Tag Archives: Estate Taxes

A/B trust: Estate tax planning for married couples

If you don’t understand the differences between a will and a trust, it may cost your surviving spouse a great deal  of money.

A Last Will & Testament

    If your estate is subject to estate taxes and you leave your property directly to your surviving spouse, he or she loses the multimillion dollar federal tax exemption.

A Trust

    If you have a trust, the trust instructions can set up new trusts when you die, sometimes referred to as A/B Trusts.

    The use of the A/B trust enables both you and your surviving spouse to claim their federal estate tax exemption allowance, potentially saving the estate hundreds of thousands of dollars.  See the estate tax section for more information.

Estate and Gift Taxes


Benjamin Franklin once said, “In this world nothing is certain but death and taxes.”  Boy was he right.  When you die, a special tax known as the estate tax comes into effect.    Currently, less than 1% of the U.S. population owes federal estate taxes when they die.

In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA).  The EGTRRA laws governs the estates of someone who died between January 1, 2002 and December 31, 2010.  The 2010 Tax Relief Act governs the estates of someone who dies between January 1, 2010 and December 31, 2012.   Unless Congress passes new laws, someone who dies after December 31, 2012 must follow the rules in place in 2001.

The discussion below regarding estate tax is applicable in all calendar years except the year 2010.    The last section below describes the special rules for someone who dies in the year 2010.

Q. What is the federal estate tax?

A. The federal estate tax is a tax levied when the taxable value of all of your assets is in excess of the personal estate tax exemption allowance.


Q.   What is the federal personal tax exemption allowance?

A Federal laws allow you to transfer a certain amount of assets tax-free to your heirs when you die, referred to as your personal tax exemption allowance.

Q. What is the amount of the federal estate tax exemption allowance?

A.The 2010 Tax Relief Act establishes $5 million dollar estate tax exemption allowance for someone who dies in the years 2010, 2011 or 2013.

Unless Congress passes new estate tax laws before January 1, 2013, the estate tax exemption allowance revert to $1 million.


Q. Is your estate subject to the federal estate tax?

A. If the value of your assets exceeds the personal estate tax exemption allowance, your estate representative will be required to file a federal estate tax return and pay taxes on that part of your estate that exceeds your allowed personal tax exemption allowance.

Q. Do states have an estate tax?

A. Prior to the 2001 estate tax legislation, states received a portion of the federal estate taxes paid.  This provision was phased out by 2005 and, as a result, many states have or are considering imposing estate taxes on the estate of the deceased.


Q.  How do you calculate the value of the estate for estate tax purposes?

A. All of your assets are subject to the federal estate tax calculation.  Assets include real estate, bank accounts, cash, motor vehicles, stocks, dons and other securities, jewelry, fine arts or furniture, notes receivable, stock options, deferred compensation, IRAs, Keoghs, retirement plans, pensions, 401(k) plans, life insurance proceeds and all interested in businesses and business property including shares in partnerships, joint ventures, farms, right to royalties, value of intellectual property, etc.

The gross value of your estate also includes the value of any gifts given away within two years of your death that exceeded the annual gift tax allowance, currently $13,000 per person.


Q. How do you calculate the taxable value of your federal estate tax?

A.The estate representative must make a list of property owned by the decedent and, perhaps with the help of an appraiser, assign a fair market value to the property.

The fair market value is the amount the property is worth at the time the decedent  dies (or six months later if the value is lower than at date of death), not the price the decedent paid for it.   Then, he or she must make a list of all the debts the decedent owed at your death.

If property is owned jointly with someone else, multiply the decedent’s ownership share times the fair market value to calculate the estate tax value of the property.

The taxable value of the estate is calculated by deducting the total amount of the  debts from the total fair market value of all the assets.

If the taxable value of the property exceeds the personal estate tax exemption allowance, the estate representative must file a Form 706 Estate tax return and pay the appropriate tax due within nine months of death.


Q. How do you calculate the amount of estate tax due?

A. The amount of tax due is calculated by multiplying the estate tax rate applicable the year of death by the value of the decedent’s net taxable estate  The maximum estate tax rate for the years 2010, 2011 and 2012 is  355%.

