Most estates don't owe tax, but it pays to be
informed. Here's a palatable introduction to estate and gift tax laws.
1. Will my estate have to pay taxes after I die?
It depends. The federal government imposes estate tax at your death only if your property
is worth more than a certain amount--$650,000 to $1 million, depending on the year of
death. But there are a couple of important exceptions to the general rule. All property
left to a spouse is exempt from the tax, as long as the spouse is a U.S. citizen. And
estate tax won't be assessed on any property you leave to a tax-exempt charity.
| Year of Death |
Exempt Amount |
| 2000, 2001 |
$675,000 |
| 2002, 2003 |
$700,000 |
| 2004 |
$850,000 |
| 2005 |
$950,000 |
| 2005 and after |
$1 million |
Important new rules also apply to family-owned businesses and farms,
which may receive a special $1.3 million exclusion from estate tax. This amount is not in
addition to the amount listed above, which is available to everyone. For example, if when
you die the general exempt amount is $700,000, then a business that qualified for the
increased exemption would get another $600,000 exemption, for a total of $1.3 million.
To qualify for this special increased exemption, the business must meet several rules:
- It must constitute more than 50 percent of your estate.
- Its principal place of business must be in the United States.
- You must meet IRS participation requirements in the business before your death.
- You must leave your interest in the business to family members or people who have been
actively employed by the business for at least 10 years before your death. (More rules
apply if you leave the business to non-U.S. citizens.)
If the people who inherit the business stop participating in the business for at least
five of any eight-year period within the 10 years following your death, they will have to
pay back some of the tax that was avoided at your death.
These rules are complex and untested. Consult an estate planning specialist if you have
questions.
2. What are the rates for federal estate taxes?
The rates are steep, starting at 37%. The maximum is 55% for property worth over $3
million.
3. Are there ways to avoid federal estate tax?
Yes, although there are fewer ways than many people think, or hope, there are.
The most popular method is frequently used by married couples with grown children. It's
called an AB trust, though it's sometimes known as a "credit shelter trust,"
"exemption trust," "marital life estate trust," or "marital
bypass trust." Spouses put their property in the trust, and then, when one spouse
dies, his or her half of the property goes to the children--with the crucial condition
that the surviving spouse gets the right to use it for life and is entitled to any income
it generates. When the second spouse dies, the property goes to the children outright.
Using this kind of trust keeps the second spouse's taxable estate half the size it would
be if the property were left entirely to the spouse, which means that estate tax may be
avoided altogether.
Unlike a probate-avoidance revocable living trust, an AB trust controls what happens to
property for years after the first spouse's death. A couple who makes one must be sure
that the surviving spouse will be financially and emotionally comfortable receiving only
the income from the money or property placed in trust, with the children as the actual
owners of the property.
