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Law Offices of Ronald W. Rutz
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February 1, 2005: Estate Taxes

Q: Estate taxes have been eliminated so I feel that all I need is a standard four or five page Will costing maybe $200 at the most and that I should hold all my assets in joint tenancy with my spouse. Right?

A: LetÕs take a time out for a second and even though I have written about this topic before, this area needs to be highlighted again. It amazes me how many people share your viewpoint.

The old chestnut that people live poor and die rich applies more so today to the general public than a few years ago when the expression was used in reference to farmers and ranchers.

First point. Estates taxes have not yet been eliminated. The exemption is currently $1,500,000, rising to $2,000,000 next year. Yes, federal estate taxes will end in 2010 (If he should die in that year, Bill Gates can leave his 54 billion dollars to his two little kids tax free.), but in 2011 the exemption reappears at only a million dollars (some commentators maintain that it will drop back down to $700,000).

Please keep reading even if you feel you are nowhere close to that total. Numbers vary but it is estimated that there are probably in excess of four million tax millionaires in the United States. How can that be? The taxable estate includes assets at their appreciated value, the face amount of such things as insurance, the value of tax deferred retirement benefits that survive death, etc. So whip out the calculator, add up your asset values, and see how close you are to being a tax millionaire (or having a federal tax net worth of $700,000).

So what is the big deal with the exemption being at $1,500,000 and if you are not in the group of four million? Well, estate planning a few years ago was very easy. An asset picture was taken to see if the total value of an estate exceeded the exemption. If yes, a Tax Will would be done. If not, a Standard Will would be prepared. But now we must guess what the situation might be in 2011 and see if defensive planning might be advisable in case one of you should die in the next six years and the other is living in 2011, or if you are both living in 2011.

For a couple, tax at the first death is normally not a problem because any amount going to a spouse passes tax free. The $1,500,000 exemption only applies to non- spousal beneficiaries. But if the surviving spouseÕs estate is loaded up because he or she received directly all of the assets, only the current exemption would be available if the surviving spouse then dies. If the value of the assets exceeds the exemption at the second death, then the estate is subject to needless taxation because the surviving spouse had received everything.

So a Trust is used, either as part of the Will or inside a Living Trust, to hold the difference between the total assets of the couple and the projected exemption in 2011. That way if one person dies, the difference is held in Trust for the benefit of the surviving spouse but would not be taxed at the second death because it was held in the Trust and not owned directly to the spouse.

Later if it turns out that there is no tax problem, the trustee can always give back the trust assets to the surviving spouse. Thus the survivor gets a second look to evaluate tax exposure in the future.

Even if tax exposure is not a concern, often the Trust continues because, for example, the surviving spouse has now become incompetent or might be in a nursing home and Medicaid coverage is sought. The assets in the Trust would not be taken by Social Services or counted against qualification for Medicaid if the Trust had been properly drafted. The Trust could also continue after the first death as a beneficiary protection Trust if, for example, a minor was receiving money or a beneficiary needed special protection.

Finally, remember that "death taxes" are imposed by both the federal government and at the state level. I have done estate planning for out-of-state clients using Tax Wills where no federal tax was due but state estate tax had to be considered. A number of states have indicated that they will keep estate taxes, with a few toying with the idea of increasing estate taxes as the federal tax is reduced.

So do not tune out the need for a Tax Will, even if you have no tax exposure now. And do not be blinded by the federal lime light when the states maintain or turn up their estate tax spotlights.

Finally remember, if you run your asset totals and discover that you have a potential tax problem, either now or in 2011, that is a good, solvable problem, not a bad problem. Deal with it realistically.

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