Estate taxes are different from, and in addition to, probate fees.
Property owned at death is subject to estate taxes, including your house (at current appraised value), business interests, investments including IRAs and 401Ks, bank accounts, personal property, and life insurance proceeds. Your assets will appreciate between now and when you die, so your estate will be worth even more then. If your assets are valued higher than $3.5 million, your heirs are at risk for huge estate taxes, unless you do estate planning.
Estate tax exemption amounts:
Each person can pass assets without any estate taxes according to the following chart. In 2009, if your estate is less than $3.5 million, it would not be subject to estate taxes. In 2010 the estate tax is repealed for 1 year. Then, unless Congress changes the law, in 2011 the estate tax exemption is reduced back to $1 million, and the tax rate increases to 55%.
Note that if your assets are greater than the exclusion amount, the tax rate is extremely high.
Estate Tax Exemption Amounts
Year exemption tax rate
2009 $3.5 million 45%
2010 $ no tax 0%
2011 $1 million 55%
2012 $1 million 55%
In 2009, any assets over $3.5 million will be taxed at 45%.
If you have assets of $3,600,000, that extra $100,000 will cost your heirs $45,000 in estate taxes.
That’s in addition to probate costs! Estate taxes must be paid in cash, usually within nine months after you die, so assets often have to be liquidated.
Cost of estate taxes for single estates over $3.5 million:
Assets estate tax
$3,600,000 $ 45,000
$3,700,000 $ 90,000
Each additional increment of $100,000 of assets costs $45,000 in estate taxes.
For very wealthy people the dollars lost to estate taxes are extremely high:
Assets estate tax
$4,500,000 $ 450,000
$5,500,000 $ 900,000
Yes, for every extra million dollars of assets you have, your heirs would have to pay another $450,000 in estate taxes!
Establishing a Credit Shelter Trust While You Are Both Alive
Property passing to a spouse qualifies for an unlimited estate tax marital deduction. However, upon the death of the second spouse, taxes will be owed for estates larger than the exemption rate ($3.5 million in 2009). By establishing a Credit Shelter Trust, (also known as an A/B Trust) while both of you are alive, twice as much can pass to heirs upon the death of the second spouse. So, if both of you die in 2009 you would be able to pass $7 million without your heirs having to pay Estate Taxes. A Credit Shelter Trust will also provide asset protection to each other against lawsuits, and protect unintentional disinheritance of children if a surviving spouse remarries.
Other Asset Protection Trusts to reduce estate taxes
There are many opportunities to reduce these huge taxes through estate planning, including irrevocable trusts, additional insurance, charitable giving, and/or gifting programs. With estate planning you can reduce or eliminate the estate taxes that your children will have to pay when you die. Chip Allen can help you discover what works best for your unique situation.