by Doug Stanley

In this month’s article, I will address three common questions that I hear as a trusts and estates attorney.

1. I have heard of the estate tax exemption. What does that mean?

Answer: Every person has an amount that they can pass on free of estate tax when they die. This is often referred to as the estate tax exemption. Currently, that amount is $1.5 million for years 2004 and 2005. This amount is scheduled to rise to $2 million from 2006 through 2008, with another jump to $3.5 million in 2009. Under current law, that amount is scheduled to go away altogether because the estate tax has been repealed for the year 2010. But, unless the law changes, in year 2011, the estate tax exemption reverts back to what the laws were in 2001. It is complicated, so the best approach is to break it down one year at a time. For now, a person has $1.5 million dollars that they can pass on free of estate tax. For couples, it is $3 million.

2. What do trusts and estates lawyers do to help people make the best use of their estate tax exemption?

Answer: We help them set up a plan that will maximize use of their estate tax exemption. One way is having a Revocable Living Trust in place that provides how your assets should be distributed at your death. But, simply having a Revocable Living Trust will not reduce estate tax liability if the trust is not written properly. Special tax provisions have to be added. As an example, let’s say a person is married and has an estate of $3 million. If the person does not have any tax provisions in their trust, then they probably have a plan that says, “leave everything to my husband or wife if he or she is alive and if not, it goes to the children.” Assuming all the assets that the couple own are jointly held, then at the death of the first spouse, the surviving spouse owns all the assets. The gross estate of the first spouse at death is $1.5 million; his taxable estate will be zero dollars because there is an unlimited marital deduction, resulting in no estate tax. There is no estate tax to pay, and everything looks good. But wait a minute, what happens at the death of the surviving spouse? That is where the estate taxes come in. If the surviving spouse dies in 2004, there will be tax to pay on $1.5 million (about $705,000 in estate taxes), because the surviving spouse would then have $3 million in their estate, but only $1.5 million of estate tax exemption. What we help people do is set up a separate trust that will hold the couple’s estate tax exemption amount of the first spouse to die, (currently $1.5 million) which would result in no estate taxes under this same scenario.

3. Is a retirement plan subject to estate tax?

Answer: Absolutely. If you add the amount in a retirement account such as an IRA, to the other assets in a person’s estate, and that amount exceeds $1.5 million dollars, then there may be estate tax to pay on a retirement account. One thing people often do not realize is that the assets in a retirement account will ultimately be subject to income tax. So, for people who are subject to estate tax with retirement accounts, there will be income tax and estate tax consequences. Most other assets are not subject to income tax when distributed to the beneficiary after death. If someone has a substantial retirement account, he or she really needs to visit their estate planning attorney to make sure the best tax benefit is being achieved.

Douglas J. Stanley is an estate planning attorney with Greensfelder, Hemker & Gale, P.C. He has experience in individual estate administration, closely held business succession planning and tax financial planning. He also has experience in business sales, purchases and other corporate and partnership taxation issues.

This article is included for general information purposes only and does not constitute legal advice. The reader should consult qualified legal counsel to determine how laws apply to specific situations.

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