Federal Estate Tax (Death Tax) Planning

The federal estate tax is an excise tax levied on the transfer of a person's assets after death. In actuality, it is neither a death tax nor an inheritance tax, but more accurately a transfer tax. There are three distinct aspects to federal estate taxes that comprise what is called the Unified Transfer Tax: Estate Taxes, Gift Taxes, and Generation-Skipping Transfer Taxes. Legal planning to avoid or minimize federal estate taxes is both a prudent and an important aspect of comprehensive estate planning.

Estimate Your Estate Tax Liability with our Estate Tax Calculator

Knowing your potential estate tax liability is a great place to start your estate tax plan. Use this calculator to estimate your estate tax liability. You can also use it to project the value of your estate, and the associated estate tax, for the next ten years.

Click here to use the Estate Tax Calculator

Federal Estate Tax Minimization

If the value of your total estate falls within the federal estate tax "applicable exclusion amount," no federal estate taxes are owed. Currently (in 2009) the applicable exclusion amount is $3.5 million. Depending on your situation, this may or may not be enough to shelter your estate from estate taxes.

Your Taxable Estate

Clients are often surprised to learn that the probate estate and the taxable estate are not always the same. For federal estate tax purposes, your estate includes

• All property interests owned by you, or by a Trust you control outright, or by a Trust in which you have incidents of ownership (certain strings attached).
• Proceeds from your qualified retirement plan(s).
• Life insurance proceeds, if the policy is owned outright by the decedent or made payable "to the estate."

So, while a $3.5 million estate tax exclusion may seem like a lot, there are many ways that even persons of seemingly moderate wealth could incur estate tax liabilities when the value of real estate, retirement plans and life insurance proceeds are considered.

Also, under current law, unless the President and Congress makes changes, the federal estate tax will be repealed for just one year in 2010. It is then reinstituted (with a vengeance) in 2011, with a $1 million exemption and a maximum rate of 55 percent. Therefore, in addition to taking advantage of the applicable exclusion amount, it is wise to consider estate planning strategies to minimize federal estate taxes.

Gift Taxes

While the federal estate tax is set for repeal in 2010, gift taxes live on. There is currently a $1 million shelter for lifetime taxable gifts and a $13,000 exclusion (per donor) per year. The $13,000 annual exclusion does not count against the $1 million lifetime gift exclusion nor the applicable exclusion amount for estate taxes. If you give away more than the annual gift exclusion limit ($13,000 in 2009) however, to any one person in a year, the gift counts against your $1 million lifetime taxable gift exclusion and, ultimately, against your applicable exclusion amount ($3.5 million in 2009) for estate tax purposes. So, if you gave your child a gift of $113,000 this year, you would have used up $100,000 of your $1 million lifetime taxable gift exclusion and, in turn, that ultimately reduces your exclusion for estate taxes, too .

Married couples can double their annual gift exclusion by "gift splitting," whereby a gift made by one is considered to be made by both, even if only one spouse actually owned or contributed the property. Lifetime gifting strategies can be prudent ways to minimize federal estate taxes. Not only do such gifts reduce the value of your current estate, but such gifts remove the future taxation and appreciation of such assets as well.

Generation-Skipping Taxes

The Generation Skipping Transfer (GST) tax was enacted in 1976 to prevent families from avoiding the estate tax for one or more generations by transferring assets directly to grandchildren or great-grandchildren rather than passing them through each generation. The GST exemption amount is equal to the estate tax exemption amount, or $3.5 million in 2009. Planning to minimize estate taxes often includes trusts designed to utilize the GST exemption ($3.5 million in 2009) as well as the estate tax exclusion (also $3.5 million in 2009).

Michigan Estate Taxes

Michigan's estate tax is a "pick-up" tax equal to the state death tax credit under federal estate tax law. Since this credit has been repealed for the period from 2005 through 2010, there are currently no estate taxes imposed by the state.

Beware the Retirement Plan Tax Trap

For many Americans a significant portion of their estate value is in a Qualified Retirement Plan. We've included here an easy-to-understand presentation on these complex assets, and their special tax treatment. Feel free to use the integrated functions to print any page, bookmark it to return later, or forward a copy to your friends, family members or financial advisor.

Qualified Retirement Plans

Qualified Retirement Plans (QRPs) present some of the most complicated tax and non-tax planning challenges of any asset in an estate, especially for married couples. The failure to make proper Life & Estate Plans for your QRP can unnecessarily enrich the IRS and disinherit loved ones. Learn more about minimizing taxation on Qualified Retirement Plans.