The federal estate tax carries a 40% maximum rate, and the exclusion amount is $5.25 million in 2013. What this means in simple English is that only $5.25 million worth of assets can be passed on to your heirs before the estate tax is imposed. Married couples, with proper planning, can preserve the exclusion amount for both spouses for a combined exclusion of $10.5 million.
We also have an unlimited marital deduction that allows you to leave any amount to your spouse free of the estate tax, even if it exceeds the exclusion amount. That is, as long as you and your spouse are both United States citizens.
It is not entirely uncommon, however, for Americans to marry people who are citizens of other countries. At any given time we have a lot of military personnel stationed overseas, and sometimes they marry people that they meet in other countries.
Many civilians work abroad as well, and there are international dating sites that some people find to be appealing. And of course world travelers sometimes fall in love along the way.
Whatever path you may have taken to an international marriage you must concern yourself with the estate tax because the marital deduction is not extended to an American who is married to a non-citizen.
A partial solution could be the creation of a qualified domestic trust. With these trusts the beneficiary, your surviving spouse, can receive distributions from the trust for their needs according to an ascertainable standard established by the IRS.
What remains in the trust at the spouse's death would be subject to the estate tax. However, applying other strategies, it could be possible to avoid the estate tax, altogether.
To learn more about these trusts and other tax efficiency tools contact our firm to set up a free consultation.
People that have assets that exceed the exclusion amount ($5.25 million in 2013) most certainly need to discuss tax efficiency strategies with a licensed estate planning attorney who places an emphasis on wealth preservation.
However, there are those who the only reason someone would meet with an estate planning lawyer is to avoid taxes. They may reason that because their estate is less than the exclusion amount, there is no need for estate planning. In fact, there are myriad concerns that can be addressed with a properly constructed estate plan that have nothing to do with tax exposure.
One of these concerns could be long-term access to financial resources. You may be concerned about leaving lump sum inheritances to certain people on your inheritance list. After all, you won't be around to help if someone in the family was to burn through his or her inheritance too quickly.
A way to respond to this would be to convey assets into a spendthrift trust. You appoint a trustee, and this could be a family member, the trust department of a bank, or a trust company. This trustee will administer the funds according to your stated wishes and distribute assets to the beneficiary in a measured fashion. The beneficiary will not be able to control the principal, which also means their creditors would not have access, either.
This is only one possible scenario. There are many others, including planning for blended families and providing for a family member with special needs without jeopardizing disability benefits.
Arranging for the transfer of your financial assets to your loved ones is a profound act. It is something that is best undertaken with the benefit of professional guidance.
The role of Life insurance is extremely important when considering your estate plan. We would like to highlight three commonly asked questions about the tax implications, and provide the answers to them here.
I have been made aware of the fact that I am the beneficiary of a life insurance policy, and I'm concerned about the tax implications. Will I be required to report the receipt of the proceeds when I file my income tax return?
This is a frequently asked question, and the answer is probably going to be a welcome one. In general proceeds received from a life insurance policy are not going to be looked at as taxable income by the Internal Revenue Service.
I own a number of insurance policies, and my estate is quite valuable. Will the value of the insurance policy proceeds count as part of my taxable estate for estate tax purposes?
Unfortunately the answer to this question is yes. At the present time the estate tax exclusion is $5.25 million, and the maximum rate is 40%. If the sum total of your assets is in excess of $5.25 million, including your life insurance policy proceeds, the estate tax may indeed be a factor.
Can anything be done to remove these policies from my taxable estate?
Yes, it would be possible to place the policies into an irrevocable life insurance trust. However, to satisfy IRS regulations you must live for at least three years after transferring the policies into the trust for the assets to be effectively removed from your estate. There are ways to avoid the three-year wait, but they must be addressed by a qualified estate planning lawyer.
The estate tax parameters we could expect for 2013 were hazy throughout last year. At the end of 2010 a piece of legislation called the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 was passed that implemented the rules for 2011 and 2012.
Due to provisions contained within this act the estate tax exclusion was $5 million at its base with annual adjustments for inflation. The estate tax, the gift tax, the generation-skipping transfer tax was set at a flat rate of 35%.
