Estate Tax Considerations

Part of the estate planning process is devoted to minimizing transfer taxes, including state and federal estate tax (applicable to taxable estates of a decedent), gift tax (applicable to certain lifetime transfers), and generation skipping transfer tax (applicable to some transfers that directly skip a generation). The payment of estate taxes may not always be necessary. Tax planning can utilize both lifetime and testamentary options. By employing available deductions, exclusions, exemptions, and credits, the transfer tax applicable to large estates may be reduced substantially and/or deferred until the death of a surviving spouse. However, even if tax planning is not needed, general estate planning should be completed which would include execution of a will.

Currently, each person has an amount available that can be passed free of federal estate taxes. In the 2001 tax changes, the amount of the “unified credit” or “exemption equivalent” was dramatically increased over the next few years. The “unified credit” or “exemption equivalent” refers to the value of property that can be passed free of federal estate taxes. For a married couple, each person can take advantage of the credit amount with proper planning. For a married couple, it is particularly important to review the planning options available so that the maximum amount can be passed free of estate tax. The following is the exemption equivalent values available under the 2001 tax act:

The current law provides that the federal estate tax is repealed for the year 2010 and is reinstated in the year 2011 with a $1,000,000 exemption. The top estate tax rate of 55% is reduced to 50% in 2002 and is gradually reduced to 45% in 2007. For the year 2010, there will be no estate tax, but each person will be subject to complex rules of asset basis adjustment. It is important to keep in mind that each state in which property is located may impose a separate state level estate or inheritance tax that may be in addition to the federal estate tax. Thus, it is important to review the laws of each state in which property or assets are located to ensure the plan properly considers the possible additional tax. As of 2008, Idaho does not have a separate state inheritance or estate tax.

Each individual can currently transfer $12,000 per gift recipient each calendar year which is excluded from gift tax. Thus, for a married couple, they can together transfer $24,000 in property value, per recipient, each calendar year. These excluded lifetime transfers are useful to gradually reduce the total value of a gross estate without incurring gift tax consequences. The gift tax exemption for lifetime transfers is also increased as of 2002 from $675,000 to $1,000,000. However, the exemption equivalent for gift tax purposes is not increased after the initial 2002 adjustment and is not ultimately repealed as of 2010. The amount of any lifetime exemption that is utilized through gifts will reduce the total amount of the exemption available at the time of death.

Transfers to a spouse may qualify for what is known as the marital deduction. Generally husbands and wives may transfer unlimited amounts of property between them under the protection of the marital deduction. This deduction enables an estate to deduct from the gross amount the value of qualified transfers of property of the decedent which are made to the surviving spouse to decrease the amount of the estate subject to taxation. Any transferred assets, however, will be subject to estate tax in the survivor’s estate.