The estate tax is a progressive tax levied on the value of the taxable estate exceeding the allowable personal tax exemption allowance, as follows:

Taxable estate exceeding personal tax exemption allowance Tax Rate
Up to $10,000 18% of excess over $10,000
$10,000 to $20,000 $1,800 plus 20% over $10,000
$20,000 to $40,000 $3,800 plus 22% over $20,000
$40,000 to $60,000 $8,200 plus 24% over $40,000
$60,000 to $80,000 $13,000 plus 26% over $60,000
$80,000 to $100,000 $18,200 plus 28% over $80,000
$100,000 to $150,000 $23,800 plus 30% over $100,000
$150,000 to $250,000 $38,800 plus 32% over $150,000
$250,000 to $500,000 $70,800 plus 34% over $250,000
$750,000 to $1,000,000 $155,800 plus 37% over $500,000
$1,000,000 to $1,250,000 $248,300 plus 39% over $750,000
$1,250,000 to $1,500,000 $345,800 plus 41% over $1,000,000
$1,500,000 to $2,000,000 $448,300 plus 43% over $1,500,000
$2,000,000 to $3,000,000 *$780,800 plus 49% over $2,000,000
Over $3,000,000 *$1,290,800 plus 55% over $3,000,000

These are the published tax rates.   However, Congress changed the highest estate tax rates for U.S. Citizens in 2010.  Currently, the highest tax rate is 35%.    The tax rates for estates in excess of $5 million would be 35%.

For example, assume the value of the estate subject to estate taxes is $5 million for someone who died in 2010.  The amount of taxes due is $780,000 plus 4% of the value over $2 million.

Q. Who will pay the estate tax?

A. The estate of the decedent is responsible for paying any estate taxes due.  The decedent can leave instructions on what assets should be used to ay the tax.   If not, the 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 estate taxes change the value of the bequests.

Q. Do states have an inheritance tax?

A. Some states have an inheritance tax, a tax imposed on beneficiaries who inherit property.  If your beneficiaries live in one of these states, they must report the amount of their inheritance as income when they file their state tax return.

You have the right to provide in your will or your trust that any inheritance taxes will be paid from the estate before the estate is distributed to beneficiaries.

Many spouses do not collect inheritance taxes from spouses or children.

Q.  Do states have an estate tax?

A Prior to the 2001 estate tax legislation, states received a portion of the federal estate taxes paid.   This provision was phased out by 2005 and, as a result, many states have or are considering imposing estate taxes on the estate of the deceased.   Like the federal estate tax, state estate taxes are paid for by the decedent’s assets.


Q. What is the Deceased Spouse Unclaimed Exclusion Amount (DSUEA)?

A. Before the 2010 Tax Relief Act created the DSUEA form, the only way a married couple could preserve the estate tax exemption allowance of the first spouse to die was to spend time and money in setting up an A/B trust.

The surviving spouse of someone who dies in the year 2011 or 2012 can now just file  Form 706 with the Internal Revenue Service and claim the right to the  deceased spouse unclaimed exclusion amount.   When the surviving spouse dies, his or her estate representative can combine the last spouse to die $5 million personal estate tax exemption allowance with the first spouse to die deceased spouse unused exclusion amount.

The ability to transfer the estate tax exemption to the surviving spouse is sometimes referred to as portability.  The net effect is it gives married couples the right to exclude $10M of assets from federal estate taxes.


Q. Are the proceeds from life insurance part of your taxable estate?

A. If you are the owner of the policy, or can designate beneficiaries, life insurance proceeds are considered part of your taxable estate.   Owning a sizable life insurance policy can trigger or greatly increase federal estate taxes.


Q. How can you use gift tax rules to minimize the value of your taxable estate?

A. Gift taxes allow you to give a way a certain amount of each money tax-free.   The gift tax law are comprised of three sets of tax giving rules:  the annual gift tax exclusion, direct gifts for education and medical expenses, and the $1 million tax-free gift allowance.


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.

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.”

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