Will my estate be subject to death taxes?

There are two types of death taxes that you should be concerned about:  the federal estate tax and state estate taxes.  The federal estate tax is computed as a percentage of your net estate.  Your net taxable estate is comprised of all assets you own or control minus certain deductions.  Such deductions can be for administrative expenses such as funeral and burial costs as well as charitable donations.  In 2021, the federal estate tax currently taxes estates with assets of $11,700,000 or above.

Even if you believe that that you may not be affected by the federal estate tax, you still need to determine whether you may be subject to state estate and inheritance taxes.  Further, you may have a taxable estate in the future as your assets appreciate in value.  You should regularly review your estate plan with an estate planning attorney to ensure your estate plan takes into account changes in the tax laws as well as shifts in your individual circumstances.

Vermont does not follow the federal estate tax law.  Beginning in 2021, Vermont estates over $5 million are subject to the State’s estate tax at a rate of 16%.   However, Vermont has no gift tax, so the increased federal exemption from gift tax provides Vermont residents with opportunities for lifetime gifting, provided it occurs more than 2 years from date of death (due to the current “clawback” provision in the state estate tax law).

What is my taxable estate?

Your taxable estate comprises of the total value of your assets including your home, other real estate, business interests, your share of joint accounts, retirement accounts, and life insurance policies – minus liabilities and deductions such as funeral expenses paid out of the estate, debts owed by you at the time of death, bequests to charities and value of the assets passed on to your U.S. citizen spouse. The taxes imposed on the taxable portion of the estate are then paid out of the estate itself before distribution to your beneficiaries.

What is the unlimited marital deduction?

The federal government allows every married individual to give an unlimited amount of assets either by gift or bequest, to his or her spouse without the imposition of any federal gift or estate taxes.  In effect, the unlimited marital deduction allows married couples to delay the payment of estate taxes at the passing of the first spouse because at the death of the surviving spouse, all assets in the estate over applicable exclusion amount ($5,490,000 in 2017) will be included in the survivor’s taxable estate.  It is important to keep in mind that the unlimited marital deduction is only available to surviving spouses who are United States citizens.

What is a Credit Shelter or A/B Trust and how does it work?

A Credit Shelter Trust, also known as a Bypass or A/B Trust is used to eliminate or reduce federal estate taxes and is typically used by a married couple whose estate exceeds the amount exempt from federal estate tax.  For example, in 2017, every individual is entitled to an estate tax exemption on the first $5,490,000 million of their assets.

Married couples can take advantage of the unlimited marital deduction. A married person can leave an unlimited amount of assets to his or her spouse, free of federal estate taxes.  Until the December 2010 extension and expansion of the estate tax, a couple with assets in excess of the federal estate tax exemption had to do some tax planning to avoid paying federal estate tax at the death of the second spouse.  This tax planning usually involved a credit shelter trust.  The December 2010 law added the concept of portability, which allows a married couple to take advantage of both spouse’s estate tax exemptions without tax planning.  The second spouse to die can now utilize what is known as the Deceased Spouse’s Unused Exclusion Amount, known as DSUEA.

However, there may be other reasons besides estate tax to utilize a credit shelter trust.  Providing for children in addition to the surviving spouse, taking care of a child with disabilities, and providing asset protection for children in the event of a lawsuit or divorce are all reasons to plan with a credit shelter trust.

What is an Irrevocable Life Insurance Trust?

There is a common misconception that life insurance proceeds are not subject to estate tax.  While the proceeds are received by your loved ones free of any income taxes, they are countable as part of your taxable estate and therefore your loved ones can lose over forty percent of its value to federal estate taxes.  An Irrevocable Life Insurance Trust keeps the death benefits of your life insurance policy outside your estate so that they are not subject to estate taxes.  There are many options available when setting up an ILIT.  For example, ILITs can be structured to provide income to a surviving spouse with the remainder going to your children from a previous marriage.  You can also provide for distribution of a limited amount of the insurance proceeds over a period of time to a financially irresponsible child.