Once again politics have entered in to the decision-making process relative to taxes. The federal government has now postponed taking up the issue of Federal estate tax due upon death, and the decisions as to what one must do to attempt to eliminate or reduce estate taxes is again up in the air. The exemption for Federal estate taxes is currently $1.5 million for individuals dying in the year 2005. In the event that the individual is married, there is no tax between spouses, however, it is upon the second death that the government takes its significant share of the estate.
The lowest rate for estate taxes is currently 45%. This amount is calculated not merely based on the estate amount over $1.5 million, but rather by calculating the tax on the entire amount of the estate and then applying a credit directly against the tax. This has the effect of taxing every incremental dollar at the highest rate.
In 2006, the exemption rises to $2 million and this amount is increased to $3.5 million in 2009. 2010 is the year of no tax, regardless of the amount of money one has at death. In 2011 the sunset provisions of the law take effect and the exemption reverts back to the $1 million threshold. The House, Senate, and the President indicate that they want to increase the exemption to some greater sum, but it is unclear whether this will be effective in 2011, or whether the new schedule of exemptions will become effective immediately.
In any event, it is important to consider making use of these exemptions if one has significant assets. The tax could be eliminated if both spouses create separate trusts. This would leave the funds in trust for the benefit of the surviving spouse and children. The surviving spouse will not have an unfettered right to control the decedent spouse’s assets, but they will be available if necessary. With some planning, significant sums of money may be passed on to the next generation without estate tax.
By: Hyman G. Darling, Esquire
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