Federal Estate Tax - 4/07/08

INTRO: What's the truth about the federal estate or death tax?  The truth, not the hype from politicians, who try to scare us, or insurance companies that try to sell us.

1. WHAT IS THE FEDERAL ESTATE TAX?

A. The federal estate tax is also sometimes called the death tax.  The U.S. government says that, in general, at death, you might have to pay tax.  Or you might not.  Here are the most basic rules:

1.  You can leave any amount to your spouse or charity with no tax.
2. If you leave assets to children or others, you pay tax only on amounts over $2 million.  So most Americans pay no federal estate or death tax.
3. If you do have to pay federal estate tax, the rates are high. 

2. NO TAX ON $2 MILLION OR LESS.  DOES THAT EXEMPTION AMOUNT CHANGE?

A. Yes.  Here's where some of the confusion comes in.  Congress passed a law years ago which set in place changes to the estate tax.  Right now, there's no tax on up to $2 million.

If you die next year, in 2009, the exemption amount goes up to $3.5 million.  And if you die in 2010, there's no federal estate tax period, no matter how much you leave to your heirs.  But if you die in 2011, or after, you pay federal estate tax on any amount over $1 million.

3. SO IF YOU DIE 3 OR MORE YEARS FROM NOW, YOU PAY TAX ON ANY AMOUNT OVER $1 MILLION?

A. That's right.  Unless Congress changes the law again.  Most lawyers expect the law to be changed, but those predictions have been made for several years, and still no changes have been made.

4. SO IF OUR VIEWERS HAVE AN ESTATE OVER $1 MILLION, AND THEY DON'T WANT TO PAY A HUGE TAX, WHAT SHOULD THEY DO?

A. They may want to put at least a simple plan in place to reduce or eliminate the federal estate tax.  Thankfully, there are lots of protective steps people can take.

5. CAN YOU GIVE US AN EXAMPLE?

A. Sure.  If you are married, maybe the easiest strategy to use is A-B or family/marital trusts.  These trusts allow a married couple to double their federal exemption.  Right now, since the individual exemption is $2 million, these trusts let you protect $4 million from tax.  When the exemption for a person drops to $1 million, these trusts automatically let you protect $2 million.

6. ANYTHING ELSE?

A. Yes.  Here's another useful technique.  It's call an Irrevocable Life Insurance Trust, or ILIT.  With this trust, you can use life insurance to create a pot of money that will pass to your heirs without any federal tax, regardless of the size of your estate.