Law Offices of John Greuner, P.C.

(This page last revised -- November 15, 2004)

ESTATE TAX

Just the Basics

THE "DEATH TAX". The federal estate tax is a tax on the transfer of wealth from a deceased person to others, usually his family. At its simplest, you add up the estate, subtract the deductions, subtract the exemption amount, and tax the rest.

WHAT'S IN THE ESTATE? The first step is to determine what assets are taxable as part of the "estate". In a nutshell, it's everything you own. It includes everything from the obvious, like stocks, bonds, cash, to the not so obvious, like tax-free municipal bonds, annuities and life insurance proceeds, assets in a revocable grantor trust, and sometimes even property that you gave away decades earlier. It includes the full value of IRA and 401(k) accounts, deferred compensation, loans receivable, your home, furnishings, jewelry, everything that has value. It does not matter that life insurance or bank accounts might pass to the heirs by beneficiary designation or through a revocable living trust. The critical issue is the deceased person's legal right to control or dispose of the property while he or she was alive.

ARE THERE ANY DEDUCTIONS? After adding up the estate, subtract out the deductions. The big ones are the value of assets left to a surviving spouse or charity, provided there are no "strings" attached to the gift. Beyond that, deduct funeral expense, legal and accounting expense, and other expenses of administration, as well as the outstanding debts, like any mortgages, vehicle loans, outstanding credit card bills, etc.

WHAT ARE THE EXEMPTIONS AND TAX RATES? The amount of property a person can transfer at death without estate tax is what tax professionals call the "Applicable Exclusion Amount".

    For Persons Dying in:	     	Tax Rates         Applicable Exclusion Amount
	2001			37% - 55%	$ 675,000
	2002			41% - 50%	1,000,000
	2003			41% - 49%	1,000,000
	2004			45% - 48%	1,500,000
	2005			45% - 47%	1,500,000
	2006			     46%		2,000,000
           2007 - 2008	 		     45%		2,000,000
	2009			     45%		3,500,000
	2010			       0%		UNLIMITED (Estate tax repealed)
	2011			41% - 55%	1,000,000 (Repeal is repealed)

JUST A FEW EXAMPLES OF TYPES OF TRUSTS IN USE TODAY

Revocable Trusts (AKA Living trusts, Grantor trusts): CAUTION: Despite popular dogma, revocable trusts offer virtually no tax advantages over trusts created by wills, and they do not necessarily avoid the necessity of probating a will. Their purpose is to hold a person's assets while they are still alive, and then to take the place of their will. There are a number of legitimate reasons to do this. Avoiding probate is desirable for some, particularly when the person owns assets located in multiple states; however, avoiding probate only works if all of the person's assets are in the trust prior to his death. For example, failing to transfer the family car over to the trust may by itself trigger probate. Privacy is an issue for some clients, particularly if they are disinheriting a child, or have celebrity status, or have some other concern about the details of their estates being public record. In many cases, a living trust is created simply because the client recognizes that if he becomes disabled, he would rather have his assets managed by a trustee (individual or corporate) than by someone acting under a power of attorney or court-created guardianship.
Bypass Trusts (AKA Credit Shelter Trusts): The simplest and most fundamental method of protecting both spouses' $1,500,000 lifetime exemptions. It can be drafted in many different ways, each having unique estate tax and income tax consequences. Most often, it is drafted to allow the surviving spouse to receive 100% of the trust's income, and as much principal as necessary for that spouse's "health, education, maintenance and support."
"QTIP" Trusts (AKA Marital trusts): A special trust for the surviving spouse, its primary purpose is to ensure that the surviving spouse cannot divert the inheritance away from the children or other intended future beneficiary. Used in combination with a bypass trust, the pair of trusts is sometimes referred to as a "A/B trust arrangement".
Irrevocable Life Insurance Trusts: Properly drafted and administered, it allows life insurance on a decedent to be kept out of his "taxable estate", a very popular method of holding large insurance policies and an extremely effective way to reduce estate tax.
Children's Trusts: Common in even simple estate plans, to ensure that children do not receive their inheritances too early in life. Can be written in a wide variety of ways. Care must be taken regarding income tax consequences.
Other Contingent Trusts: Estate plans often contain trusts for contingencies, such as the possibility of a child dying before his trust terminates, leaving behind young grandchildren. Depending on the size of the estate, many other contingent trusts may be created to deal with another type of transfer tax, the "Generation Skipping Tax."

FAMILY LIMITED PARTNERSHIPS (FLP's)

FLPs are bona fide business entities designed to hold a family's assets together while protecting those assets from future creditors. It can ensure proper management of a large estate spread among many family members. It works like this -- Partners in a limited partnership are either "general partners" or "limited partners". General partners control the partnership. Limited partners have virtually no voice in the management of the partnership. Limited partners often have no guaranteed rights to distributions from the partnership, but may incur annual income tax liability as a result of the partnership's business activities. Further, limited partners are often prohibited from selling their partnership interest to anyone other than a family member, thus keeping the business in the family. Restrictions such as these, while necessary to meet the family's objectives, render a limited partnership interest somewhat unmarketable which severely depresses it's fair market value. Depressed market value means a smaller estate for the IRS to tax. FLPs carry significant consequences to the family, and should be tailored to the family's needs. Generally, family limited partnerships that carry the most significant restrictions are reserved to estates that exceed several million dollars.

LAW OFFICES OF JOHN GREUNER
1450 Hughes Rd., Suite 215
Grapevine, TX 76051
Voice: (817) 329-1155
Fax: (817) 488-4998
info@estates-trusts.com

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