Estate Planning Memo « »
Federal Estate and Gift Taxes
You can give unlimited amounts to your spouse and qualified charities without incurring gift or estate tax. Assets remaining in your surviving spouse’s estate at death are subject to estate taxes. Current law imposes a gift tax when assets are given to someone other than your spouse or a charity. However, each person may make an unlimited number of tax-free gifts totaling up to $13,000 per donee per calendar year without incurring gift tax. You can also directly pay certain education and medical expenses without gift tax. In addition to annual gifts, each person can gift (through the end of year 2012) a total of $5,000,000 to friends, family or others during life without incurring gift tax, provided that gift tax returns are timely filed. As the law is now written, the lifetime gift exemption amount will decrease to $1,000,000 in year 2013 and beyond. Larger gifts (in excess of $13,000 per year) which you make during your lifetime will impact the “exemption equivalency amount” which is available to shelter your estate from taxes at death.
At death, persons are entitled to pass the “exemption equivalency amount” to one or more beneficiaries without liability for estate taxes. The exemption equivalency is $5,000,000 per decedent for years 2011 and 2012. Larger gifts made during lifetime impact the exemption amount available at death. Legislation allows executors the option to apply the 2010 or the 2011 estate tax laws to estates of decedents dying in 2010. “Portability” of the exemption amount between spouses is allowed if certain steps are followed. If no changes are made to the law, the exemption equivalency amount and lifetime gift exemption thresholds are scheduled to revert to $1,000,000 for year 2013 and beyond. A substantial tax is payable on all amounts in a person’s gross taxable estate over the exemption equivalency amount. Every estate valued in excess of the exemption amount is required to file a federal estate tax return with the Internal Revenue Service and with the Illinois Attorney General.
When valuing your estate for purposes of calculating your gross taxable estate, the fair market value of assets over which you have ownership or control and the value of certain taxable gifts made during your lifetime are included. Such assets may include your interest in joint tenancy assets, some recently gifted assets, payable on death assets, assets you hold as custodian for another, life insurance policies in which you have ownership or a right of control (i.e., “incidents of ownership”), tax deferred retirement assets such as IRAs and 401(k) pension plans, annuities and so on. In certain situations, taxes will be payable from living trust assets, gift recipients and/or others based on the value of assets which were given away in the months or years prior to death. Your executor may deduct from the gross taxable estate various estate administration fees and costs, funeral expenses, debts and charitable donations.
Importantly, if you leave assets in one or more trusts for your spouse, your exemption equivalency can be sheltered from estate taxes upon your death and minimized upon the subsequent death of your spouse. Such trusts (which “spring out of” your living trust at your death) are referred to as “bypass trusts,” “family trusts” and “credit shelter trusts.” If you fail to plan for estate taxes, your estate may be unnecessarily diminished by substantial taxes.
Various protection and control objectives are met by married couples’ use of marital trusts, qualified terminable interest property (“QTIP”) trusts and other trusts to hold assets which exceed the exemption amount for the benefit of a surviving spouse.
It is likely that changes to estate and gift tax laws will continue. We recommend that all persons keep up to date and consult regularly with their legal, accounting, financial and insurance advisors.
Powers of Attorney
Powers of Attorney are useful during your lifetime to enable you to designate and empower another person (your agent) to handle matters without the need for probate to appoint a guardian, even if you become mentally disabled. A power of attorney for health care deals with your physical care and treatment and includes the release information under federal HIPAA laws. A power of attorney for property relates to the management of your assets which are not titled in your living trust.