This tax relief act was scheduled to sunset at the end of 2012. Under laws that existed throughout the year the maximum rate would automatically go up to 55% while the exclusion went down to $1 million upon the expiration of this measure. This tax increase was one of the perils that we would have faced had the country gone "over the cliff."
Because of the agreement that was reached around the first of the year we avoided the cliff and the estate tax parameters are largely unchanged. We still have a $5 million base exclusion adjusted for inflation. The Internal Revenue Service has announced that adjustment, making the estate tax exclusion $5.25 million in 2013.
The top rate of the federal estate tax has been raised, but the increase is not anywhere near as severe as it could have been. In 2013 the rate has gone up from 35% to 40%, and once again this applies to the gift tax and the generation-skipping transfer tax as well.
Though things could have been worse 40% of your taxable legacy is a lot of money. It is however possible to implement tax efficiency strategies that will preserve your wealth.
As Reno estate planning attorneys we have a thorough understanding of tax laws, and we urge you to contact us to arrange for a consultation if you would like to tap into some professional expertise.
We can be reached by phone at 775-823-WILL (9455), or online at www.wealth-counselors.com.
A couple of years ago a legislative measure was passed that has subsequently been named the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010. This legislation re-unified gift/estate tax exclusions.
In 2011 the amount of the unified gift and estate tax exclusion was $5 million. This year the exclusion has risen to $5.12 million to account for inflation.
Throughout both 2011 and 2012 the maximum rate of the gift tax, the estate tax, and the generation-skipping transfer tax has been 35%.
As a result of the above, people who have resources that do not exceed $5.12 million have been more or less immune from taxes on such transfers to their loved ones.
However, things are changing in the very near future.
This tax relief act is going to expire at the end of 2012. If this expiration takes place without any new legislation being enacted the exclusion will go down to $1 million while the top rate rises to 55%.
Those who have resources in excess of $1 million may want to consider giving gifts during the 2012 calendar year. There is, of course, a very limited window of opportunity left because the end of the year is rapidly approaching.
The act of funding certain types of trusts such as dynasty trusts could be taxable under gift tax regulations. Aside from giving direct gifts, however, there are methods that could allow you to take advantage of this larger exclusion to fund an irrevocable trust for the benefit of loved ones. These methods may allow for discounting, so an even greater amount may qualify for the exclusion.
Giving shares in a family limited partnership or family limited liability company may also be a possibility.
These methods are relatively sophisticated, so if you are serious about wealth preservation you would do well to discuss this temporary opportunity with a qualified Reno estate planning lawyer as soon as possible.
A trust is often used as an estate planning tool in order to accomplish a variety of goals. At its most basic, a trust consists of a grantor (sometimes called a settlor, or trustor) who establishes the trust, a trustee who administers the trust assets, at least one beneficiary, and assets to fund the trust. Often, all three positions -- grantor, trustee and beneficiary -- can be held by the same person. Beyond that, trusts come in numerous forms that range in complexity; however, one simple distinction centers around whether the trust is revocable or irrevocable. Understanding some of the important features of the two options can help you decide which one is right for you.
All funded trusts, including the revocable trust, avoid probate. What this means is that the funds held in the trust are not required to pass through the often lengthy legal process that follows the death of the grantor, making the trust benefits available to the beneficiaries in a much more timely fashion. A much more important aspect of a revocable trust is that a revocable trust, as implied by the name, can be revoked, amended or modified by the grantor at any time. This feature can be very important if you feel that you may wish to change the beneficiaries or the specific terms of the trust at some future point. This flexibility makes a revocable trust an attractive option for most people.
An irrevocable trust cannot be revoked, amended or modified without court intervention in most states. Under most circumstances, the grantor may not be the trustee or the beneficiary. All control and access is delivered to an independent trustee and a third party beneficiary. What the grantor receives, however, for giving up the ability to control the trust is asset protection, probate avoidance, possible estate tax avoidance and potential income tax and, when the beneficiary is a charity, capital gains tax advantages. These are highly complex strategies and must be entered into with appropriate caution. The expertise of a qualified estate planning attorney should always be sought.
