1. Who should have the Basic Estate Plan?
2. What are Estate Taxes and do I have to worry about them?
3. Who has to pay estate taxes?
4. What makes up my net estate?
5. If I have a "Large Estate", what is important to know?
6. How can I reduce or eliminate my estate taxes?
7. Use Both Exemptions !!!
8. Remove Assets From Your Estate !!!
9. Buy Life Insurance!!!
10. If I give away (Gift) my property before I die, does it become part of my estate?

Who should have the BASIC ESTATE PLAN?

Everyone should have an estate plan, no matter the size of their "estate". The basic estate planning documents cover the rest of your life as well as disposition of your assets after death.

Back to Top

What are ESTATE TAXES and do I have to worry about them?

Federal Estate and Gift Taxes are taxes assessed against the transfer of wealth at the time of death. The Estate and Gift Taxes are unified and operate in coordination with each other with the same rates. You can not make Gifts to avoid Estate Taxes.

Estate taxes are different from, and in addition to, probate expenses and final income taxes (which must be paid on income you receive in the year you die). Federal estate taxes are expensive – they start at 41% and quickly go up to 55%. And they must be paid in cash, usually within nine months after you die. Since few estates have this kind of cash, assets often have to be liquidated. But estate taxes can be substantially reduced or even eliminated – if you plan ahead.

At the present time there is an credit which allows the first $1,000,000 (year 2002) of a person's estate to be exempt from estate taxes.

ESTATE and GIFT TAXES FOR LARGE ESTATES ARE A SERIOUS PROBLEM AND ONE SHOULD CONSULT AN ATTORNEY.

Back to Top

Who has to pay estate taxes?

Your estate will have to pay estate taxes if its net value when you die is more than the "exempt" amount set by Congress at that time. Here is the current schedule:
Year of Death.........Estate Tax “Exemption”
2002 & 2003..........$1,000,000
2004 & 2005..........$1,500,000
2006 to 2008.........$2,000,000
2009 & 2010..........$3,500,000

2011 & beyond....back to $1,000,000 ???

Back to Top

What makes up my net estate?

To determine your current net estate, add up your assets then subtract your debts. Many people are surprised that insurance policies for which they have any "incidents of ownership" are included in their taxable estates. This includes policies you can borrow against, assign or cancel, or for which you can revoke an assignment, or can name or change the beneficiary.

You can see how life insurance can increase the size of your estate – and the amount of estate taxes that must be paid.

Back to Top

If I have a LARGE ESTATE, what is important to know?

If your estate is greater than $1,000,000.00, your Estate will incur federal taxes. This tax is an excellent reason to get your Estate Plan up-to-date. You should discuss any potential tax liability with your attorney.

Back to Top

How can I reduce or eliminate my estate taxes?

In the simplest terms, there are three ways:
1. If you are married, use both estate tax exemptions (Unified Credit).
2. Remove assets from your estate before you die.
3. Buy life insurance to pay remaining estate taxes.

Back to Top

Use Both Exemptions!!!

If your spouse is a U.S. citizen, you can leave him or her an unlimited amount when you die with no estate tax. But this can be a tax trap, because it can waste an exemption.

Let's say, for example, that Jack and Jill together have a net estate of $1.5 million and they both die in 2002. Jack dies first. He leaves everything to Jill, so no estate taxes are due then. When Jill dies, her estate of $1.5 million uses her $1,000,000 exemption. The tax bill on the remaining $500,000 is over $200,000! OUCH!

But if, instead, Jack and Jill plan ahead, they can use both their exemptions and pay no estate taxes. A tax-planning provision in their living trust splits their $1.5 million estate into two trusts of $750,000 each. When Jack dies, his trust uses his exemption. When Jill dies, her trust uses her exemption. This reduces their taxable estate to $0, so the full $1.5 million can go to their loved ones.

This planning can also be done in a will, but you would not avoid probate or enjoy the other benefits of a living trust.

Back to Top

Remove Assets From Your Estate!!!

A great way to reduce estate taxes is to reduce the size of your estate before you die. So, spend some and enjoy it!

Also, you probably know whom you want to have your assets after you die. If you can afford it, why not give them some assets now and save estate taxes? It can be very satisfying to see the results of your gifts--something you can’t do if you keep everything until you die. Appreciating assets are usually best to give, because the asset and future appreciation will be out of your estate.

Assets you give away keep your cost basis (what you paid), so the recipients may have to pay capital gains tax when they sell. But the top capital gains rate is only 20% (assets held at least 12 months). That's a lot less than estate taxes (41-55%) if you keep the assets until you die.

Some of the most commonly-used strategies to remove assets from estates are explained below. Note that these are all irrevocable, so you can't change your mind later.

Back to Top

Buy Life Insurance!!!

Depending on your age and health, buying life insurance can be an inexpensive way to pay remaining estate taxes. Also, the three-year rule mentioned earlier does not apply to new policies. But don't be the owner of the policy—that will increase your taxable estate and estate taxes. To keep the death benefits out of your estate, set up an ILIT and have it purchase the policy for you.

Back to Top

If I GIVE AWAY (gift) my property before I die, does it become part of my estate?

Generally no. Once you no longer have ownership/control of property, it will not be included in your estate when you die. Keep in mind that any gift over $11,000.00 to an individual in a year without a Gift Tax return will cause that gift to be included in your estate. Click here to get a cup of water and read our article on ways to give more than $11,000.00 without gift tax. Use of the Per Donee Exclusion (PDE) is a complex matter in which the advise of an attorney is required.

Back to Top

Additional considerations in Estate Planning with Minor Children!