MAXIMIZING THE BENEFITS OF THE ESTATE TAX EXEMPTION
by Michael J. Norton
So much has been jokingly written and said about the need to die in 2010 so as to take advantage of the one year repeal of federal estate taxes that little additional comment on this issue is usually necessary.
The value of an estate that is exempt from federal estate taxes increases gradually from an amount that is equivalent to $1.5 million in 2004 and 2005 to $2 million in 2006, 2007, and 2008, and then to $3.5 million in 2009. After a one year hiatus in 2010, the exemption, popularly known as the "unified credit," returns to only a $1 million exemption in 2011.
If you own a home, have some life insurance, and a retirement plan in place, your gross estate may already exceed the 2005 "unified credit" threshold of $1.5 million. Moreover, an estate plan which results in the surviving spouse receiving all the assets of the first spouse to die may well result in estate tax liability at the death of the second spouse. This, in turn, reduces the amount available for your children and grandchildren or other beneficiaries. Since the top tax rate in 2004 is 48 % (and is phased down to 45 % by 2009), it makes good sense to plan to make the best use of your exemption no matter the level or the year.
A married couple can escape federal estate tax on assets of up to two times the exemption amount, $3 million in 2005, if the couple's wills are drafted to take full advantage of each spouse's own unified credit. The wills should provide that, when the first spouse dies, the amount protected from federal estate tax by the available credit passes to a "credit shelter trust" from which the surviving spouse can benefit during his or her remaining lifetime but which will not be included in the surviving spouse's estate at death.
Here is an example that illustrates the tax savings that can result from using a credit shelter trust in the will of the first spouse to die instead of leaving the entire estate outright to the surviving spouse. Assume that a husband and wife have assets of $3 million and $1 million respectively and that the husband predeceases the wife. If the husband leaves his entire estate to his wife, there will be no estate tax at the husband's death, even if he dies before 2009 when the unified credit reaches $3.5 million. That is because his $3 million qualifies for the marital deduction and passes to the surviving spouse free of estate tax. However, when the wife dies, assuming no changes in wealth, her estate, which now includes the $3 million inherited from her husband and her $1 million would total $4 million. If the wife were to die in 2007 or 2008, when the unified credit is $2 million and the top estate tax rate on amounts in excess of $2 million is 45 %, the wife's estate tax liability would be $900,000. This would mean that, after the estate taxes are paid, $3.1 million is left for the children.
If, instead, the husband's will provided that an amount equal to the unified credit passed to a credit shelter trust from which the wife and/or the children would receive income and have principal paid to them if they needed it, there would be no estate tax due at the wife's death. In other words, with a credit shelter trust, $900,000 in federal estate taxes would be saved and the full $4 million could be available for the children.
So, as you can see, while it may make a difference when we die, and each of us will, it makes good sense to plan for your family and their future.
Michael J. Norton
For more information, please contact Michael J. Norton at (303)796-2626 or
. Mr. Norton is a senior member of the firm. His practice areas include complex civil litigation and white collar criminal defense, real estate law, including real estate broker and licensing law, and wills, trusts, and estate planning.