Frequently Asked Questions about Estate Planning

How do I know if I need estate tax planning?

The federal estate tax law is always changing. Moreover, many states are now enacting their own estate tax laws that are separate from, and in addition to, the federal estate tax. You should talk with a qualified professional if you think that estate tax planning is warranted in your case.

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What is the current federal estate tax law?

A federal estate tax is levied on the transfer of money and other assets to your heirs after your death. This is known as an estate tax. It is also sometimes called the death tax.

In 2020, the federal estate tax exemption was raised to $11.58 million per individual. The tax rate for estates over the exemption amount is a flat rate of 40 percent.

The federal tax exempt amount is called the applicable exclusion amount. We sometimes refer to it as a “coupon” which allows you to pass up to the exemption amount to others without the payment of any death taxes.

In addition to the applicable exclusion amount, a married person can leave an estate of any size to a spouse, provided the spouse is a U.S. citizen. This is called an “unlimited marital deduction.”

Because estate taxes are due within nine months of death, a failure to plan for estate taxes can lead to a lack of liquidity and forced sales of assets.

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If I am married, is the amount that my spouse and I can pass tax free automatically doubled?

“Portability” is the legal term that allows a surviving spouse the option to obtain the Deceased Spouses Unused Exemption Amount (DSUEA), effectively doubling the amount of wealth that can be passed by a married couple to their heirs. In order to elect portability, a surviving spouse must file an estate tax return, IRS Form 706, within 9 months of the death of the first spouse. Filing a Form 706 typically requires the assistance of a CPA or attorney.

A couple can also make use of trusts at the death of the first spouse to assure that they maximize their tax exemptions. Such trusts have different names in the estate planning industry, such as A-B trusts, Family Trust, Credit Shelter Trust and Bypass Trust. We are happy to teach you more about these trusts and help you decide if they should be used in your estate plan.

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If my estate is under $5 million, do I have to worry about estate taxes?

You will not have to worry about federal estate taxes if your estate is under the Applicable Exclusion Amount in the year of your death. In 2020, that amount is $11.58 million.

Many people are unaware of everything that should be counted as part of their estates for tax purposes. In calculating the size of your estate, you must include the total value of your life insurance policy proceeds, all retirement plans, the fair market value of all real and personal property, and any inheritances. It is also important to consider the effects of inflation and the future growth of your estate.

Finally, if you are living in a state that has established its own estate tax, you retire to such a state, or own real estate in such a state, your family could be subject to state estate or inheritance taxes.

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Does Alaska have an estate tax?

No. Alaska does not currently have an estate tax. There has been no discussion to date in the Alaska legislature about implementing an estate tax and most local experts do not expect an estate tax to be implemented in Alaska in the near future.

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Can I avoid estate taxes by giving away my assets now?

Gifting can be an effective way to avoid future estate taxes, with certain limitations. Federal tax laws allow you to give $15,000 per year (subject to adjustments for inflation) to an unlimited number of people without creating any gift or estate tax problems. A husband and wife may jointly gift $30,000 per year, per recipient.

Annual gifts that you make in excess of $15,000 per person will not immediately be taxed. Instead, such gifts will reduce your Applicable Exclusion Amount ($11.58 million coupon in 2020) available at your death. You may give a total of $11.58 million in gifts to individuals during your lifetime. A husband and wife may give a total of $23.16 million and use up all of their exemption with lifetime gifts.

Gifts are valued for tax purposes at the time the gifts are made. Therefore, future appreciation in the value of the gifted property will not be part of your estate. You may also give unlimited gifts to qualified charities during your lifetime or at death without gift or estate tax consequences.

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Can life insurance be used to pay estate taxes?

Life insurance which is owned by you will be included in your estate for estate tax purposes. Therefore, although life insurance can be used to provide liquidity to pay taxes, the life insurance proceeds themselves will also be taxable unless you do not own the policy at the time of your death.

The ideal way to use life insurance proceeds to pay taxes, but still maintain some degree of control, is to use an Irrevocable Life Insurance Trust (ILIT). The ILIT can own policies on your life. Premiums are paid by the trustee with gifts you make to the ILIT. Because the ILIT is an irrevocable trust and you do not own the policy personally, the death benefits may be excluded from your taxable estate. This means that the entire death benefit can provide the liquidity to your estate to pay taxes. The use of an ILIT can be a very effective and economical way to pay estate taxes with non-taxable dollars.

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How should I transfer my business to my descendants?

Often a closely held family business represents a large part of a client’s wealth. Such businesses present a special challenge in estate planning because not all of the children are interested or involved in the business. Moreover, liquidation of the business to pay estate taxes or assure fairness among children would exact a huge financial cost. Foley & Pearson is experienced in planning for the succession of closely held businesses. There are a number of ways to transition businesses to future generations. Having us assist you with business succession planning can turn a seemingly impossible situation into a very rewarding and dynamic experience.

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