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Uncle Sam Isn’t Named in My Will – How Did He Get All That Money?

01 Jul 2009, by Tipton Law in Estate Planning

Featured in Cherry Creek Living Magazine – Volume 1, Issue 4

Some of the highest taxes Americans pay are for their accumulated wealth when they die and gifts they give while they are still living. Both federal estate and gift tax rates are currently an astronomical 45% for which either the heirs of the estate or the donor of the gift ultimately takes the hit. In addition, state taxes may be added to the already high federal tax rates depending on the location of the donor or person who dies. Unless an estate is structured through clever pre-planning over 50% of the total value of the estate could be paid to the government in the form of taxes. Despair not, with some estate planning forethought and the help of a skilled estate planning and tax attorney, you can reduce or even eliminate tax liabilities associated with your estate and preserve your wealth for your heirs.

Many people don’t worry about their estate tax liability because they are convinced they will die before their spouse. They know all their assets pass to that spouse tax free. That is partially true. Property and money can be passed tax free during the married couple’s lifetimes and through the inheritance by one spouse of the other’s estate. Problems with this strategy for avoiding estate taxes come when the second spouse dies.  When the first spouse dies the estate passes to the other tax free. The still living spouse’s estate has increased in value without preserving a potential tax credit (“unified credit”) for the ultimate distribution to their children or other down line heirs of the full estate.

Each person has one “unified credit” that can be utilized by that person’s estate upon death. However, if an individual dies and leaves the entire estate to a surviving spouse without any estate tax planning, the “unified credit” is now lost to any children or other down line heirs of the ultimate estate. With the assistance of an estate planning attorney, the “unified credit” for the deceased spouse can be preserved so ultimately both spouses’ individual “unified credits” are combined and can be utilized by the down line heirs upon the second spouse’s death.

Although likely to change over the next few years as government administrations change and estate statutes expire, the 2009 “unified credit,” available to each individual is currently $3.5 million dollars in value. That means if an individual dies in the year 2009, the first $3.5 million dollars of their estate is exempt from taxes even if there is no surviving spouse.  This exemption cannot be transferred to another individual, and will be lost if not used or if that person’s estate passes to a spouse outside of a tax planning trust. For example, if a husband predeceases his wife, the entire estate passes to the wife free of taxes. In this case, the husband’s “unified credit” is not required and, therefore, is lost and unavailable to any future heirs. The husband’s assets become part of the wife’s total estate.  When the wife dies, her estate will pass to her heirs, often her children or grandchildren. The wife’s total estate is now subject to estate taxes, and she only has her individual “unified credit” to offset those taxes. If this husband and wife had thought ahead, they could have had $7.0 million dollars in value to pass to their children and other heirs tax free in 2009.

A common tool used in estate plans to take full advantage of both spouses’ “unified credits” is called a “by-pass trust.” Sometimes you will also hear it referred to as a “shelter trust,” “marital and family trust” or “unified credit trust.” This trust is created by skilled estate planning and tax attorneys to maximize the amount of the estate exemptions for their clients.  Don’t be fooled, you may be thinking you don’t have enough assets to justify the need for this type of trust, but remember that in certain years the “unified credit” has been as little as $1 million dollars and under current law will go back to this amount in 2011. When most folks add-up the value of their retirement accounts, life insurance policies and equity in real estate, they come very close to the lower-end of the “unified credits” seen in the past. This means you should seriously consider preserving your wealth through a solid estate plan and preventing Uncle Sam from getting his hands in the pockets of your heirs.


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