The impact of the estate tax is a matter of great concern when you are planning your estate, and the first thing you have to determine is whether or not your estate is subject to it. The current exclusion amount is $5 million so if your estate is worth less than this it is not exposed to the estate tax. If it is worth more, the portion that exceeds the exempt amount is subject to a 35% federal levy.
Does this mean that you do not have to concern yourself with the estate tax if your estate is worth less than $5 million? The answer is no because the parameters that are in place right now as a result of the passage of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 last April are not permanent.
This act is scheduled to sunset at the end of 2012, and if it does without any additional legislation passing that affects the estate tax the exclusion is going down to just $1 million and the maximum rate is increasing to 55%. So if your estate is worth more than $1 million and you expect to live beyond the end of next year the estate tax is relevant to you.
Paying the estate tax once is bad, but paying it twice or more is worse and this happens to some families. If you were to leave a taxable inheritance to your children and they left that same money to their children it would be taxed twice. This could repeat continually until only the exempt portion remained.
A possible solution is the creation of a generation-skipping trust. With these vehicles you name your grandchildren as the beneficiaries rather than your children, though your children can still benefit from the trust. So ultimately two generations benefited from the trust but the only tax levied is a single imposition of the generation-skipping transfer tax.
Paul A. Kraft, Estate Planning Attorney
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.
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