Columns
Ask an Attorney: The future of the federal estate tax
By Andrew Heideman
This article will appear monthly in this newspaper as a public service. It is not intended as legal advice, and will address only general propositions. If you have a question about a matter which affects you, you should contact an attorney.
Q: We are uncertain about the future of the federal estate tax. How can we best plan for such uncertainty?
A: Currently, the federal estate tax exemption amount is $2,000,000. This means that each of you can own up to $2,000,000 on your death and not be subject to any estate tax, also commonly referred as the “death tax.” In 2009, this number increases to $3,500,000, and in 2010, there is no estate tax. These numbers are important to note — many people mistakenly believe that their estate will be taxed when then die. Unless you have a substantial amount of assets, this is not true.
The uncertainty about the tax arises from the fact that in 2011, the law expires. The exemption goes back to the 2001 level, which is $1,000,000.
Nobody really expects that we will return to the 2001 scenario. Many commentators believe that Congress will step up to the plate and that the exemption will rise to $5,000,000 or so.
The problem is what to do in the meantime until we know how this is going to finally play out.
You may be among the lucky ones whose net worth is such that you will continue to need to take steps to avoid estate taxes, even if the exemption rises as suggested. But the overwhelming majority of people, even those with a very respectable net worth, can reasonably anticipate that for them estate tax considerations are a thing of the past unless the exemption reverts to the 2001 level.
As a starting point, you should recognize that if you are married, and you leave all your assets to your surviving spouse, there will be no estate tax on the death of the first of you due to the spousal exemption. This is true no matter how many assets you own. The trick is to avoid tax on the death of the second spouse.
Here in Arizona, a common estate planning device over the years was for a couple to create a community property revocable trust which, upon the death of the first spouse to die, would split between a survivor’s trust and a tax shelter trust in order to take advantage of the exemption available to the first spouse to die.
However, if there is no need to do that in order to avoid estate taxes and there is no other purpose (which there may be) to create the separate trust from the deceased spouse’s share of the trust assets, then it is uneconomic to do so.
So what can be done when a husband and wife have a net worth which at this point in time exceeds the exemption? The family wants to avoid estate taxes, but they do not want to set up a tax shelter trust if there is no reason to do so.
There is a way to hedge your bets. It can be done by using what is often called a “disclaimer trust.” Under the provisions of such a trust everything goes to the surviving spouse.
However, the surviving spouse has the power to disclaim all, or a portion, of the deceased spouse’s share into a tax shelter trust, commonly called the disclaimer trust. In that way, if, upon the death of the first spouse to die, the parties’ net worth is such that the surviving spouse would have a taxable estate or might, if the law reverts to what it was in 2001, have a taxable estate, the spouse can disclaim so much of the decedent’s share as makes sense in order to avoid estate taxes upon his or her death.
The flexibility of the disclaimer trust is also, however, one of its disadvantages. The surviving spouse must act to disclaim and to take advantage of the benefits of the trust, and must do so within nine months of the death of the first spouse.
We hope that sometime in the near future (probably after the election this fall) Congress will address the issue and resolve some of these questions about the future of the estate tax. For how, however, the disclaimer trust is one estate planning option that can help plan for an uncertain future.
Andrew Heidman writes the “Ask a Lawyer” column for the Green Valley News. Contact him at his Green Valley office, 625-4404.
Q: We are uncertain about the future of the federal estate tax. How can we best plan for such uncertainty?
A: Currently, the federal estate tax exemption amount is $2,000,000. This means that each of you can own up to $2,000,000 on your death and not be subject to any estate tax, also commonly referred as the “death tax.” In 2009, this number increases to $3,500,000, and in 2010, there is no estate tax. These numbers are important to note — many people mistakenly believe that their estate will be taxed when then die. Unless you have a substantial amount of assets, this is not true.
The uncertainty about the tax arises from the fact that in 2011, the law expires. The exemption goes back to the 2001 level, which is $1,000,000.
Nobody really expects that we will return to the 2001 scenario. Many commentators believe that Congress will step up to the plate and that the exemption will rise to $5,000,000 or so.
The problem is what to do in the meantime until we know how this is going to finally play out.
You may be among the lucky ones whose net worth is such that you will continue to need to take steps to avoid estate taxes, even if the exemption rises as suggested. But the overwhelming majority of people, even those with a very respectable net worth, can reasonably anticipate that for them estate tax considerations are a thing of the past unless the exemption reverts to the 2001 level.
As a starting point, you should recognize that if you are married, and you leave all your assets to your surviving spouse, there will be no estate tax on the death of the first of you due to the spousal exemption. This is true no matter how many assets you own. The trick is to avoid tax on the death of the second spouse.
Here in Arizona, a common estate planning device over the years was for a couple to create a community property revocable trust which, upon the death of the first spouse to die, would split between a survivor’s trust and a tax shelter trust in order to take advantage of the exemption available to the first spouse to die.
However, if there is no need to do that in order to avoid estate taxes and there is no other purpose (which there may be) to create the separate trust from the deceased spouse’s share of the trust assets, then it is uneconomic to do so.
So what can be done when a husband and wife have a net worth which at this point in time exceeds the exemption? The family wants to avoid estate taxes, but they do not want to set up a tax shelter trust if there is no reason to do so.
There is a way to hedge your bets. It can be done by using what is often called a “disclaimer trust.” Under the provisions of such a trust everything goes to the surviving spouse.
However, the surviving spouse has the power to disclaim all, or a portion, of the deceased spouse’s share into a tax shelter trust, commonly called the disclaimer trust. In that way, if, upon the death of the first spouse to die, the parties’ net worth is such that the surviving spouse would have a taxable estate or might, if the law reverts to what it was in 2001, have a taxable estate, the spouse can disclaim so much of the decedent’s share as makes sense in order to avoid estate taxes upon his or her death.
The flexibility of the disclaimer trust is also, however, one of its disadvantages. The surviving spouse must act to disclaim and to take advantage of the benefits of the trust, and must do so within nine months of the death of the first spouse.
We hope that sometime in the near future (probably after the election this fall) Congress will address the issue and resolve some of these questions about the future of the estate tax. For how, however, the disclaimer trust is one estate planning option that can help plan for an uncertain future.
Andrew Heidman writes the “Ask a Lawyer” column for the Green Valley News. Contact him at his Green Valley office, 625-4404.
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