It is logical to assume that passing along assets to your heirs after you die is not something that will cost you a lot of money. Why should it? Of course you have to retain the services of an estate planning attorney to get the correct documents in place, but after that it would seem as though no further costs should be incurred. Unfortunately however, there is indeed a formidable source of asset erosion out there that must be addressed in the form of the federal estate tax.
Who has to pay the estate tax? This is a very good question, and it is not an easy one to answer because the parameters of the estate tax are constantly changing. The dividing line that you need to keep an eye on is the estate tax exclusion. Right now the estate tax exclusion is $5 million, which means that only the portion of your estate that exceeds this amount is subject to the estate tax, which is presently carrying a 35% maximum rate. However, if the laws stay the same as they are right now, in 2013 the estate tax exclusion will be $1 million, and the top rate of the tax will be 55%. In 2008 the exclusion was $2 million; in 2009 it was $3.5 million; and during 2010 it was repealed, so you can see that it is difficult to plan ahead considering the way that the exemption is always changing.
Estate planning attorneys often emphasize the fact that your estate plan is going to have to be updated as your life changes. But in addition to the changes that take place in your own life you have to be ready to react to circumstances that are not under your control, such as alterations to the estate tax laws. The wise course of action is to stay in touch with your estate planning attorney who will keep you apprised of changes that may have an impact on your estate plan.
Last year, estate planning attorneys were placed in a difficult position because there was a lot of uncertainty regarding the future of the estate tax parameters. If the laws stayed unchanged as they were throughout most of the year, the estate tax exclusion would have been $1 million and the rate of the tax would have been 55% at the beginning of 2011. Due to provisions contained in the Bush-era tax cuts, the estate tax was repealed for 2010, but in 2009 the rate of the estate tax was 45% and the exclusion was $3.5 million.
Because of the new tax relief legislation that was signed into law by the president on December 17th, we now have a $5 million exclusion and a 35% maximum rate, but this act is set to expire at the end of 2012. As it stands right now, at the beginning of 2013 the rate of the tax will once again go back up to 55% and the exclusion will revert to the $1 million that was in place in 2002.
All this movement has a lot of people scratching their heads and this is one of the reasons why there is so much support for a permanent repeal of the estate tax. But the reality is that some people have already been victimized and treated differently than others over a period of just a few years. Let's look at a very simple example.
Let's say that you live on a block where everyone has a $5 million estate. If your across-the-street neighbor died in 2007 or 2008 when the estate tax exclusion was $2 million and the rate was 45%, his family would have had to pay the IRS $1.35 million. If your next-door neighbor died in 2009 when the exclusion was $3.5 million with that same amount of money, her heirs would have to pay $675,000. Now if your neighbor on the other side died this year, her $5 million estate wouldn't be taxed at all.
These are hundreds of thousands and even millions of dollars we're talking about that could make an enormous difference in the lives of your family members going forward into future generations. Even the most staunch pro-tax advocate would have to admit that there's something fundamentally wrong with the inconsistencies highlighted above.
One of the provisions that was included in the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 reduced the max rate of the estate tax to 35%. It was scheduled to return from a one year repeal with a 55% top rate, so your first thought upon the news of the change would logically be one of relief.
But we need to put the matter into perspective. Since when is a 35% tax on after-tax earnings a cause for celebration? Compared to 55% this 35% seems almost tame, but in reality it is an extremely harsh bite and an instance of double taxation regardless of the rate.
In addition, the selective nature of the tax is patently unfair. The last time it was in effect in 2009 the exclusion was $3.5 million. Now it is $5 million, so it took a baby step in the right direction, but why should some people pay the tax while others don't? Why should a $10 million estate owe $1.75 million to the IRS while a $5 million estate owes nothing?
The polarizing pro-tax talking points involve making villains of Americans who would be subject to the tax, but it could be argued that anyone who buys into this is being misled. Let's say you created something like Facebook or invented a better mousetrap and you wound up with an estate worth a billion dollars. Under this "tax relief" act, $995 million of it would be taxed at 35% as you passed it along to your heirs after your death. So the federal government would take more than $348 million.
