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| Jack had a $5 million gross estate. When he died,
his estate had to pay in excess of $750,000 in federal
and state level estate taxes. With simple planning, this
could have been avoided and Jack could have passed the
money tax-free to his children and grandchildren. |
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Under current
federal law, there are three potential taxes that may be imposed
when assets are transferred during life or upon death:
Gift Tax (transfers or gifts
made during life)
Estate Tax (transfers or
gifts made upon death)
Generation Skipping Tax (GST)
(transfers or gifts made during life or upon death which skip
one generation and pass to the next)
Generally, there is no limit to the value of assets
gifted or transferred amongst spouses or to qualified charities. Tuition
and medical payments made directly to the academic institution
or service provider are not considered taxable gifts. In
addition, the federal government allows you to gift the “annual
gift tax exclusion” to any individual within the calendar year. Annual
gift tax exclusions are gift and income tax free to the donor
and the recipient of the gift.
In 2009, the annual gift exemption is $13,000 per person (or $26,000 for a married
couple). After the applicable exclusion amount has been used, any additional
gifts made in a calendar year begin to use up part of your $1 million lifetime
gift exemption. Once your $1 million lifetime gift exemption has been used,
any additional gifts made other than annual gift tax exclusions are subject to
tax.
Upon your death, the executor of your estate will
examine the fair market value of every asset you owned at the
time of your death (equity in your home, investment portfolio,
cars, personal belongings, and life insurance). Your
estate will be granted deductions for debts, administrative
expenses, qualified transfers to a surviving spouse, and transfers
to qualified charities. The net value of your assets
at death is commonly referred to as your “gross estate”. The
federal and state government allows you to pass a certain amount
tax-free upon your death. This is commonly referred to
as the “estate tax exemption”. However, where your gross
estate exceeds the Federal and/or State exemption, your estate
may be subject to tax.
The Federal estate tax may result in a tax at a rate of up to 45%. Many
states (including Illinois), also impose a state level estate tax. Based
on your residency, your estate may be subject to an estate tax at a rate
in excess of 50%. This means that for every dollar in excess of the
Federal exemption, more than 50% will go to the US Government. These
high tax rates mandate that you monitor the value of your gross estate from
time to time. With the proper planning, additional estate planning
tools can be layered into your plan to help minimize any potential estate
tax upon your death.
As shown in the chart below, the current Federal estate tax exemption for 2009
is $3.5 million. In 2010, the Federal estate tax exemption is unlimited
and for 2011, the Federal estate tax exemption is scheduled to revert to $1 million.
| Year |
Federal
Estate Tax Exemption |
Federal
Estate Tax Rate |
| 2009 |
$3,500,000 |
45% |
| 2010 |
Unlimited |
N/A |
| 2011 |
$1,000,000 |
55% |
Unfortunately, no one can predict the future tax structure, if you might become
disabled, or when you will die. Thus, it is necessary to be diligent about
your planning, to be mindful of the current tax laws and evaluate your gross
estate based on current and future values. For example, if your current
gross estate is valued at approximately $3 million, you may think it is unnecessary
to incorporate advanced estate planning tools. However, an estate valued
at $3 million may appreciate to $10 million in the future. Therefore, you
need to examine the value of your gross estate not only in today’s terms, but
also based on forecasted future growth.
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