Q. My wife and I have a Living Trust and a combined estate worth roughly $2 million, including the equity in our home. I understand that the federal estate tax returns on January 1, 2011, and that couples having a combined estate worth more than $1 million may once again be subject to tax. Is this true? Is there anything we can do to about this?
A. Yes and yes. As things now stand, the federal estate tax is scheduled to return with a vengeance on January 1, 2011. For individuals who pass away after that date, the estate tax exemption will drop to only $1 Million per person, and the excess above that amount will be subject to a very hefty estate tax that can be as high as 55%. In your case, if your trust leaves everything outright to your spouse without special “tax savings” provisions, the tax that will be due upon the death of the survivor owning a $2 Million taxable estate would be approximately $435,000.
While Congress could still act to change that result, legislative efforts over the last several years to do so in anticipation of January 1, 2011, have thus far failed.
Background: During the last decade, the exemption from estate tax gradually went up each year from a starting amount of $675,000/person in the year 2000, all the way up to $3.5 Million/person in the year 2009 and, for persons dying in 2010, there is no estate tax whatsoever. For many persons who designed their estate plans during the last decade and whose estates were valued at less than the applicable exemptions, estate taxes became less and less of a concern and many plans were put in place that did not incorporate tax planning. This often made sense when the exemptions were greater than the value of one’s estate, but tax planning now suddenly becomes important once again for many folks. Consider that the value of the equity in your home, a 401K, plus some savings & investments can easily add up to more than $ 1 Million, once again exposing your estate to tax upon death.
With the exemption scheduled to drop once again to $ 1 Million and the federal estate tax scheduled to return at a rate of 45% to 55% for amounts above that, tax planning once again becomes important. This is especially so in your situation. Without proper tax planning, your children would be faced with a hefty tax bill and might need to sell some or all of your estate in order to raise money to pay the tax by the due date, nine (9) months after death of the surviving parent.
The good news: There are strategies that may reduce or even eliminate this burden, with more strategies available to married couples. However, they must be set up during your lifetimes. These may include creating “sub-trusts” within your Living Trust which would be “activated” upon the first death in order to preserve the decedent-spouse’s full exemption. This technique can effectively double the exemption over the span of two lifetimes; using life insurance to fund the anticipated tax liability; and, making intra-family gifts during lifetime to reduce the value of your taxable estate. Other available strategies are sometimes known by their funny sounding acronyms, e.g. QTIP, ILIT, QPRT, GRAT, IT, GSTT. If you also wish to design your plan so as to permit access to available government benefits to help pay the cost of long term care, the strategies might also include creating MIDGTs or VIDGTs to protect the home. Our recommendation: have your plan reviewed by a competent professional. An ounce of prevention may be worth a pound of cure.