Here is a quick summary of the current federal estate tax laws. Be sure to consult your attorney before taking any recommendations listed below. If you have not updated your will and estate plan within the past few years, make an appointment with your attorney today!
Current tax law concerning federal estate taxes provides an applicable exclusion amount of $2,000,000 per person. This means that each person can give away during their life up to $1,000,000 or at death a combined total of $2,000,000 worth of property, without any taxes being due and payable.
On May 26, 2001, Congress passed “The Economic Growth and Tax Relief Reconciliation Act of 2001,” which provides for the applicable exclusion amount to increase over time as follows:
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Additionally, current federal tax law provides for an unlimited marital deduction. This means that you may transfer an unlimited amount of property between you and your spouse without incurring federal estate taxes. Combining the applicable exclusion amount with the unlimited marital deduction means that a married couple can have a combined estate of $4,000,000, which passes tax-free at the death of the second spouse to die. The tax rate on any amount in excess of $4,000,000 starts at forty-six percent (46%). To ensure utilization of the $2,000,000 applicable exclusion amount, both of you should have property worth at least $2,000,000 held in your own names or revocable trusts and not with rights of survivorship.
A typical plan to fully utilize both $2,000,000.00 applicable exclusion amounts for a married couple is to place $2,000,000.00 in a bypass trust at the death of the first spouse. The bypass trust typically provides that all income is payable to the surviving spouse and the Trustee may invade principal for the spouse’s health, support, maintenance and education. Upon the spouse’s death, the principal is payable to the children outright or in continuing trust, free of any estate tax even on the appreciation of the assets in the credit shelter trust. The balance of the estate in excess of $2,000,000.00 is given outright to the surviving spouse and the surviving spouse, at his or her election, may place this additional inherited amount into his or her own revocable trust. Alternatively, the balance may be held in further trust. Upon the death of the surviving spouse, all of the survivor’s property is passed on to the children, either outright or in a continuing trust. The $2,000,000.00 in the bypass trust create upon the first spouse’s death, together with all appreciation therein, is not taxable again in the surviving spouse’s estate.
