Estate Taxes – Are there ways to avoid estate taxes?

YES.  Does this sound too good to be true? I counsel clients to reduce and often eliminate estate taxes through various techniques, including but not limited to:

  • Drafting Credit Shelter Trust Provisions; whereby spouses leave some of their property in trust for their children, but give the surviving spouse the ability to access some or all of it for the remainder of their life. This keeps the second spouse’s taxable estate half the size it would be if the property were left entirely to the spouse.
  • Drafting “QTIP” Trust Provisions; whereby couples can postpone estate taxes until the second spouse dies.  This allows for additional gifts qualifying for the annual exclusion.
  • Drafting Charitable Remainder Annuity Trusts; whereby a tax free gift is made to to a tax-exempt charity and the surviving spouse and/or children receive perpetual income from the transfer.
  • Drafting Irrevocable Life Insurance Trusts; whereby the value of life insurance proceeds is removed from the client’s estate.

What are the rates for federal estate taxes?

In actuality it really depends on your date of death. The federal government imposes a hefty estate tax when your property is worth more than a certain amount. In determining your gross estate, the government values all of your assets including, but not limited to bank accounts, stock, bonds, annuities, mutual funds, real estate, retirement plans, Individual Retirement Accounts (IRA’s), and life insurance.  It is important to note that property left to a spouse is exempt from the tax, as long as the spouse is a U.S. citizen. However, in many cases this merely defers the tax due until the surviving spouse’s death. In addition, Massachusetts has its own estate tax which provides a much smaller $1,000,000.00 exemption. With the escalation of real estate values in the last twenty years many retirees have become vulnerable to Massachusetts estate tax and/or federal estate tax.

Year of Death    Exempt Amount

2001                    $675,000
2002-03            $1 million
2004-05            $1.5 million
2006-08            $2 million
2009                   $3.5 million
2010                   No estate tax
2011                    $1 million unless Congress extends repeal

The rates are steep, starting at 37%. The maximum is 55% for property worth over $3 million. The maximum rate is scheduled to decline gradually to 45% in 2009. There will be no estate tax in 2010, if the current tax law (passed in 2001) is not amended. Unfortunately, in 2011 the exemption is scheduled to drop back to $1,000,000.00 unless congress extends the repeal.

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