Estate Planning—Frequently Asked Questions
1. Can I give my estate away before I die and avoid Estate Taxes?
The Congress has "tied" the Gift Tax and an Estate Tax together. If you give more than $11,000.00 to any person per year ($22,000.00 with your spouse) you will be subject to the Gift Tax. If your gift to any person (relative or non relative) is in excess of $11,000.00 ($22,000.00 for married donors) then you will have to file a Gift Tax return (generally due April 15 of the year following the gift). The amount of the gift in excess of $11,000.00 ($22,000.00 for married persons) will reduce your lifetime exemption for Estate Taxes by the amount of the excess.
For example, a couple decide to give an automobile to their daughter. The auto is worth $35,000.00 when they give it to their daughter. Because they are married, the first $22,000.00 of the gift does not count as a gift for Gift Tax purposes ($35,000.00 $22,000.00 = $13,000.00). The couple will have to file an IRS form 709 Gift Tax Return by April 15th. If this occurred in 2006 each individual can leave up to $2,000,000.00 of net estate free from Estate Taxes. However, because they exceeded $22,000.00 to someone in one year they will have to reduce each of their $2,000,000.00 exclusions by the following:
Husband
$2,000,000.00
6,500.00 (minus ½ value of car after subtracting annual gift exclusion amount)
=============
$1,993,500.00 Amount husband can leave without Estate Taxes when he dies
Wife
$2,000,000.00
6,500.00 (minus ½ value of car after subtracting annual gift exclusion amount)
=============
$1,993,500.00 Amount wife can leave without Estate Taxes when she dies
2. What are the Estate and Gift Tax Rates for 2001 and 2011 and Thereafter?
Estate and Gift Tax Rates
| Value of Estate/Gift |
Tax Rate |
| $1,000,000.00 | 41% |
| $1,250,000.00 | 43% |
| $1,500,000.00 | 45% |
| $2,000,000.00 | 49% |
| $2,500,000.00 | 53% |
| $3,000,000.00 | 55% |
The maximum rate of 55% is reduced to 49% for 2003; 48% for 2004; 47% for 2005; 46% for 2006; and 45% for 2007, 2008,and 2009. The maximum rate returns to 55% in 2011.
3. How much can I exclude from my estate before I have to pay Estate or Gift Taxes (under the 2001 law)?
First, remember the Gift Tax and the Estate Tax are tied together. Congress enacted this joined Gift/Estate Tax so that someone would not give away their entire estate on their death bed without paying the Estate Tax. Therefore, both taxes are tied together. If you give away your entire tax free portion when you are alive it won't be available for death.
For Gift Taxes purposes the annual exclusion of $10,000.00 (or $20,000.00 if married) (however starting 1/1/2002 the $10,000.00 jumps to $11,000.00 or $22,000.00 if married), does not reduce the overall excludable amount so do not include the first $10,000/$20,000.00 per person per year of the gift. This table is for people dying in the year stated or giving property in that year:
First, remember the Gift Tax and the Estate Tax are tied together. Congress enacted this joined Gift/Estate Tax so that someone would not give away their entire estate on their death bed without paying the Estate Tax. Therefore, both taxes are tied together. If you give away your entire tax free portion when you are alive it won't be available for death.
For Gift Taxes purposes the annual exclusion of $11,000.00 (or $22,000.00 if married), does not reduce the overall excludable amount so do not include the first $11,000/$22,000.00 per person per year of the gift. This table is for people dying in the year stated or giving property in that year:
