Who is required to pay estate taxes?
More than 99% of all estates are exempt from federal estate tax. Estates which are subject to estate tax, however, are taxed heavily. Federal tax law allows a certain amount to remain exempt from the estate tax, depending on the year of your death. $3.5 million is exempt from estate tax for those who die in 2009; the estate tax is repealed in 2010; and the estate tax resumes in 2011 with a $1 million exemption unless Congress extends the repeal.
If your estate is sizable enough to be subject to the federal estate tax, an estate planning attorney can help you arrange your affairs to minimize your tax obligation. Leaving property to your spouse or to a charitable organization can help avoid the estate tax altogether. Because the estate tax can reach a rate of 45%, avoiding this tax is in your best interest.
Can I give my money away before I die to avoid estate tax?
Generally speaking, if you give large sums of money away, the recipient of your gift must pay a gift tax with a rate equal to that of the estate tax. This means that without careful planning, money given away is subject to a tax rate equal to that of the estate tax. Tax law does, however, allow exemptions to the estate tax for certain gifts:
- Gifts of any amount to spouses who are U.S. citizens are exempt.
- Gifts of any amount to tax-exempt charities are exempt.
- Gifts of any amount to help with medical bills are exempt.
- Gifts of any amount to help with school tuition are exempt.
- Gifts of up to $133,000 to spouses who are not U.S. citizens are exempt.
- Gifts of up to $13,000 per year to any individual are exempt.
- Gifts of up to $13,000 per year to any non-charitable institution are exempt.
Can I establish a trust to help me avoid the estate tax?
An estate planning attorney can fully explain the types of trusts which may be used to avoid or postpone paying estate taxes. Married couples with large estates commonly utilize AB trusts and QTIP trusts to achieve this end. With AB trusts, couples place all of their assets in a trust for named beneficiaries, with the surviving spouse to have access to trust funds for life. Surviving spouses can use trust funds for healthcare and maintaining the lifestyle they are accustomed to, but cannot revoke the trust once the other spouse has deceased. Because the assets are in trust, they are not subject to the estate tax. QTIP trusts work to postpone the estate tax until both spouses are deceased. Other trusts which help to avoid the estate tax include charitable trusts, which leave trust funds to a tax-exempt charity; and life insurance trusts, which remove the value of life insurance policies from an estate.
