Estate Planning Education Courses

ESTATE TAXES

INCOME TAX FOR A LIVING TRUST

There is no Income Tax on a living trust. If the trust is completed with the husband and wife setting up a trust, the social security number of the husband is used and all the income is reported on the husband's 1040 tax form. When the husband dies, the trust will then use Social Security of the wife. The living and revocable trust does not pay an income tax.

The basic planning strategies in a living trust, joint living trust, or Will prepared for married persons are (1) to fully preserve the estate tax exemption amount available to both spouses, and (2) to avoid the estate tax on the death of the first spouse to die by fully utilizing the unlimited estate tax marital deduction.

With estate taxes, you are subject to two taxing systems: one is the federal government; the other is the tax system of the state in which you live. The federal tax is called an estate tax and the state tax is called an inheritance tax. Let's look at each of these tax systems.

FEDERAL ESTATE TAXES

If you think income taxes are high, then you haven't seen what estate taxes can do to your wealth. Some of the highest taxes in the land are those that the federal government imposes on wealth you pass on to your loved ones when you die.

The Estate Tax Exemption chart below is from the Tax Relief Reconciliation Act of 2001. This is a quote from the CCH Tax Briefing Report, "some in Congress have claimed to have repealed the estate tax. More precisely, however, the new law repeals the estate tax (aka, the death tax) for one year–2010". This law allows the old law to come back in the year 2011 with the exemption amount of $1,000,000 with a tax rate of 55%.

ESTATE TAX EXEMPTION

Year	Top Estate Tax Rate	Exemption Amount
2002	50%	$1,000,000
2003	49%	$1,000,000
2004	48%	$1,500,000
2005	47%	$1,500,000
2006	46%	$2,000,000
2007	45%	$2,000,000
2008	45%	$2,000,000
2009	45%	$3,500,000
2010	Repealed	N/A
2011	55%	$1,000,000

Fortunately, the federal government provides us with a few tax breaks. The first one is called the Unlimited Marital Deduction, which simply means that there's no estate tax due on assets which one spouse leaves to another, no matter how much wealth might change hands,

The first catch is that if you don't use your unified tax credit exemption, you lose it. So you must save the exemption for each person and a couple can exempt up to three million dollars in the year 2005. One big mistake couples make is to pass to the surviving spouse all of the deceased partner's estate. This in turn actually throws away one exemption.

The second catch is that it is much easier than you might think to reach the unified tax exemption. The federal government includes in your estate assets the face value of any life insurance policies you might own, your retirement plans, your home, your investment portfolio, your artwork and collectibles, etc. That's why proper estate planning is so essential to ensure that you protect as much of your wealth as possible from unnecessary estate taxes.

STATE INHERITANCE TAXES

In addition to federal estate taxes, your wealth could also be exposed to state inheritance taxes. The state tax comes in two varieties: one is the inheritance tax, and the other is referred to as the pickup tax.

Inheritance taxes are just what the name suggests: a tax applied to the inheritance you leave to your beneficiaries.

In Texas, the inheritance tax is called a "death tax." If you owe a federal tax, the death tax will be credited against your federal estate tax. That is why it is called a sponge tax: we "sponge off' the federal estate tax. Texas is a great place to die.