Planning for Estate Taxes

Estate taxes are imposed on transfers of assets from one person to another upon the donor’s death. Federal estate taxes have been in the news during much of the 2000s because estate tax exemptions are scheduled to rise from $1.5 million in 2005 to $2 million in 2006-2008, and to $3.5 million in 2009. The federal estate tax is scheduled to be repealed in 2010 but will revert back to a $1 million exemption in 2011 unless the 2001 tax taw is extended. Given these increased exemptions, about 99 percent of Americans who die are able to escape federal estate tax entirely.

State estate taxes are another matter, however, as many states have “decoupled” from the federal estate tax system and have exemptions on non-spousal transfers as low as $675,000. Households with assets above their state and/or the federal exemption amount should seek legal advice from an estate planning attorney. Several common strategies can be used to reduce a taxable estate, including lifetime gifts, transferring assets between spouses, and bypass trusts that maximize the benefit of two estate tax exemptions for a married couple (for example, a total of $3 million currently and up to $7 million in 2009 that can pass free of estate tax).