Frequently Asked Questions on Estate and Gift Tax Laws

• Will my estate have to pay taxes after I die?

• What are the rates for federal estate taxes?

• Are there ways to avoid federal estate taxes?

• Can't I just give all my property away before I die and avoid estate taxes?

• Do some states impose estate taxes?

• Can I avoid paying state estate or inheritance taxes?

Will my estate have to pay taxes after I die?

It depends. The federal government imposes estate tax at your death only if your property is worth more than a certain amount, which depends on the year of death. But all property left to a spouse is exempt from the tax, as long as the spouse is a U.S. citizen. Estate tax is also not assessed on any property you leave to a tax-exempt charity.

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What are the rates for federal estate taxes?

Federal estate tax rates are steep, starting at 39%. The highest marginal rate, for the largest estates, is 48%. The maximum rate is scheduled to decline gradually to 45% in 2009. There will be no estate tax in 2010, if the current tax law is not amended.  However, the estate tax will return in 2011 with an exemption of only $1 million. 

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Are there ways to avoid federal estate taxes?

Yes, although there are fewer ways than many people think, or hope, there are. Here are some of the most popular:

• Tax-free gifts. You can give up to $11,000 per calendar year per recipient without paying gift tax. You can also pay someone's tuition or medical bills, or give to a charity, without paying gift tax on the amount. This reduces the size of your estate and the eventual estate tax bill.
• An AB trust, where spouses leave their property in trust for their children, but give the surviving spouse the right to use it for life. This keeps the second spouse's taxable estate half the size it would be if the property were left entirely to the surviving spouse. See Tax-Saving AB Trusts for more on this type of trust.
• A "QTIP" trust, which enables couples to postpone estate taxes until the second spouse dies.
• Charitable trusts, which involve making a sizable gift to a tax-exempt charity.
• Life insurance trusts, which let you take the value of life insurance proceeds out of your estate.
• Estate Freeze.  Allows to freeze value of estate through sophisticated planning.
• Qualified Personal Residence Trust.  A popular technique for removing the family home and/or vacation home from your estate.

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Can't I just give all my property away before I die and avoid estate taxes?

No. The government long anticipated this one. If you give away more than $11,000 per year to any one person or non charitable institution, you are assessed federal "gift tax," which applies at the same rate as the estate tax.

Making gifts of $11,000 or less, however, can yield substantial estate tax savings if you keep at it for several years. Some other kinds of gifts are exempt from the gift/estate tax as well. You can give an unlimited amount of property to your spouse, unless your spouse is not a U.S. citizen, in which case you can give away up to $114,000 per year free of gift tax. Any property given to a tax-exempt charity avoids federal gift taxes. However, an exception to the $11,000 gift rule applies to indirect gifts for medical bills or tuition (i.e., money spent directly for someone's medical bills or school tuition is exempt as well).

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Do some states impose estate taxes?

Yes. Even if your estate isn't big enough to owe federal estate tax, the state may still take a bite.  New Jersey has both an estate tax and inheritance tax.

Estate tax. Until recently, most states didn't impose their own estate tax; instead, they took a share of the federal estate tax paid by large estates. (This is called a "pick-up" or "sop" tax.).   But the federal legislation that started the phase-out of the federal estate tax also cut the share of estate tax that states get to keep. To get back some of what they're losing, some states are collecting tax from estates that aren't big enough to owe any federal tax. So far, almost half the states have changed their laws so they can keep collecting estate tax.

For example, in New Jersey, Rhode Island, and Wisconsin, estates worth more than $675,000  are likely to owe state estate tax. Property left to a surviving spouse, however, is exempt from state estate tax, just as it is exempt from federal estate tax.

Inheritance tax. Some states impose a separate tax on a deceased person's property, called an inheritance tax. The tax rate depends on who inherits the property; usually, spouses and other close relatives pay nothing or a low rate.  New Jersey has both an estate and inheritance tax.  Transfers of assets under a New Jersey decedent's will  to a significant other who is not a spouse or a domestic partner will be subject to a minimum tax of 15% on very dollar of assets transferred.

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Can I avoid paying state estate or inheritance taxes?

We have significant planning strategies to minimize or eliminate state inheritance taxes.  Please contact us for a free initial consultation so that we can discuss the issue further.

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