Sunday, June 7, 2009

What are Estate Taxes and How Do I Avoid Them?

What are Estate Taxes and How Do I Avoid Them?

In 2001, the Economic Growth and Tax Relief Reconciliation Act was enacted and included sweeping changes to how estate taxes are determined and calculated. The Act also repeals federal estate taxes in 2010. However, there is a Sunset Provision, which means that all of the estate and gift tax laws revert back to the law in effect prior to the passage of the Act—which would be the laws that were in existence in 2001. This “sunset” provision is part of Congress’ procedures and budgetary estimates.

Federal estate taxes are expensive in 2004 they start at 45% and quickly go up to 55%. And they must be paid in cash, usually within nine months after you die. Since few estates have this kind of cash, assets often have to be liquidated. But estate taxes can be substantially reduced or even eliminated-if you plan ahead. If your estate exceeds the estate exemption amount set by Congress below, your family must pay estate taxes within 9 months of your death.

Estate Exemption and Tax Rates

Calendar Year Estate Exemption Amount Highest Tax Estate Rate________
2005 $1,500,000 47%
2006 $2,000,000 46%
2007 $2,000,000 45%
2008 $2,000,000 45%
2009 $3,500,000 45%
2010 $0 n/a
2011 $1,000,000 55%

Unlike a will, a Trust agreement has provisions, which reduce federal and state estate taxes. A Trust agreement may take advantage of federal laws, which allow the separation of one’s estate into Marital and Family Trusts or sometimes referred to as Credit Shelter Trusts or A/B Trusts. The purpose of the Marital Trust is to maximize the surviving spouse’s estate tax exemption. Any amount of money over the estate tax emption should go into the Family Trust and be spent first to reduce or eliminate the likelihood of paying estate taxes (see Attorney for explanation). Upon the surviving spouse’s death, the marital trust is transferred to the Family Trust. The purpose of two Trusts: Marital and Family Trust is to reduce the likelihood of a federal and state estate tax.


Simply put, you add your total assets minus your liabilities to equal your net worth. To get your total net worth, you add all of your assets together such as your home, business interests, bank accounts, investments (CDs, Stocks, etc), personal property, retirement plans, stock options, and death benefits from your life insurance to equal your total net value. Here is a form to assist you entitled “Calculating Your Net Worth”.

Calculating Your Net Worth



Stocks, bonds, mutual fund $___________________
Bank accounts $___________________
Retirement accounts [IRAs, 401(k)s, etc.] $___________________
Life insurance proceeds $___________________
Annuities $___________________
Real Estate $___________________
Personal property (jewelery, belongings, etc.) $___________________
Automobiles and other vehicles $___________________
Business Interests $___________________
Other/miscellaneous $___________________
Total Assets $___________________


Residential mortgages $___________________
Personal debts (loans, credit cards, etc.) $__________________
Estate settlement costs (3-8% of estate) $___________________
Business-related debt $___________________
Total Liabilities $___________________

Net Worth $___________________
(total assets minus total liabilities)


A. Tax Free Gifts
First, you may want to be charitable with some of your assets while you are alive (if you can afford it). You likely already know who you want to be the beneficiary of your assets upon your death. You could give tax free gifts to your children, grandchildren or even your favorite charity. Tax free gifts are easy and cost effective. Each person can give away $12,000 per year ($24,000 if married) to as many people as you wish. Gifting is tied to inflation and may increase every couple years.

For example, if you have three children and six grandchildren and you give the maximum amount of gifts allowed per beneficiary each year, your estate will be reduced by $108,000 per year. If your spouse joins in and makes gifts with you, your estate will be diminished by $216,000 per year. With estate taxes around 50%, this could save your estate over $100,000 in estate taxes per year. Additionally, an individual (or married couple) may make unlimited gifts to charities, educational institutions, and healthcare providers if the gifts are made in the correct manner. Why should you begin a gifting program? A simple gifting strategy may save your estate thousands to millions of dollars in estate taxes. Before you start a gifting program, you should consult an estate planning attorney.

B. Irrevocable Life Insurance Trusts (ILITS)

An irrevocable Life Insurance Trust (“hereinafter referred to as ILIT”) are an irrevocable trust that cannot be amended, revoked, or altered upon formation. For most families, death benefits from life insurance proceeds are a major asset of their total net worth. Removing life insurance proceeds from one’s estate may save some families thousands to millions of dollars. For instance, Dan Smith (hypo only) has a total net worth of $4 million with $2 million dollars in life insurance proceeds in 2004. In 2004, the estate tax exemption amount is $ 2 million.

Therefore, anything over $2 million will be taxed at a rate of approximately 50 percent. By setting up an ILIT and removing $ 2 million dollars of life insurance from Mr Smith’s estate, his estate is getting an estate tax savings of around $1 million. Additionally, ILIT may be an inexpensive way to pay estate taxes without liquidating any non-liquid assets such as a business or real estate. Please note that transfers within 3 years of your death, may be disregarded by the IRS if not planned correctly.

C. Equalize Both Spouses’ Estates

A great way to reduce estate taxes is to maximize the marital exemption provided by the IRS. With many families, one spouse earns substantially more than the other and owns the business in their individual name (in an LLC or Corporation typically). For example, a doctor earns $400,000 per year and owns his/her medical practice worth $2 million (according to IRS). In this case, one spouse may have a disproportionate amount of the net worth of the family due to the ownership of the medical practice. Therefore, an effective estate strategy is to equalize both spouses’ estates, so that each spouse uses the maximum amount of estate exemption allowed by the IRS. Please see an attorney for a better explanation.

C. Qualified Personal Residence Trust

A qualified personal residence trust (QPRT) is an irrevocable trust that removes a home from one’s estate at a discounted value while remaining to live in the property. The purpose of a QPRT is to remove assets from one’s estate and reduce the amount of estate taxes due upon death while enjoying the benefits of living in their home.

D. Family Limited Partnership/LLC
A family limited partnership or limited liability corporation is an estate tax and asset protection strategy designed to minimize one’s estate value. Simply put, a family limited partnership/LLC is designed for business, farm, real estate, or stock assets thereby saving thousands to millions of dollars in estate taxes. A family limited partnership/LLC also allows you to transfer appreciating assets to your children, reducing your gross taxable estate. If planned correctly, the general partner (senior family member with high net worth) can keep full control of the family limited partnership/LLC.

E. Charitable Trust
A charitable trust (CT) converts appreciated assets into lifetime income with no capital gains tax and saves estate (assets out of your estate) and income taxes (by creating a charitable deduction). Upon your death, the charity of your choice receives trust assets.

Sean L. Robertson is a Wealth Preservation Attorney and Principal of Robertson Law Group, LLC. Sean concentrates in Wills and Trusts, Advanced Estate Planning, Probate and Guardianship, and Asset Protection law. Sean can be reached at 312-498-6080 or

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