Handbook
STEP 3: AVOID ESTATE TAXES
Your third step is to avoid as much in estate taxes as you can. Yes, even when
you pass away, Uncle Sam will come around one last time for his share. These
estate taxes are also sometimes known as death taxes.
Avoiding estate taxes is very different from avoiding probate. Here, the
government doesn’t care about the form of ownership or whether your property
avoids probate. In general, if you own it they will want to add it to your estate for
estate tax calculations.
Estate taxes can be very large. If you have limited property, you will not have to
worry about estate taxes. But be careful, assets can build up quite quickly and
items you wouldn't normally think of as an asset will be included as part of your
estate tax calculation. (E.g., If you pass away with a $1,000,000 life insurance
policy, that $1,000,000 is counted towards your estate tax calculations.) In
addition, estate taxes are generally due 9 months from the date of passing.
Completing Step 3 means that you are maximizing and preserving your assets and
property for the benefit of your family.
John and Mary were fortunate with regard to estate taxes. Because their estate
was limited and below their applicable exclusion amount, they did not incur any
estate taxes.
However, let’s take a look at what would have happened if John had purchased
that large life insurance policy he had always talked about. In that case, let’s say
John passed away in 2003 with a net taxable estate valued at $1,500,000. After
his $1,000,000 exclusion amount, the remaining $500,000 would have been taxed
at a rate of at least 40%, making his estate taxes at least $200,000.
Note: Estate Tax Rates Table
Dying In Exclusion Amount Top Estate Tax Rate
2000 – 1 $675,000 55%
2002 $1,000,000 50%
2003 $1,000,000 49%
2004 $1,500,000 48%
2005 $1,500,000 47%
2006 $2,000,000 46%
2007 $2,000,000 45%
2008 $2,000,000 45%
2009 $3,500,000 45%
2010 Estate Tax Repealed
2011 If the repeal is not extended then back to
$1,000,000 . . . . . . and . . . . . . 55%
Even though the exclusion amount is generally increasing, it is still up to Congress
to determine whether the exclusion amount will revert back to $1,000,000 in 2011.
To be safe, it may be wise to plan on only having a $1,000,000 exclusion amount
available.
Note: Our discussion in this section focuses on the federal estate tax. The
potential New York estate tax is generally of lesser concern and will not be
specifically addressed here.