If you had the inspiration to create such a wealth building enterprise, would you feel as though the government deserved over a third of what was earned after you pass away? Some say they could afford to lose that much, if they could create that much wealth, but could the money lost to the government be more effectively used in further research and development that would create more wealth and provide jobs for more families?
Beyond that, consider the potential good that the $348 million could do as an inheritance. If it was in the hands of your children they would invest it to stimulate commerce and create jobs. If it goes to the government, it is swallowed up into a black hole of infinite debt and does little good for anyone.
The bottom line is that the matter of the estate tax has not been resolved, the debate goes on, and many Americans are still in favor of a total and permanent repeal of this draconian federal death levy.
There were some big changes to the estate tax parameters included as part of the new legislation signed into law by the president on December 17th that is being called the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.
The lead story from an estate planning perspective involved the rate of the tax and exclusion amount. Rather than the $1 million exclusion that was scheduled upon the expiration of the Bush tax cuts the exclusion is set at $5 million, and the rate of the tax is now 35% rather than the 55% that was on tap.
Is worthwhile to underscore the fact that this $5 million estate tax exclusion is for each individual. So if you are married you and your spouse have a total combined estate tax exclusion of $10 million to work with going forward in 2011 and 2012. If you think this through, a logical question will arise: If I passed away would my spouse get to use my $5 million exclusion as well as his or her own?
In estate planning circles this idea is defined as the issue of "portability." To many observers the estate tax in and of itself is unfair, so as you might expect most of the rules surrounding it tend to defy logic as well. Until the passage of this new tax relief legislation in December the answer to the above question was no, your surviving spouse could not use your estate tax exclusion if you were to pass away.
The reason why this is unfair is because the estate that is accumulated by a married couple is the product of the earnings and investments of each individual; this wealth represents the combined efforts of two people. When one of these two people passes away his or her contribution to the estate still exists and it is taxable, but his or her exclusion is not available to defray the tax liability.
As a result of the new law the estate tax exclusion is now portable, and your spouse can indeed use your $5 million exclusion if either of you were to pass away. Unfortunately, the new measure is only available for the next 22 months and dies with the sunset provision in 2013. Who knows what the law will look like at that time, but at least there is now a "toe in the door."
Nobody is especially anxious to part with any of their hard earned money and hand it over to the tax man. But in spite of the complaining, most people recognize the fact that some taxation is necessary and are perfectly willing to pay their fair share. What people don't want to do is pay taxes multiple times on the same earnings, and this is one of many reasons there is so much support in some quarters for a permanent repeal of the estate tax.
Consider this overly simplified example that demonstrates the logically indefensible nature of the estate tax. Let's say that Elizabeth was an avid saver throughout her life. She socked away a sizable portion of every paycheck that she ever earned in a savings account.
Since she was so frugal it always bothered her to see that she was left holding only about $60 out of every $100 she earned after paying payroll and income taxes, but she was heartened by the fact that she was doing her part as a good citizen.
After saving so diligently for so long she was able to accumulate quite a large sum of money. Every year she paid income taxes on the interest she had earned and then when she died, the estate tax kicked in and her children received just 65% of the savings that she worked so hard to accumulate after paying taxes. And then when her children died and left that money to their children, it was once again taxed at 35% and less than half of the taxable portion of Elizabeth's original bequest was left.
A viable response to this potential scenario is the creation of a legacy trust. With these vehicles you name your grandchildren as the beneficiaries, skipping a generation as it were. Your children can still receive benefits from the trust, but they don't own the assets so they can't be targeted by claimants or former spouses. When your children die, your grandchildren inherit the contents of the trust, and the estate tax is levied only once though two generation enjoyed benefits from the trust. And now, in Nevada, as well as a handful of other states, the tax can be avoided for multiple generations with a properly established trust.
For those Americans who have been able to build some wealth throughout their lifetimes, estate planning has a lot to do with addressing the reality of the estate tax. Many people would suggest that there should be no estate tax at all. Their most convincing argument is that any assets that are left over after you have passed away represent a remainder that you managed to hang on to after paying any number of taxes throughout your life. And the more successful you have been, the more you have been taxed.
