NASE Blogs

Estate Taxes

Mar 23, 2011

Q: My wife and I are worth about $9.5 million. We have two adult daughters. How can I avoid estate taxes when I die?

A: According to the current (2011) federal estate tax table, assuming you each own half of the total marital estate, when either of you dies there won’t be any federal estate tax.  Current federal estate tax law imposes no federal estate tax on estates less than $5 million.  Also, this $5 million federal estate tax exclusion is portable between spouses so if a decedent doesn't use all of his or her $5 million exclusion his or her spouse can utilize whatever amount remains. You should investigate whether the state you live in has either an estate tax or an inheritance tax, or both.  If so, you might need to do some tax planning regardless of the status of the federal estate tax.

For those with combined marital estates greater than $10 million:  Through the use of A/B trusts you can reduce the impact of both state and federal death taxes.  Let’s assume that the federal exclusionary amount is $5 million. You should each have a will that leaves your half of the total marital estate to your heirs in what is called a testamentary trust.  Your will would create Testamentary Trust A.  Your wife's will should have a similar provision leaving her half of the total marital estate to your heirs.  Her will would create Testamentary Trust B.  As tempting and loving as it would be, neither of you should leave your half to your spouse.  You can assure that your surviving spouse is adequately provided for, however, by including in each of your wills a provision that any income generated by the decedent’s Trust goes to the surviving spouse until his or her death.

Through use of A/B Trusts the value of the estate of the first to die will be less than the federal exclusionary amount and no tax will be due.  The surviving spouse will own only the remaining half of the estate when he or she passes. Since that half of the estate will also be less than the federal exclusion the estate will have avoided all federal estate tax. Of course you will have to investigate the impact of your state's death taxes, if any.

Here’s the current federal estate tax table, based on year of death and value of the taxable estate (TE = gross estate less exclusions):

             (m = million)

2008-1st $2 m of TE excluded, balance @ 45%

2009-1st $3.5m of TE excluded,balance @ 45%

2010-Executor has 2 options – see below

2011-1st $5 m of TE excluded, balance @ 35%

2012-1st $5 m of TE excluded, balance @ 35%


For both 2011 and 2012 (and 2010 if the 2011 option is selected) the $5 million exclusion is portable, meaning if a spouse doesn’t use all of his or her $5 million exclusion the survivor can use some or all of it.  Portability is limited to spouses.


OPTIONS - for those administering estates of 2010 decedents:

1) Elect to accept the rules in effect prior to the 2010 Tax Relief Act.  This election must be made no later than September 19, 2011.  These new rules provide a $5 million estate tax exemption,  a 35% estate tax rate and a full stepped-up basis for most assets included in the gross estate, or

2) The executor may (do nothing and) choose to accept the federal estate tax rules for 2010 Estates which include no federal estate tax but also no stepped-up basis for assets.


There are exceptions to the no stepped-up basis rules:

The exceptions are:  If the 2010 rules are selected the heir can choose to take a step-up in basis for $1.3 million of the property. For any amount inherited over $1.3 million, the heir's basis will be the smaller of the deceased owner's basis or the date-of-death-market value. The basis of property passing to a surviving spouse can be increased by an additional $3 million for a total basis increase of $4.3 million.  Basis of property given to the decedent by someone other than his/her spouse within 3 years of death cannot be increased.

A note of caution: A trust requires a trustee. It is tempting and convenient to name the surviving spouse as trustee of the A or B trust. However, there is a potential conflict of interest since the surviving spouse, who receives income from the trust, may have priorities different from the heirs who own the assets in the trust. In addition, the IRS may view the trust as a sham and rule that all assets passed directly to the surviving spouse, undoing the tax planning benefits of the trust unless the trust provisions are carefully drawn. Similarly the heirs owning the trust corpus may be unsatisfactory choices as trustees. Depending on the trust provisions, a third party trustee may be advisable in many circumstances. You should consult a local attorney about such circumstances.

Many individuals also consider charitable gifts as a way to reduce the impact of death taxes.  Regardless of what method you choose you should seek the advice of an attorney who specializes in wills, trusts, estate planning, elder law, etc. 


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