Federal Estate Tax Exemption. Living Trust and Death Tax, Gift tax rates

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Federal Estate Tax Exemption  

Federal Estate Tax Exemption


Please remember that most relatively simple estates (cash, publicly-traded securities, small amounts of other easily-valued assets, or jointly-held property) with a total value under $1,500,000 (for the year 2004) do not require the filing of an estate tax return.

"According to Economic Growth and Tax Relief Reconciliation Act of 2001, the estate tax for the year of 2004 applies only to estates of more then $1,500.000. The estate tax exemptions will grow and rise to $2,000.000 by the year of 2006. (Source: www.irs.gov)

Another words, an estate tax return for a U.S. citizen or resident needs to be filed only if the gross estate exceeds the applicable exclusion amount, listed below."



2003 $1,000,000 $2,000,000 2007 $2,000,000 $4,000,000
2004 $1,500,000 $3,000,000 2008 $2,000,000 $4,000,000
2005 $1,500,000 $3,000,000 2009 $3,500,000 $7,000,000
2006 $2,000,000 $4,000,000 2010 Unlimited

"For estates of decedents dying, and gifts made, after 2002, the maximum rate for the estate tax and the gift tax is as follows." (source: www.irs.gov)



2003 49%
2004 48%
2005 47%
2006 46%
2007 - 2009 45%
2010 35%
2011 55%

* The law is subject to change in 2012.


Reduction of Credit for STATE DEATH TAXES

For estates of decedents dying in 2004, the credit allowed for state death taxes will be limited to 25% of the amount that would otherwise be allowed.


"The gift tax applies to the transfer by gift of any property. You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced interest loan, you may be making a gift.
The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule.
Generally, the following gifts are not taxable gifts:

  • Gifts that are not more than the annual exclusion for the calendar year (11,000 for one person, or 22,000 for married couple for 2004);
  • Tuition or medical expenses you pay directly to a medical or educational institution for someone;
  • Gifts to your spouse;
  • Gifts to a political organization for its use, and
  • Gifts to charities." (source: www.irs.gov/publications/p950/ar02.html)

Of course, a couple can double the tax free amount with a Living Trust.


While alive, spouses establish a Living Trust, naming each other as trustees and their children (or whoever they want) as beneficiaries. This Trust is called an A-B Trust.
Subsequently, at the time of death of one of the spouses, his part of the property goes to Living Trust, instead of going directly to his spouse. The living spouse has broad powers to spend the trust assets, and at her death the property that is left at the Trust, will go to the named Beneficiaries. In such scenario the beneficiaries enjoy the avoidance of probate and attorneys fees. Probate is a court - supervised legal procedure that determines the validity of your will. This procedure may take more then 8 months and eat up approximately 5-6 % of your estate assets.
If a husband and wife leave everything to each other, there is no tax at the first death, regardless of the value of their assets, if the survivor is a United States citizen. However, at the second death, if there is more than the current estate tax exemption passing to the children or other relatives, it is taxed. Thus, creating a Living Trust, couple can exempt from estate taxation the sum of $3,0 million to $6,0 million, depending on the year of death of the second spouse, and leave it to their children.
As soon as one of the spouses dies, the other spouse can not revoke the Living Trust.
Let's assume that Adam and Eve own assets for $3,0 million, If each left his or her half, $1,5 million, to the surviving spouse directly, that spouse would be left with an estate of $3,0 million. If the surviving spouse died in 2004, no estate tax is due because the amount is within death tax free amount. If the amount of estate is more then $3,0 million, then the surviving spouse has to pay taxes from the sum that exceeds $3,0 million.


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