Easy to Explain Estate Taxes? Not Exactly


Seems like the subject of estate taxes becomes part of every politician's election promises, and today's election environment is no different. Even though we are not really expecting significant changes in that area, estate taxes have changed dramatically, and some folks may still be uncertain about how those changes relate to them. First of all, remember that there are two kinds of estate taxes and each can be significantly different from the other in certain ways. What gets taxed? Essentially everything you own (even the face value of life insurance policies where you are listed as owner). The amount of each person's estate that can be excluded from federal estate taxes stands at a whopping $5 million. That means the federal estate tax of roughly 35% would be exacted on any estate valued over $5 million. Another relatively new provision is that married persons, each of whom has the $5 million exclusion, can pass any unused portion of their $5 million to their spouse. This is called "portability."

The article, "Estate taxes explained," from nj.com explains that state estate taxes are entirely different animal: many are not very easy to understand and state laws can differ drastically from state to state. For example, married persons have the flexibility of knowing that they don't have to pay either federal or state estate taxes in New Jersey when one of them dies. This is called the unlimited marital deduction.

But things can get pretty tricky quickly when you own real estate in a state or states that are not your state of residence. When you die, those other states may seek to tax your estate with their own very different state estate tax. A smart way to avoid this issue is to establish a trust to hold that property. The surest way to avoid estate taxes is to give assets away. However, that's a serious step when you might need those assets to provide for you and your family during your lifetime.

Another way would be to create an irrevocable life insurance trust. In that situation, the trust, and not you, "owns" the life insurance, and if life insurance is purchased directly into the trust, there is no waiting period. But if existing life insurance is transferred into the trust, there's a three-year wait before the life insurance is considered out of your estate.

Another way to remove assets from your estate is to establish a 529 Education Savings account with a named beneficiary. With a 529 plan, even though you're the stated "owner" of the account, it's not considered part of your estate.

Keep in mind there are only a few ways to accomplish this, so work with an experienced estate planning attorney.

Reference: nj.com (October 18, 2015) "Estate taxes explained"

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