Love it or loathe it, however, we will likely always have an estate tax. For the past 10 years, one problem with the tax is uncertainty. If the estate tax was somewhat uniform and adjusted according to market conditions it could be planned for intelligently, but who must pay it and how much must be paid has been all over the place in recent years. In 2008 the exclusion amount was $2 million; in 2009 it was $3.5 million; in 2010 the estate tax was repealed; and in 2011 the estate tax exclusion was scheduled to be just $1 million. In addition to the reduced exclusion, the rate of the tax was scheduled to rise to as much as 55% in 2011 unless there was some 11th hour legislation to alter the law.
Lo and behold, that legislation has in fact been passed and the estate tax burden will be significantly lessened going forward. The bill that is going to extend the Bush era tax cuts and provide all Americans with continued tax savings also contains an estate tax provision. In light of the enactment of this legislation the estate tax exclusion will now be $5 million, and the top rate of taxation has been reduced to 35%.
Once again, however, these changes are only temporary and are scheduled to sunset in two years. What happens on January 1, 2013? You guessed it - back to a $1 million exemption and 55% tax. Uncertainty is still the order of the day.
These changes will impact many estate plans, so you may want to pay your estate planning attorney a visit to discuss how this legislation affects your existing strategy.
To ensure that we all have enough to live on during our golden years, the IRS will penalize you for withdrawing money early from your retirement accounts – up to 10% in most cases – above and beyond the taxes you’ll pay on the money you have withdrawn. Think of it as the government’s way of enticing you to save. Sometimes we need that money sooner than later and penalty or not, we’re forced to dip into our retirement funds. Is there any way around all those extra fees?
One option is equal periodic payments from your retirement account or IRA, using the “substantially equal periodic payments” rule (SEPP). This little known rule allows you to withdraw money in equal and regular payments, at least once a year for the remainder of your life and/or your life and the life of your beneficiary.
To satisfy the criteria for this rule:
You can also avoid the penalty if you withdraw from a qualified retirement plan (other than your IRA) as long as you are at least 55 and are no longer working for the respective employer. So, if you quit your job after you turn 55, you can freely withdraw funds from your retirement plan without worrying about extra penalties.
In addition, many companies provide an employee stock ownership plan. Employees who are eligible to be paid stock monies can take a distribution from this plan anytime and not have to pay a penalty or early distribution tax.
Also remember that if you need to use your retirement account to pay child support or alimony, you will not be penalized for withdrawals for these purposes. You can also withdraw money in order to divide your estate with your ex-spouse. To qualify, you must have a Qualified Domestic Relations Order from a court that states the money is going to an alternate person than the account holder.
If you contributed more money to your retirement account than you were eligible to deduct on your taxes, you can take that money back and not pay the early withdrawal penalty. Be sure to remove the money before you file your federal income taxes.
If you are in dire need of withdrawing from your retirement plan, speak with a financial planner to figure out the best route to avoid any penalties. Anderon, Dorn & Rader has highly-rated professionals that can help guide you.
Understanding how the gift tax works is an essential part of good estate planning. A gift tax attorney can help guide you through the gifting process but put simply, the gift tax is a federal tax owed when assets are “gifted” to another person. Gift taxes can be levied on personal property, real estate, and monetary gifts.
The person giving the gift is responsible for paying the tax, but the tax is waived completely if the gift is to a spouse or if it is for medical or education purposes. In addition, any gifts to a qualifying charity or a political organization are not taxed either.
Currently, you can gift up to $13,000 per year to a single individual without paying the gift tax and you can continue to do this until you reach the $1 million dollar lifetime maximum. That means you can gift up to $13,000 of your property to whomever you choose each year. Beyond that minimum, you must file a gift tax return up to the point that the $1 million dollar threshold is reached. After that, you will be liable for a very high tax.
These limits are "per person." So if you own property jointly with your spouse, you could theoretically give up to $26,000 per year to a single individual between the two of you.
This is a popular option for seniors looking to help their heirs avoid estate taxes and, if used properly, can become a great tool in your estate planning arsenal.
To learn more about the gift tax and to find out how to best plan your estate, you should consult with a qualified gift tax attorney. Anderson, Dorn & Rader in Reno, NV has experienced attorneys that you can trust.
