That is a great question because there has been a great deal of discussion in the media recently about the federal estate tax. For starters, it is important to understand that the federal estate tax is based upon a percentage of your estate, which is comprised of all the assets you own less certain deductions, including charitable donations and what is known as the applicable exclusion amount.
In 2001, Congress passed the Economic Growth and Tax Relief Reconciliation Act (EGTRRA), which provided that the applicable exclusion rate increased annually up to $3.5 Million dollars in 2009. EGTRRA expired in 2010, which meant no federal estate tax in 2010. Accordingly, we entered 2010 with much speculation of whether Congress would allow this so-called "sunset provision” of EGTRRA to occur.
It wasn’t until December 17, 2010 that the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (the "2010 Tax Relief Act”) was signed into law. This ended nearly a year of speculation of what would happen to the federal estate tax. The new law, which amends EGTRRA, provides that the applicable exclusion amount is $5 Million dollars in 2011 and 2012. However, in 2013, neither EGTRRA nor the 2010 Tax Relief Act will apply. Without action by Congress, the applicable exclusion amount will revert back to $1 Million dollars. So, we are again left to speculate about whether Congress will allow this to happen.
We recommend that everyone should have their estate plan regularly reviewed by an experienced estate planning attorney. If your estate plan hasn’t been reviewed recently, you or your family may face unintended consequences due to these changes in the federal estate tax. Additionally, the 2010 Tax Relief Act may offer some additional opportunities for advanced planning related to gift tax and generation skipping transfer taxes.
Your taxable estate is made up of the total value of your assets minus liabilities and deductions such as funeral expenses, debts, bequests to charities and the value of the assets passed on to your spouse. Taxes imposed on the taxable part of your estate are paid out of the estate itself before distribution to heirs.
This is a tricky question. The federal government lets married individuals give an unlimited amount of assets by gift or bequest to his or her spouse without federal gift or estate taxes being imposed. This is known as the unlimited marital deduction, and in effect it lets married couples delay the payment of estate taxes when one spouse passes away. However, upon the death of the surviving spouse, all assets in the estate in excess of the applicable exclusion amount will be included in the survivor’s taxable estate. Also, unlimited marital deductions apply only to surviving spouses who are U.S. citizens.
4. If my estate exceeds the applicable exclusion amount, do I automatically have to pay the full amount of estate taxes?
A number of tools exist to minimize estate taxes. Some of the more commonly used are Credit Shelter Trusts, Qualified Personal Residence Trusts (QPRTs) Irrevocable Life Insurance Trusts, and Family Limited Partnerships (FLPs). An experienced, competent estate planning attorney can use these tools and more to help protect against your estate paying too much in death taxes.
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