Taxable Estate

The amount to which the rate of estate tax is applied in order to determine the amount of estate tax payable. For federal estate tax purposes, it is the decedent's gross estate, i.e., all property in which the decedent had an interest at the time of death as well as specified other property, I.R.C. §§2033 et seq., less the estate tax deductions, such as marital and charitable deductions, I.R.C. §§2051 et seq.


ESTATE TAX PLANNING

Despite the Economic Growth and Tax Relief Reconciliation Act of 2001, estate taxes could still have an impact on your estate and beneficiaries. Learn more about:

• Estate tax legislation (Is your estate at risk?)
• Your taxable estate
• Strategies to help reduce estate taxes
• How your Financial Advisor can help with your estate plan

ESTATE TAX LEGISLATION

Estate Tax Legislation: Is Your Estate at Risk?

The 2001 tax legislation has caused many people to disregard the threat of estate taxes. As it stands now, the applicable exclusion (the amount that's not subject to estate taxes) is scheduled for one additional increase before 2010, when the estate tax will be repealed for one year only. However, unless Congress takes action, even higher estate taxes will be back in 2011.

Maximum Estate Tax Rates & Exemption Amounts
(The Economic Growth & Tax Relief Reconciliation Act of 2001)

Year -- Exclusion Amount -- Tax Rate
2006 -- $2 million -- 46%
2007 -- $2 million -- 45%
2008 -- $2 million -- 45%
2009 -- $3.5 million -- 45%
2010 -- Not applicable -- Not applicable
2011 -- $1 million -- 55%

Even with the current tax law's increase in the applicable exclusion amount, you still need to determine whether you will have a taxable estate in the future. That's why you should regularly review your estate plan and make adjustments to reflect changes in the tax laws and shifts in your circumstances.


YOUR TAXABLE ESTATE

Generally, assets you own or control are part of your taxable estate. That includes:

• IRAs and retirement plans
• Life insurance
• Annuities
• Other assets that have a beneficiary designation (including transfer on death accounts)
• Assets held in a revocable trust
• Assets held as joint tenants with the right of survivorship

Be sure to include each of these when calculating your estate.


STRATEGIES TO HELP REDUCE ESTATE TAXES

If you're concerned about estate taxes, you can use a variety of strategies to help reduce your estate's tax bill, including:

• Credit shelter trust planning
• Annual gifting
• Life insurance
• Irrevocable life insurance trust

Credit shelter trust planning. A credit shelter trust enables married couples to use each spouse's applicable exclusion ($2 million in 2008) to protect $4 million from estate taxes.

When one spouse dies, a credit shelter trust can be created from his or her estate. The surviving spouse can then receive income from the trust and may have access to the principal.

When the surviving spouse dies, the assets in the credit shelter trust are distributed to heirs as directed in the trust document. Because the surviving spouse would have limited control over the distribution of the trust assets, those assets would not be considered part of his or her taxable estate.

Annual gifting. A simple way to reduce estate taxes is through annual gifting. By gifting up to the $12,000 annual exclusion amount to individuals, you can remove those assets from your taxable estate.

Life insurance. Even though life insurance proceeds are income-tax-free for your beneficiaries, if you own the policy, the death benefit will still be part of your taxable estate. However, if your children (or other beneficiaries) own the policy, the proceeds are free from federal estate and income taxes. That means if you make gifts to your children (or other beneficiaries) to acquire the insurance, the proceeds from the policy are not part of your taxable estate.

Irrevocable life insurance trust. Another way to make sure your life insurance proceeds are not part of your taxable estate is to establish an irrevocable trust to own the policy and make gifts to the trust to fund the policy.

When you die, the life insurance proceeds are paid into the trust and distributed according to your directions. Those proceeds are not included in your taxable estate and are available for distribution to your family or can be used to pay estate taxes. Learn more about using trusts as part of your
estate plan.


FAQ

What makes up my taxable estate?

Answer:

Your gross estate for federal estate tax purposes includes:

• All property that you own at death (e.g., real estate, investments, business interests, personal property, mortgages held by you)
• Property you have given away while retaining a lifetime interest in the income from the property, the use and enjoyment of the property, or the right to determine who ultimately receives the property
• Gifts that don't take effect until you die
• Property that you own jointly with another person except to the extent the other party contributed to the purchase price of the property
• Property over which you possess a general power to appoint the property to yourself or others
  Life insurance policies owned by you or in which you retained the right to change the beneficiary, cancel the policy, or make policy loans
• Your one-half interest in community property
• Annuities, pensions, and profit-sharing plans

From your total gross estate, your estate may take deductions for funeral expenses, administration expenses (e.g., executor's fees, court costs, attorney's fees, appraiser's fees), certain debts and income taxes, property left to your U.S. citizen spouse or to qualified charities.

The net amount may be subject to estate taxes, if estate taxes are imposed in the year in which you die. However, the amount of taxes payable on your taxable estate may be reduced by the applicable exclusion amount (formerly known as the unified credit), the allowable credit for state death taxes, and a credit for foreign death taxes.

Note: The credit for state death taxes will be replaced by a deduction effective in 2005.