faqs Featured Legacy Matters — 07 April 2014

Recent Changes to Federal Estate Tax Laws – Do They Impact Your Plan?

Craig Anderson, Esq.

Everyone has heard the old saying: “The only two inevitable things in life are death and taxes.” Most people try very hard to avoid both! However, there are many misconceptions about how federal estate taxes (sometimes called “death taxes”) actually impact your estate plan, and recent changes in that law have been good for the middle class.

Before going into detail, two basic concepts need to be clear. First, there is a fundamental difference between income taxes and estate taxes. Income taxes are due every year on what you earn or receive as compensation. Estate taxes are only due once, at the time a person dies. The second basic concept is that any transfer to a surviving spouse at the death of the first spouse is not subject to federal estate taxes at all; there is an unlimited marital deduction for those transfers, no matter how much they are.

A problem in the past occurred when a spouse died leaving everything to his surviving spouse. Then at her death (for example purposes only, we are having “him” die first!), whatever she had left was subject to the federal estate tax. Years ago, if that amount exceeded $325,000, the Federal estate tax applied – and it was hefty, with rates ranging from 45-55%! That led to the popularity of revocable trusts, where the first spouse to die could leave up to the amount just under a taxable level in a trust for the benefit of his surviving spouse. She controlled it and received the income from it. At her death the funds in it would pass on to the children. This allowed double the threshold amount to be passed to the children without paying any federal estate taxes.

In recent years, the US Congress substantially raised the amount that can be passed in a decedent’s estate to over $5 million without paying any federal estate taxes. Even better, if a spouse leaves everything to his surviving spouse and doesn’t use any of his exemption amount, the surviving spouse now gets his exemption as well as hers at her death, again doubling the amount that could pass on to the children. However, contrary to what some people may think, using revocable trusts during one’s lifetime does not impact the requirement to pay annual income taxes.

For 2014 and the foreseeable future, family estate values under $10 million (that includes everything – house, life insurance, retirement accounts, other real property, etc.) will not result in any federal estate taxes. In Virginia, there is no state “death” tax, but that may not be true in the state where you live. It is important for you to find out how your state handles this issue. Even without a current federal estate tax impact, many families continue to build an estate plan around revocable trusts. The use of trusts can protect beneficiaries from future financial woes and with careful planning, help a family completely avoid the probate process. Probate rules vary from state to state, but they all have costs and deadlines and administrative procedures monitored by a court or commissioner of accounts. The use of revocable trusts can keep the distribution of assets passing from one generation to the next wholly private and within the family, entirely outside the semipublic probate bureaucracy.

Be sure to discuss your estate planning goals and objectives with a qualified professional so you can learn about the advantages of using trusts in your estate plan.

Craig Anderson has practiced law for more than 35 years, 20 of which as an active duty Air Force JAG. He earned his JD from the Indiana University Mauer School of Law and has a Masters of Law degree from the George Washington University Law School. He now focuses his practice on trust and estate law and issues of concern to military veterans and their families.


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(1) Reader Comment

  1. You need new software every year tax laws cghnae and the software only generates forms for that tax year anyway. The 5 efiles you are allowed are for the same year and is set up so that multiple family members in a single household can all file. Most of the turbo tax programs will include all schedules and forms that could go with a 1040 however, the interviews and help sections are more detailed with the more expensive versions like Home and Business. If you don’t run a business for youself and are not filing a Schedule C you really don’t need to spend the money on the Home and Business version. The Premier will offer the guidance you are looking for to complete your Schedule D.

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