Estate Tax Exclusion
| Year |
Exclusion |
| 2001 | $675,000.00 |
| 2002 | $1,000,000.00 |
| 2003 | $1,000,000.00 |
| 2004 | $1,500,000.00 |
| 2005 | $1,500,000.00 |
| 2006 | $2,000,000.00 |
| 2007 | $2,000,000.00 |
| 2008 | $2,000,000.00 |
| 2009 | $3,500,000.00 |
| 2010 | ESTATE TAX REPEALED FOR ONE YEAR, BUT NO STEP UP IN BASIS FOR 2010 YEAR |
| 2011 | $1,000,000.00 (Year 2011 and thereafter) |
4. What is an A-B Trust, can it help me?
An A B Trust is a regular trust made during the lifetimes of a husband and wife. It has the characteristic that upon the death of either a husband or wife it splits into two trusts, an "A" trust and a "B" trust. By doing this, the trust takes advantage of the decedent's $675,000.00 exemption (year 2001) AND the unlimited marital deduction. The surviving spouse becomes the trustee of both trusts and can utilize the funds in both trusts. The purpose of the A B trust is to eliminate all estate taxes upon the death of the first spouse.
First, to be able to use an A B trust you must be married and have an estate tax problem. If you have an estate worth more than $2,000,000.00 in 2006, 2007, and 2008; or worth more than $3,500,000.00 in 2009. In 2011 and thereafter the old estate and gift law comes back and the maximum you can leave is only $1,000,000.00. If you have an estate of more than these amounts in these years, yes an A B trust can help you. Of course a trust can avoid probate too.
Often an individual will leave some or all of his/her estate to the surviving spouse with the monies going to the children after the surviving spouse's death. The IRS LOVES THIS! Why? Remember each spouse can exclude up to $3,500,000.00 (in 2009)
(see
Estate and Gift Tax exclusion). If an individual leaves money to his/her surviving spouse he/she LOSES THE EXCLUSION!! However, if it is left to a Bypass Trust and the balance (if any) to the Surviving Spouse's trust, then one KEEPS THE EXCLUSION!
A typical A B trust is as follows: a Husband and Wife have an estate of $10,000,000.00. The Husband dies. His share of the estate is worth $5,000,000.00 (one half of $10,00,000.00 = $5,000,000.00, the other half is owned by his wife). In 2002 he leaves $1,000,000.00 to Surviving Spouse's trust to be used by his surviving wife until she dies and to her children upon her death. The balance to the surviving wife is $4,000,000.00 ($5,000,000.00 $1,000,000.00 = $4,000,000.00), NO TAX!! Because of the Unlimited Marital Deduction (any amount going to the surviving spouse gives a deduction to the estate and is then taxed when the surviving spouse dies), there will be no tax until the surviving wife dies. Of course in this example, the wife's $5,000,00 plus the $4,000,000.00 that she inherited from her husband will be added together ($5,000,000.00 + $4,000,000.00 = $9,000,000.00) and be taxed, minus his wife's $1,000,000.00 exclusion ($9,000,000.00 $1,000,000.00 = $8,000,000.00 x 55% = $4,400,000.00 in Estate Taxes).
There are other ways to avoid Estate Taxes for larger estates. What if a husband has a large estate and his wife has no estate or it is a second marriage and there are children from both spouses involved? Can someone take advantage of the Unlimited Marital Deduction? Yes, with a
QTIP election.
5. What is a QTIP Trust?
Congress realized that today many people are into their second, third or more marriages and that frequently, one spouse will have substantially more assets than the other spouse. For the spouse with all of the assets to be able to take advantage of the Unlimited Marital Deduction and the surviving spouses exclusion of $1,000,000.00, the law was changed to have a QTIP Trust or a Qualified Terminal Interest Property Trust.
A QTIP Trust permits the spouse with all of the assets to "leave" the property to the surviving spouse, except the surviving spouse cannot touch the principal of the trust. She/he must have the QTIP Trust's income (interest, dividends, royalties, etc.) for her/his lifetime. But, the spouse with all the assets gets an Unlimited Marital Deduction that makes his estate pay ZERO Estate Tax upon his death and it can utilize the surviving spouse's exclusion of $2,000,000.00 (in the year 2006) when she dies.
Disclaimer: The information in these web pages has been prepared as a
service to the community and does not constitute legal advice. This
information may not apply to your situation particularly if you do
not live in the state of California. Do not make legal decisions based
on this material. Consult an attorney in person before making any
important legal decision.
