Exclusion from Estate Taxes
In recent years, the amount you could pass on without paying taxes, called the Exclusion, has been adjusted upward because of increased cost of living expenses. Many people own homes worth several hundreds of thousands of dollars and the concept of taxing them on the death of the first spouse was rethought and revised.
In a change of Exemption amounts, the Federal Government passed a law that lasts through 2010. After that date, the law is void and the taxation amount reverts to 1999 rates (which makes no sense, but does government ever pass laws that are clear and long term?)
The Exclusion amount is set according to federal statute and is as follows for the next few years:
| 2006 | $2 Million |
| 2007 | $2 Million |
| 2008 | $2 Million |
| 2009 | $3.5 Million |
| 2010 | Unlimited |
| 2011 | 1 Million |
That’s right, in 2009 the exempted amount goes to $3.5 Million dollars, which means that if you die in that year with less than $3.5 Million in your estate, then you will pay no taxes. Your exemption in 2010 is unlimited, which means that the law is repealed due to a sunset provision. Likely the law will be amended before that date but at the time of this writing in 11/07 this is the exemption amount in the year of your death.
In 2012, the previous limits are rolled back which could prove costly to those who delay protecting their assets by forming a trust. As simple example of how your exemption will show how the calculation is made:
| You have 5 million in assets. You die unexpectedly in 2008. Here is the tax on the estate calculation: | |
| Estate is allocated to you | = $5.0 Million |
| Exempted amount (See chart above) | - $2.0 Million |
| Taxable estate that must pay taxes | 3.0 Million |
You cannot avoid estate taxes by preparing a will and giving assets after your death. The taxes have to be paid first before distribution. Additionally, you will have an executor of the will, and an attorney that petition’s and advocates the disposition of the estate at great cost to the estate. Just selling the home can include an attorney fee that exceeds the agent fees typically paid. A Court has to manage and approve of all transaction to manage your estate after your death.
A trust can streamline your disposition after your death. No attorney needs to be hired if there are no questions about your estate disbursements. You do not need to get Court permission to distribute assets or even to collect assets and pay taxes. Yet a procedure can be instituted if the trustee is not following your orders. You can even avoid estate taxes by setting up certain assets and benefits to be included in the trust and certain assets no be given outright to others outside of your estate, through tax planning, insurance products, irrevocable trusts and gifting during your lifetime.
The Exemption amount is the starting point to any analysis you must do to determine what you should prepare for in the event of your death. Call us at 1 (888) 752-7474 or Contact Us online for a free consultation if you wish to examine your options.