For the past decade, the estate tax exemption has been in a state of flux and the final chapter has not yet been written. In 2002 the exemption was $1,000,000, but it has progressively grown to the point that exemption was expended to $5,000,000 for years 2011 and 2012. Currently, it still continues to grow.
The estate tax exemption has been a political hot potato over the years. There was some serious talk of repealing the estate tax, but at this point it is alive and well. The recent history of the estate tax exemption follows:
2010 estate tax repealed for this year only
Based on these excluded amounts, less than one percent of Americans currently have an estate that is subject to estate tax. For those individuals, there are several tax planning techniques that should be considered:
AB or Bypass Revocable Trusts
Bypass trusts can increase, up to double, the amount of assets that can be passed free of estate taxation. In an AB Trust, a husband and wife’s assets are held in one revocable trust until the first spouse dies. Upon the death of the first spouse, the trustee creates two separate trusts shares: An A or Survivor’s Trust, and a B or Decedent’s Trust. Part of the couple’s assets go into the A Trust and the other part goes into the B Trust. Upon the death of the first spouse and the creation of the B Trust, the B Trust becomes irrevocable. The surviving spouse cannot change or disinherit beneficiaries or otherwise amend the B Trust. The advantage of the AB Trust is that the assets in the B Trust are still available to the surviving spouse during his or her life, but sheltered from estate taxation.
Gifting to family members, charities, or others is also a technique that some may wish to reduce estate taxation in large estates. Up to $14,000 per year per person can be gifted without gift or estate tax consequence. One drawback to a gifting program is that the recipient receives the same capital gains tax basis for the property as the donor of the gift. Inheritances after death, by way of contrast, receive a “step-up in basis” to fair market value as of the date of death.
Life Insurance Trusts
The general rule is that life insurance benefits are included in the gross estate for the purpose of calculating whether an estate is subject to estate tax. Through a life insurance trust, life insurance benefits may be excluded from the gross estate and, therefore, from taxation.