The
federal estate tax unwittingly attacks a large number of American
families and causes them to unnecessarily pay large portions of
their estates directly into the United States Treasury. Unfortunately,
the tax code has become so complicated that very often two similarly
situated families having identical net worths will pay very different
amounts of estate taxes. One family may pay no estate
tax at all while the other may pay hundreds of thousands of dollars,
or more, in estate taxes. The only difference between the two
families is the type of estate planning that was done for them.
What is the Federal Estate Tax?
The federal estate tax is a tax imposed on the net worth you have
accumulated during your lifetime. It is a different tax
from, and is imposed in addition to, the income tax that you pay
every year. Simply stated, at the time of your death,
the value of all of your assets is totaled up. That total is
then subject to tax at your estate tax rate. Your family only
receives what is left of your assets after this tax is paid.
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Do I have an Exemption from the Federal Estate
Tax?
Yes. Every individual can currently accumulate a net worth of $675,000
before he or she becomes subject to estate tax. Therefore, it is
the balance of your net worth in excess of $675,000 that is subject
to the estate tax .
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What is the tax rate?
The federal estate tax rate is very high. It is also progressive
(i.e., the higher the value of your estate, the greater the tax
rate). The first dollars that you accumulate over $675,000
are taxed at 37% and the rate go up from there. If you have
accumulated an estate of more than $3million, every dollar over
$3 million is taxed at a rate of 55%!
A simple example will illustrate the devastating effect this tax
can have for your family. If you leave an estate of $1,350,000
(exactly double your $675,000 exemption), and you have not implememnted
basic estate planning measures, then the estate tax that your family
will unnecessarily pay will be $270,750!
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What property exactly is the federal estate tax imposed upon?
The federal estate tax is imposed on the value of all of your assets
at the time of your death. Many times clients will tell
us that they do not have to worry about the estate tax because they
do not have anything close to $675,000. However, these
clients are often, in fact, unwittingly misled. This
is because the estate tax is imposed not on the value of the assets
you accumulate while you are alive, but rather, on the amount you
are worth when you are dead.
This means that the tax is imposed not only upon the value of the
assets you have accumulated, such as your home, bank accounts, jewelry,
CDs, stocks and bonds, business interests, and retirement benefits,
but also on the face amount of your life insurance. Often,
adding in the life insurance proceeds that the family collects,
pushes what would otherwise have been a very modest estate well
above the $675,000 taxable threshold.
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When does the tax have to be paid?
The answer to this question generally depends on whether or not
you are married. With basic estate planning for married
couples, the estate tax can be postponed until after the deaths
of both spouses. However, the tax is generally due in
full 9 months after the death of the surviving spouse, meaning that
the children bear the full burden (and expense) of the estate tax.
For individuals who are not married, the tax is generally due in
full 9 months after the date of death.
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Can I avoid estate tax if the value of my
estate is over $675,000?
Yes, absolutely. But it requires that you do some quality
estate planning. The estate planning, however, will be well
worthwhile because the results are most often huge tax savings.
For example, assume a couple has accumulated an estate of $1,350,000,
and, as is typically the case when one of them dies, everything
goes to the other. Then, when the surviving spouse dies,
absent any changes in value, the surviving spouse's entire estate
of $1,350,000 is subject to estate tax. However, the
surviving spouse has an estate tax exemption of only $675,000. This
causes an estate tax to be paid (not later than 9 months after the
death of the surviving spouse) of $270,750.
The problem in this example is that even though there were 2 persons
(both husband and wife), they only received the benefit of one $675,000
exemption. With proper estate planning, however, they
could have easily availed themselves of two $675,000 exemptions
(one for each spouse), meaning that their entire estate of $1,350,000
would have been exempt from estate tax. Thus,
the entire estate tax of $270,750 could have been saved, meaning
that $270,750 could have gone to the children instead of the United
States Treasury.
For those with estates in excess of $1,350,000, quality estate planning
becomes even more imperative. Otherwise, every dollar
in excess of that amount will be taxed at rates of between 37% and
55%. For those whol will accumulate estates in excess
of $3million, an estate tax rate of 55% will apply. That
means that a greater portion of that excess will go into
the United States Treasury than to the children.
Fortunately, there are many good strategies and techniques available
to circumvent this result. The techniques that will work
best for you will depend upon your personal circumstances and goals. In
many cases, even for high net worth individuals, estate tax can
be eliminated. Almost always, estate taxes can be significantly
reduced.
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