Understanding Estate Taxes: Net Value, Reduction/Elimination and Exemptions

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How is the net value of my estate determined?

To determine the current net value, add your assets, then subtract your debts. Include your home, business interests, bank accounts, investments, personal property, IRAs, retirement plans and death benefits from your life insurance.

How can I reduce or eliminate my estate taxes?

In the simplest terms, there are three ways:

1. If you are married, use both estate tax exemptions

2. Remove assets from your estate before you die

3. Buy life insurance to replace assets given to charity and/or pay any remaining estate taxes

Using Both Exemptions

If your spouse is a U.S. citizen, you can leave him or her an unlimited amount when you die with no estate tax. But this can be a tax trap, because it wastes an exemption.

Let’s say, for example, that Bob and Sue together have a net estate of $4 million and they both die in 2006. Bob dies first. He leaves everything to Sue, so no estate taxes are due then. When Sue dies, her estate of $4 million uses her $2 million exemption. The tax bill on the remaining $2 million is $920,000! ($900,000 in 2007 and 2008.)

But if, instead, Bob and Sue plan ahead, they can use both their exemptions and pay no estate taxes. A tax planning provision in their living trust splits their $4 million estate into two trusts of $2 million each. When Bob dies, his trust uses his $2 million exemption. When Sue dies, her trust uses her $2 million exemption. This reduces their taxable estate to $0, so the full $4 million can go to their loved ones.

This planning can also be done in a will, but you would not avoid probate or enjoy the other benefits of a living trust.  Speak with an experienced Estate Planning Attorney in Los Angeles today to plan for your estate taxes.

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Understanding Estate Taxes: Who Has to Pay Estate Taxes?

Who has to pay estate taxes?

Depending on how much you own when you die, your estate may have to pay estate taxes before your assets can be fully distributed. Estate taxes are different from, and in addition to, probate expenses (which can be avoided with a revocable living trust) and final income taxes (on income you receive in the year you die). Some states also have their own death/inheritance taxes.

Federal estate taxes are expensive – the rate is 46% in 2006, 45% in 2007 and 2008 – and they must be paid in cash, usually within nine months after you die. Since few estates have this kind of cash, assets often have to be liquidated. But estate taxes can be substantially reduced or even eliminated – if you plan ahead.

Your estate will have to pay estate taxes if its net value when you die is more than the “exempt” amount set by Congress at that time.

Here is the current schedule:

Year of Death                    “Exemption” Amount

2006, 2007 & 2008        $2 million

2009                                     $3.5 million

2010                                     N/A (repealed)

2011 and thereafter         $1 million

For additional questions about estate tax law, speak with our experienced Estate Lawyer in Los Angeles today.

Summary of Living Trust Benefits

The Main Benefits of a Living Trust:

• Avoids probate at death, including multiple probates if you own property in other states

• Prevents court control of assets at incapacity

• Brings all your assets together under one plan

• Provides maximum privacy

• Quicker distribution of assets to beneficiaries

• Assets can remain in trust until you want beneficiaries to inherit

• Can reduce or eliminate estate taxes

• Inexpensive, easy to set up and maintain

• Can be changed or cancelled at any time

• Difficult to contest

• Prevents court control of minors’ inheritances

• Can protect dependents with special needs

• Prevents unintentional disinheriting and other problems of joint ownership

• Professional management with corporate trustee

• Peace of mind

For additional questions about living trust, please review our blog series entitled “Understanding Living Trusts: How you can Avoid Probate, Save Taxes and More FAQ” or speak with our Living Trust Attorney in Los Angeles.

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