Ask the Probate Judge—Estate Taxes and Trusts
Rudd, appeared June 5, 2003, Albuquerque Journal, Business Outlook
Reprinted with permission
Editor's note: This column may not be quoted or reproduced in whole or part without express written permission of the author.
Q: I'm widowed. My friends tell me that a revocable living trust will keep my estate from paying estate taxes. Are they right?
No! An individual with a revocable living trust can avoid probate but generally not estate tax liability. To avoid a court probate proceeding with a revocable living trust, you must do two things: create the trust by signing it before a notary public, and transfer all of your assets into the name of the trustee of the trust. Only assets that are properly transferred pass automatically upon your death to the beneficiaries named in the trust.
Regarding estate taxes, estates worth more than $1,000,000 at death are subject to federal and state estate tax. This $1,000,000 figure is in effect for 2002 and 2003.
To decide whether an estate owes federal estate taxes, first determine the value of the decedent's gross estate, i.e., the value of ALL assets, no matter how titled. This includes the value of houses, life insurance, bank and stock accounts, savings bonds, IRAs, jewelry and other personal effects, and other assets. These assets are usually valued at their fair market value at the date of death. An IRS Form 706, estate tax return, must be filed if your gross estate exceeds $1,000,000, even if no tax is ultimately due.
Once the amount of the gross estate is calculated, the personal representative or trustee deducts final medical bills, funeral expenses, administration costs, gifts to charity, and attorney's fees to calculate the net taxable estate. Estate tax is due when the net taxable estate exceeds $1,000,000.
A revocable living trust does not reduce the estate tax obligations of single individuals. But for spouses whose assets exceed $1,000,000, use of an A-B trust, either in a revocable living trust or a testamentary trust within a will, can reduce estate tax obligations. Unfortunately, A-B trusts only help married people who create them while both are living.
In 2003 single people can avoid estate taxes by:
having an estate valued at $1,000,000 or less;
donating certain amounts to qualified charities, since charitable gifts are not subject to federal estate tax; or,
making gifts during their lifetime to keep the value of the estate under $1,000,000.
You can currently gift up to $11,000 per person per year with no tax consequences if you wish to reduce the size of your estate. If you gift more than $11,000 to an individual in one year, you must file an IRS Form 709, the federal gift tax return.
The good news for those who hope to avoid estate tax liability is that, under current federal estate tax laws, the $1,000,000 estate tax exemption increases to $1,500,000 in 2004 and tops out at $3,500,000 in 2009. The U.S. Congress could decide to change these figures again before 2009.
© 2003, Merri Rudd & Albuquerque Journal, All Rights Reserved