| Estate & Gift Tax / Estate tax—maximizing benefit of exemption |  |
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If you own a home and some life
insurance and are entitled to retirement plan benefits from work, your
gross estate may already exceed the threshold at which estate tax
liability begins. (In 2000 and 2001, that threshold is $675,000; it will
gradually rise to $1 million by 2006.) Since estate tax rates begin at
37% and rise to 55%, planning to make the best use of your exemption is
essential. In 2000 and 2001, you are entitled
to a credit against estate (or gift) tax of $220,550. This credit
exactly equals the federal estate (or gift) tax on $675,000, thereby
exempting from tax the first $675,000 of your taxable estate (or taxable
gifts made during lifetime). Your spouse is entitled to an additional
credit of $220,550. If the value of all assets owned by
you and your spouse exceeds $675,000, an estate plan which results in
the surviving spouse receiving all the assets will result in estate tax
liability at the death of the second spouse. This, in turn, reduces the
amount available for your children or other beneficiaries. A married couple can escape estate
tax on assets of up to $1,350,000 if the couple's wills are drafted to
take full advantage of each spouse's own credit. The wills should
provide that, when the first spouse dies, the amount protected from
estate tax by the available credit passes to a trust (the "credit
shelter trust") from which the surviving spouse can benefit during
his or her remaining lifetime but which will not be included in the
surviving spouse's estate at death. The following example (which uses
the exemption amount that applies in 2000 and 2001) illustrates the tax
savings that result from using a credit-shelter trust in the will of the
first spouse to die instead of leaving the entire estate outright to the
surviving spouse. Assume you and your spouse have
assets worth $1 million and $350,000, respectively. If you leave your
entire estate outright to your spouse, there will be no estate tax at
your death because your $1 million qualifies for the marital deduction
in your estate. However, when your spouse dies, her estate includes the
$1 million inherited from you (assuming no intervening changes in
wealth) plus her own $350,000, resulting in a federal estate tax of
$270,750, determined as follows:
After the estate taxes are paid,
$1,079,250 is left for the children. If, instead, your will provided that
an amount equal to the estate tax exemption ($675,000 in 2000 and 2001)
passed to a trust from which your spouse and/or children would receive
income and could have principal paid to them if they needed it, and the
balance of your estate ($325,000) passed outright to your spouse, the
tax result would be:
Thus, the full $1,350,000 is
available for the children. |
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