Estate and Gift Tax FAQ

Will my estate have to pay taxes after I die?

It depends. The federal government imposes estate tax at your death only if your property is worth more than a certain amount - $650,000 to $1 million, depending on the year of death. But there are a couple of important exceptions to the general rule. All property left to a spouse is exempt from the tax, as long as the spouse is a U.S. citizen. And estate tax won't be assessed on any property you leave to a tax-exempt charity.

Important new rules also apply to family-owned businesses and farms, which may receive a special $1.3 million exclusion from estate tax. This amount is not in addition to the amount listed above, which is available to everyone. For example, if when you die the general exempt amount is $700,000, then a business that qualified for the increased exemption would get another $600,000 exemption, for a total of $1.3 million.

To qualify for this special increased exemption, the business must meet several rules:

• It must constitute more than 50% of your estate.
• Its principal place of business must be in the United States.
• You must meet IRS participation requirements in the business before your death.
• You must leave your interest in the business to family members or people who have been actively employed by the business for at least 10 years before your death. (More rules apply if you leave the business to non-U.S. citizens.)

If the people who inherit the business stop participating in the business for at least five of any eight-year period within the 10 years following your death, they will have to pay back some of the tax that was avoided at your death.

These rules are complex and untested. Consult an estate planning specialist if you have questions.

What are the rates for federal estate taxes?

The rates are steep, starting at 37%. The maximum is 55% for property worth over $3 million.

Are there ways to avoid federal estate tax?

Yes, although there are fewer ways than many people think, or hope, there are.

The most popular method is frequently used by married couples with grown children. It's called an AB trust, though it's sometimes known as a " credit shelter trust," " exemption trust," " marital life estate trust," or " marital bypass trust." Spouses put their property in the trust, and then, when one spouse dies, his or her half of the property goes to the children - with the crucial condition that the surviving spouse gets the right to use it for life and is entitled to any income it generates. When the second spouse dies, the property goes to the children outright. Using this kind of trust keeps the second spouse's taxable estate half the size it would be if the property were left entirely to the spouse, which means that estate tax may be avoided altogether.

Unlike a probate-avoidance revocable living trust, an AB trust controls what happens to property for years after the first spouse's death. A couple who makes one must be sure that the surviving spouse will be financially and emotionally comfortable receiving only the income from the money or property placed in trust, with the children as the actual owners of the property.

Another way to save on estate taxes is to use what's called a " QTIP" trust. It enables a surviving spouse to postpone estate taxes that would otherwise be due when the first spouse dies. And there are many different types of charitable trusts, which involve making a sizable gift to a tax-exempt charity. Some of them provide both income tax and estate tax advantages.

 1 | 2  NEXT