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2010                                     N/A (repealed)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.

What’s NOT in The 2010 Tax Act

There are two key provisions that many commentators feared would be in the 2010 Tax Act, but which were not included in it.

Specifically, there have been several proposals to place limits on Grantor Retained Annuity Trusts (“GRATs”), which allow individuals to transfer wealth out of their estates with as little as a zero estate or gift tax cost that would have made GRATs less valuable from an estate planning perspective.  There have also been several proposals to limit valuation discounts in connection with certain estate planning techniques such as family limited partnerships. There were no such provisions included in the Act.  Therefore, these techniques continue to be available to move wealth to lower generations.

Temporary Relief Does Not Extend to Non-US Citizens Who Are Not Residents for Estate Tax Purposes

The Act reinstates federal estate taxes on United States-situs property of non-US citizens who are not residents.  The increase of the applicable exclusion amount to $5 million per person does not apply to non-US citizens who are not residents. US situs property exceeding $60,000 in value is currently subject to US estate taxes beginning at graduated marginal rates starting at 18 percent.  Accordingly, particular vigilance needs to be exercised in structuring the acquisition of US assets such as real property, so as to avoid imposition of US estate taxes at pre-2010 levels.

Contact our Estate Planning Lawyer in Los Angeles today to review your estate plan.

Continue to final post in blog series:

Summary of The 2010 Tax Act