Historically, the Federal Estate Tax has been a fact of life (or, rather, a fact of death) for many Americans. This tax is levied on the estates of decedents, and could consume almost fifty percent of a decedent’s net worth, above a statutorily determined exempt amount. By applying estate planning techniques skillfully, the taxpayer could minimize the impact of such taxes on their beneficiaries and heirs.
During recent years, the amount of a decedent’s estate not subject to Federal Estate Tax (i.e. the exempt portion) has changed significantly. In 2001, for example, the exemption was $675,000. This meant that no tax was levied on the first $675,000 of the decedent’s net worth. By 2009, the exemption was $3.5 million.
The Federal Estate Tax expired in 2010. The tax was scheduled to re-appear in 2011, with a reduced exemption of $1 million.
Tax experts expected Congress to reinstate the Federal Estate Tax during 2010. After all, it costs the Federal Government big bucks to wage wars, give bailouts and generally provide governmental services, and dead people don’t have a strong lobby in Congress.
At the last minute of the 2010 legislative game, Congress did reinstate the Federal Estate Tax, effective in 2010 and presumably for the next two years, with an exemption of (are you ready?) $5 million! Now, with proper estate planning, a married couple can pass $10 million dollars to their beneficiaries, free of any Federal Estate Tax.
Most of us don’t have five million dollars of net worth. Does that mean we no longer need living trusts? To the contrary, there is still probate avoidance to consider. In California, if I die leaving an estate, in my name, having a gross value in excess of $100,000, there will be a probate. Probate is a legal procedure that takes eight months or longer, costs thousands of dollars (mostly in legal fees) and is public record.
Remember, the first job of a revocable living trust is to avoid probate, by vesting a Grantor’s assets in the name of a Trustee of a Revocable Living Trust. At the Grantor’s death, a named Successor Trustee can then transfer these assets to the Grantor’s Beneficiaries – all without probate, publicity or delay.
Jerry Kessler practices law in Santa Clarita. He can be reached at 661-255-1001.