Estate Taxes

The estate tax is levied upon estates (passing to someone other than a spouse) which are in excess of what is called “the estate tax threshold.”  The IRS considers almost every conceivable asset when calculating whether or not an estate is over this threshold, even life insurance proceeds.  The tax is levied upon every dollar in excess of the threshold at tax rates as high as 45%.  For years, this threshold was $600,000.00 until Congress finally decided to start ratcheting it up in order to reduce the number of estates subject to the tax. Under current tax law, the threshold will remain $2 million through 2008 and jump to $3.5 million for 2009.  Come 2010, the estate tax is scheduled to be “repealed,” but only for one year.  If additional legislation is not passed by 2011, the threshold is scheduled to drop back to $1 million.  In short, the estate tax threshold is a moving target and the future is uncertain.

A Revocable Living Trust does not automatically protect all assets from consideration for the estate tax.  What it does for the typical married couple is to allow the second spouse to die to utilize the estate tax thresholds allotted to both spouses.  For example, let’s assume John and Mary Smith have two children and a combined estate of $3 million.  While they are both alive, each is allotted the applicable estate tax threshold, let’s say $2 million for the sake of our example.  However, if John dies first, leaving everything to Mary (a transfer that is exempt from estate tax since Mary is his spouse), she is now the proud individual owner of a $3 million estate.  John’s threshold has gone unused and is lost forever.  Upon Mary’s death, again assuming the $2 million dollar threshold, she wants to pass the $3 million to her kids but her estate has to pay hundreds of thousands of dollars in estate taxes before the kids get a dime.  If John and Mary had created the correct type of  Revocable Living Trust prior to John’s death, Mary could have preserved John’s threshold and combined it with her own so that upon her death a combined $4 million could have been passed to the kids tax free.