spouse, the first spouse to die loses his or her right to claim the existing $2 million personal tax exemption allowance.  We refer to this as the married couple estate tax trap.

When the second spouse dies, all the property the survivor owns (which includes the inherited property) is subject to an estate tax.  The surviving spouse can only claim one personal federal estate tax exemption.

There is a way to get the benefit of two estate tax exemptions and still take care of the second spouse to die. Instead of leaving everything outright to each other, couples should leave assets in what is known as an A/B trust.


Why should a married couple consider an a/b trust?

Q. What is an A/B trust?
A. Married couples can leave instructions in their will or in their living trust to establish new A/B trusts when the first spouse dies. In an A/B Trust, the marital assets are split and transferred to two separate trusts, known as trust “A” and trust “B,” created when the first spouse dies.

Q. What happens with trust “A”?
A. Trust “A,” which was set up by the surviving spouse, is a revocable trust.  The surviving spouse can be trustee and usually has total control over the assets in the trust.  The surviving spouse can generally do with the assets transferred to trust “A” whatever he or she pleases.

The surviving spouse decides who inherits the assets in trust “A” when he or she dies, and may change the names of the beneficiaries until he or she dies or becomes incapacitated.

Q. What happens with trust “B”?
A. Trust “B” is set up according to the instructions previously specified in the living trust of the deceased spouse. The new trust “B becomes an irrevocable trust upon the death of the first spouse.
The assets in trust “B” are managed according to the instructions specified in the decedent’s living trust agreement.  The trustee of trust “B” is the person the deceased specified in their living trust and commonly is the surviving spouse.

Usually, the income from trust B is used to support the surviving spouse and the principal is maintained for the benefit of the ultimate beneficiaries of the trust after the surviving spouse dies.  Since the trust “B” is irrevocable, the surviving spouse cannot generally change any terms or instructions defined by the first spouse to die.

Q. How does an A/B trust save on estate taxes?
A. The will or the living trust of the first spouse to die instructs the estate representative to transfer to Trust “B” property up to the maximum federal estate tax exemption allowable in the year of death.

When the surviving spouse dies, the property in Trust “B” is not part of his or her estate, regardless of its value. The deceased spouse’s estate only owes estate taxes on Trust “A” assets.

Setting up an A/B trust provides two tax advantages for married couples.  First, it allows each of them to claim the estate tax exemption.  Secondly, and just as important, it allows the assets in Trust “B” to grow and be distributed tax-free when the second spouse dies.

Q. What happens if the value of the assets of the first spouse to die exceeds the estate tax personal exemption allowance?
A. If the value of the property of the first spouse to die exceeds the federal estate tax personal exemption allowance, the first spouse to die has several choices.

Choice 1. If you want to control the distribution of the excess assets when the surviving spouse dies, your trust instructions can provide that the amount of your estate in excess of the estate tax personal exemption allowance should be placed in a new trust, commonly referred to as a “C” trust.

The trustee of the “C” trust must manage these assets according to your directions, which can be the same as directions you leave for the “B” trust. For instance, your instructions can direct any income be paid to a surviving spouse and upon his or her death, the “C” trust assets be given to your grandchildren.

Your estate representative must immediately pay estate taxes on the funds set aside in the “C” trust.  Similar to the “B” trust, the assets in the “C” trust can continue to grow but no additional estate taxes will be assessed at the time the “C” trust is distributed.

Choice 2. Your trust instructions can provide the excess assets be given to the “A” trust.  The excess assets will now be under the control of the surviving spouse.  The distribution of the assets will be done according to the terms of the “A” trust when the surviving spouse dies.

No estate taxes are due on the excess assets.  When the surviving spouse dies, all of the assets in the “A” trust will be subject to any applicable estate taxes.