Monthly Archives: June 2014

Estate Tax

What Taxes Apply to My Assets When I Die?

Federal Estate Tax: The IRS imposes significant taxes on a descendant’s estate.  Property subject to federal estate tax (called the “gross taxable estate”), includes most or all of a decedent’s assets, including assets held in trust or otherwise avoiding probate.

Generation-Skipping Transfer (GST) Tax: gifts made to relatives more than one generation away (i.e. grandchildren, etc.) are subject to GST taxes.  GST taxes will only apply in the event that no federal estate tax applies.  In 2011, there is an exemption for the first $1.06 million.

 Missouri Estate Tax:  None

  How Are Estate Taxes Calculated?

Exemption #1: Unlimited Martial Deduction

All transfers between spouses are exempt from current taxation.  In other words, a decedent spouse can transfer an unlimited amount of assets to their surviving spouse, without incurring any tax liability.  These assets are of course subject to potential taxation when the surviving spouse dies, but no taxes are incurred at time of the death of the first spouse.

Exemption #2: Lifetime Unified Credit

Every individual is entitled to a lifetime tax credit against federal estate taxes.  The amount of this applicable credit varies depending on the year of death.  In 2010, there is an unlimited unified credit.  In other words, there are essentially no applicable federal estate taxes this year. For those lucky enough to live beyond 2010, the unified credit will be equal to $1 million.  It is important to note that the credit allowance will likely be changed by future laws.

Annual Gift Tax Exclusion: amounts not greater than $13,000 (for 2010) to a particular recipient, per year, are allowed to every individual without any tax consequences. Amounts greater than the annual gift tax exclusion reduce the lifetime unified credit by the excess gifted amount.

Exemption #3: Charitable Donations

All property bequeathed to qualifying charitable organizations is exempted from the gross taxable estate.

 

Amount of Taxable Estate

Tax Rate

Up to $1,000,000

Excluded by Unified Credit*

$1,000,000-1,250,000

41%

$1,250,000-1,500,000

43%

$1,500,000-2,000,000

45%

$2,000,000-2,500,000

49%

$2,500,000-3,000,000

55%

*this assumes (i) 2011 tax laws and (ii) no lifetime gifts exceeding the annual exclusion

Methods of Eliminating or Reducing Taxes

Marital Tax Credit Shelter Trust (“A-B Trust”)

Each spouse is entitled to the unified credit ($1 million in 2011) as an exemption from federal estate tax.  This excludes the applicable amount ($1 million in 2011) from taxation, regardless of the identity of the recipient of the gift.  All transfers between spouses are also exempt from federal estate taxation.  Accordingly, by utilizing both spouses’ unified tax credit, estate taxes can be eliminated or substantially reduced.

When the first spouse dies, an amount equal to the current unified credit exemption is transferred to an irrevocable trust (controlled by the living spouse and a co-trustee), the principal and interest of which are used for the health and maintenance of the living spouse for the remainder if their life.  The remaining assets of the estate are transferred directly to the living spouse.  When the “living” spouses dies, they can use their own unified credit to exempt another large portion of the estate ($1 million in 2011).  By utilizing this planning technique in 2011, a substantial estate could shelter an additional $1 million from taxation, resulting in an estate tax savings of nearly $500,000.

Charitable Gifts

Gifts made to the following types of organizations effectively reduce the value of the gross taxable estate:

-United States, any states or political subdivision

-an organization, fund, foundation or trust operated exclusively for religious, charitable, scientific, literary, or educational purposes

-fraternal society, order or association if gifts used for religious, charitable, scientific, literary or educational purposes

-posts or organizations of war veterans

Lifetime Gifts

Gifts during the lifetime of the donor can be effectively used to reduce the size of the taxable estate and thus reduce estate tax liability.  Each year, a donor can give a gift to any particular recipient in an amount equal to or less than the annual gift tax exclusion amount ($13,000 in 2010—and practically speaking, $26,000 for married couples), without incurring any adverse tax consequences.  The gift reduces the amount of the taxable estate.  It should be noted that this amount can be given to an unlimited amount of individuals each year. Gifts in excess of the annual gift tax exclusion require a “gift tax return” and effectively reduce the lifetime unified credit discussed above.

For larger estates, giving gifts that exceed the annual exclusion and the lifetime unified credit may have beneficial tax consequences. Due to the manner in which lifetime taxes are calculated and the manner in which estate taxes are calculated, taxes may substantially reduced on the same gift, if given during the donor’s lifetime as opposed to at their death.  Furthermore, the value of the gift (for gift and estate tax purposes) is calculated at  the time of transfer, so property that will increase in value my may most wisely be transferred sooner rather than later.

Irrevocable Life Insurance Trusts

A trust established for life insurance purposes can remove life insurance proceeds from the taxable estate.  The trust must be irrevocable and is created to serve as the owner and beneficiary of the life insurance policy.  While there are a substantial limitations on flexibility, this planning technique can eliminate the eventual proceeds from federal estate taxation.

Note on Revocable Living Trusts

While the benefits of a revocable living trust are many, the existence or funding of a revocable trust alone does not accomplish any tax reduction.  However, the A-B marital deduction trust (discussed above) can be readily incorporated into a plan involving a revocable living trust.

Zoning Districts

Overview:  Any purchaser understands that their valuation of the property is largely dependent on their ability to use the property as intended.  When the future use of the property is identical to the prior use, there is often little reason for concern.  However, when the use is going to be changed in any degree, a diligent purchaser must be satisfied that their intended use is permitted by local zoning ordinances.   Buyer will want to be assured the opportunity to obtain any required approvals and permits from the local governing body before they will close on the deal.  It should be noted that even where use is unchanged, a purchaser should obtain a zoning letter from the local planning commission assuring them that the use is indeed permitted.

Suggested language (Buyer):   When the future use of the property will require any type of local government approval (such as a special use permit, lot consolidation, lot split or variance) Buyer should include a relevant contingency in the purchase agreement.  An example of such language might read as follows:

“Purchaser’s obligations under this Agreement are contingent upon its securing the required permits, lot changes, zoning changes and any and all other land use approvals (the “Approvals”) necessary to use and operate the Property according to its intended plans as a _______.  Purchaser shall have a reasonable amount of time to obtain the Approvals from the appropriate entities, which shall be no less than ___ days from the execution of this Agreement.  In the event Purchaser fails to obtain the Approvals, Purchaser may provide notice to Seller within this ___day period and terminate this Agreement.”

 Suggested Language (Seller):  If Buyer demands that a zoning and land use contingency be included in the purchase agreement, Seller must be careful to specify the desired change / approval and require buyer to take diligent and timely effort to pursue these approvals.  Suggested language could read as follows:

“Purchaser’s obligations under this Agreement are contingent upon its securing the following approvals from __________: __________  (the “Approvals”) with respect to the Property.  Purchaser shall have ___days from the execution of this Agreement to obtain the Approvals from the appropriate entities.  Purchaser shall exert due diligence to obtain the Approvals and in the event that Purchaser does not provide notice to Seller of its election to exercise its rights pursuant to this paragraph within ___ days from the executon of this Agreement, this contingency shall be deemded waived by