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Estate Tax Planning

Without careful planning, much of your life’s legacy could be lost to estate taxes. While a simple will can provide for the transfer your estate to your loved ones, it does not have special provisions for advanced estate tax planning.

The Federal Estate tax: Exemptions & Rate

Federal estate tax laws were updated in 2013 as part of the American Taxpayer Relief Act which provides for an exemption of $5.45 million (for calendar year 2016).  This means that each individual can transfer up to $5.45 million (reduced by lifetime taxable gifts) in assets free of federal estate taxes.   The federal estate tax exemption, also referred to as applicable exclusion amount is adjusted annually for inflation.  

The taxable value of the estate is calculated by adding up all the assets owned by the individual and subtracting from that total any of his or her liabilities.  Additional deductions can be taken for amounts passing to a surviving spouse (discussed below), qualified charitable deductions and administrative and legal costs involved in settling the deceased’s estate.

The tax rate for estates exceeding the exemption amount is 40%.  The rate is applied to the taxable estate value that is in excess of the exemption amount.

The Federal Estate tax: Understanding Portability

In addition to the individual exemption, married couples enjoy an unlimited deduction for transfers to one another.  While this is great news for many couples who choose to leave their estate to each other, without proper planning, it can result in a forfeiture of some of the individual estate tax exemptions after the passing of the second spouse.  

Prior to 2012, a married couple had to balance assets between each spouse.  Suppose a husband died in 2009 leaving $3 million of his individually-owned assets to his surviving wife who already has $5 million herself, bringing her total net worth to $8M.  The bequest to his wife was not subject to estate taxes because it qualified for the unlimited marital deduction.   When the wife later passed away, her assets are distributed to the couple’s children.   While her estate could take advantage of her individual estate tax exemption (currently $5.45 million), the rest her estate would be subject to estate taxes because her husband left the assets to his wife (rather than to a credit shelter trust for her benefit).

To address this issue, the current estate tax law allows for “portability” of individual exemptions between spouses.  Stated another way, estate tax portability enables the surviving spouse to utilize the unused portion of the first-to-die spouse’s estate tax exemption.   Portability is not automatic and in order to take advantage of it, an estate tax return must be filed with the IRS within 9 months of the passing of the first spouse, even if there are no taxes due at the time.

Consider the example above under portability.  Again, assume a husband died in 2016 leaving $3 million of his individually-owned assets to his surviving wife who already has $5 million herself, bringing her total net worth to $8M.  The bequest to his wife is not subject to estate taxes because it qualifies for the unlimited marital deduction.   When the wife later passed away, her estate could take advantage of her individual estate tax exemption (currently $5.45 million) and her husband’s unused estate tax exemption (which is $5.45 in the year of his death).  That would permit the wife to shelter up to $10.9 million from the federal estate tax. 

A number of states impose a separate estate or inheritance taxes.  While the rates are typically much lower than the federal rate of 40%, the exemption amounts are smaller as well.  Missouri does not impose a separate estate or inheritance tax.

Special Planning for High Net Worth Individuals

Individuals and families with significant net worth might still have taxable estates even if they take full advantage of their respective exemptions.  For these individuals, there are a variety of advanced planning techniques that can be crafted to help reduce the estate tax burden, such as strategic gifting plans, life insurance trusts, personal residence trusts and grantor retained annuity trusts.  

Same-Sex Couples

The Supreme Court's ruling on the Defense of Marriage Act (DOMA) paves the way for same-sex couples married under state law to take advantage of all the federal privileges afforded to opposite-sex couples, including those related to federal gift and estate taxes.  

Tax planning strategies are inherently complex but an experienced estate planning attorney with knowledge of estate and gift tax laws can help you establish a comprehensive plan that will allow you pass on as much of your hard-earned assets as possible to your loved ones and beneficiaries.


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