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Estate Tax Planning

Without careful planning, much of your life’s legacy could be lost to estate taxes. While a simple will can provide for the transfer your estate to your loved ones, it does not have special provisions for advanced estate tax planning.

The Federal Estate tax: Exemptions & Rate
The federal estate tax exemption, also referred to as applicable exclusion amount is adjusted annually for inflation.  

The taxable value of the estate is calculated by adding up all the assets owned by the individual and subtracting from that total any of his or her liabilities.  Additional deductions can be taken for qualified charitable deductions as well as administrative and legal costs involved in settling the deceased’s estate.

The tax rate for estates exceeding the exemption amount is 40%.  The rate is applied to the taxable estate value that is in excess of the exemption amount.

The Federal Estate tax: Understanding Portability
In addition to the individual exemption, married couples enjoy an unlimited deduction for transfers to one another.  While this is great news for many couples who choose to leave their estate to each other, without proper planning, it can result in a forfeiture of some of the individual estate tax exemptions after the passing of the second spouse.  

For example, this can occur when a husband leaves $3 million of his individually-owned assets to his surviving wife who already has $5 million herself, bringing her total net worth to $8M.  The bequest to his wife is not subject to estate taxes because it qualifies for the unlimited marital deduction.  After some time, the wife also passes away, leaving everything to the children.  While her estate can take advantage of her individual exemption of $5.25 million, the rest her estate it could be subject to estate taxes because her husband’s individual exemption was unutilized.

To address this issue, the current estate tax law allows for “portability” of individual exemptions between spouses.  Stated another way, estate tax portability enables the surviving spouse to utilize the unused portion of the first-to-die spouse’s estate tax exemption.   Portability is not automatic and in order to take advantage of it, an estate tax return must be filed with the IRS within 9 months of the passing of the first spouse, even if there are no taxes due at the time.

An alternative to relying on portability is to utilize a special planning tool referred to as a credit shelter trust (also referred to as a bypass or A-B trust).  If properly established, such trusts work much in the same way as portability, but do not require filing of an estate tax return after the passing of the first spouse.  

A number of states impose a separate estate or inheritance taxes.  While the rates are typically much lower than the federal rate of 40%, the exemption amounts are smaller as well.

Special Planning for High Net Worth Individuals
Individuals and families with significant net worth might still have taxable estates even if they take full advantage of their respective exemptions.  For these individuals, there are a variety of advanced planning techniques that can be crafted to help reduce the estate tax burden, such as strategic gifting plans, life insurance trusts, personal residence trusts and grantor retained annuity trusts.  


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