By the Estate Planning Attorneys at Garg & Associates, PC, serving The Woodlands, Spring, Houston, Conroe, Humble, Kingwood, Tomball, Cypress, Huntsville, Westchase, Southwest, Sugar Land, West Oaks, Alief, Memorial, River Oaks, Stafford, Katy, and Missouri City.

ESTATE TAX

The federal estate tax, sometimes also known as “the death tax,” is a progressive tax imposed on a decedent’s gross estate when such estate exceeds an applicable threshold.  It is a “wealth transfer tax,” meaning it is imposed at the point that wealth is transferred from a decedent to beneficiaries. The tax will apply regardless of whether the deceased individual left a Will at his or her death, or whether his or her estate will pass via the default intestacy laws.

Although the estate tax is determined based on the value of property transferred, it is not considered a property tax. Instead, it is deemed to be an excise or privilege tax, since the taxable event is the transfer of property; it is not a tax on the property itself. Another way of viewing the tax is that it is a tax on the privilege of transferring property to the beneficiaries under your Will or to your legal heirs at your death.

The federal law currently in effect with respect to the estate tax is The Economic Growth and Tax Relief Reconciliation Act of 2001 (called “EGTRRA”). It was signed by President Bush on June 7, 2001, and provides for a gradual increase in the amount of the estate tax exemption between the years 2001 and 2009. In 2002, the estate tax exclusion (meaning the amount that can be transferred free of estate tax) was $1 million, with the highest tax rate set at 50%. In 2003, the exclusion amount remained at $1 million, with the highest rate falling to 49%. In 2004 and 2005, the exclusion amount jumped to $1.5 million, with the highest estate tax rate set at 48% and 47% respectively. In the years 2006-2008, there is a $2 million exclusion amount, with the highest rates dipping from 46% in 2006 to 45% in ‘07 and ‘08.  In 2009, our exemption amount is scheduled to increase to $3.5 million, with the highest rate remaining at 45%. The interesting aspect of this law is that in 2010, we are scheduled for a disappearance of the estate tax altogether—only to have it reappear again in 2011 with the exclusion amount dropping back down to $1 million. It is this one-year abolishment of the tax in 2010 that has many in the estate planning community highly expecting a revised tax law in this arena within the next year.

As mentioned, the tax is imposed based on the size of a decedent’s “taxable estate,” so it is important for tax-planning purposes to recognize which of your assets will be included in your “gross estate.” Some such property seems obvious, such as your home, bank accounts and investments; but the inclusion of certain other assets may be counterintuitive—such as the possible inclusion of life insurance, retirement accounts, certain partnership earnings, powers of appointment, annuities, and so on. Understanding how your “gross estate” is calculated is a vital component of tax planning, since it directly bears on the advisability of which assets should be “removed” from your gross estate or otherwise handled through lifetime or testamentary tax-planning vehicles.

There are various methods for reducing your taxable estate—and therefore reducing your estate tax bill—such as the use of certain types of trusts, marital deduction planning, charitable deduction planning, and lifetime gift planning. It is important to remember that the federal tax laws fluctuate, and your Wills and Trusts should therefore be reviewed on a regular basis to ensure they consider each Congressional change. To secure your family’s financial security and gain personal peace of mind, we urge you to explore your estate tax exposure and the possible planning mechanisms available to you with the experienced Estate Planning attorneys at Garg & Associates.

Call Garg and Associates today at 281-362-2865 or complete our Contact Form and let us assist you with your wills and trusts.