ESTATES AND TRUSTS: Taxes
Managing and Minimizing Taxation
Two forms of taxation impact estate planning: income tax, which we all pay annually, and transfer taxes that are due upon certain wealth transfers. Knowledgeable legal counsel in planning one's estate can help minimize the impact of these taxes on the legacies you leave.
What are the income taxes on estates and trusts?
Income taxes continue to accrue for estates and trusts at tax brackets that are similar to, and sometimes higher than, the decedent's individual income tax brackets. With the complexities created by the popularity of income tax deferred accounts, such as Individual Retirement Accounts ("IRAs"), 401(k)s and other qualified plans, income tax planning has become a mandatory component of estate planning and we bring all our experience to bear on creating timely and appropriate tax management strategies for our clients.
However, estate planning is not the only area where our clients benefit from our counsel and income tax analysis. Virtually every financial transaction has a tax component that should be considered from the perspective of one's estate and legacy: stock and bond transactions, executive compensation issues, alternative investment comparisons, and business investments.
We have seen that the strategic management of income tax planning considerations is maximized with consistent attention and counsel. Usually, transactions must be structured correctly before they are finalized in order to ensure proper tax treatment when they are later reported. Waiting until year-end to analyze the income tax implications of a transaction can be costly.
What about tax return preparation?
Each type of tax requires the filing of a tax return. As a result, the more complex that a person's asset structure is, the more complex her tax reporting will need to be. And, each type of tax return has the potential of affecting the others. When tax reporting is done correctly, it has the potential of preserving significant savings for persons of moderate to high net worth.
What are transfer taxes?
There are currently five types of federal and state transfer taxes that apply to wills and trusts in Illinois. Our attorneys are also familiar with similar provisions, which apply in other states.
- Federal Estate Tax: at the present time, tax is assessed on the value of a decedent's estate at 35%
- Federal Gift Tax: assessed on transfers made during the transferor's lifetime, also at 35%
- Federal Generation Skipping Tax: assessed on some gifts and transfers to individuals who are two or more generations from the transferor
- Illinois Estate Tax: assesses an additional percentage of the estate's value; at this time, between 6.4% and 16%
- Illinois Generation Skipping Tax: as above, assessed in addition to the federal generation skipping tax
Further consideration must be given to the fact that federal transfer tax laws are in flux. Our current tax law was enacted on December 16, 2010 for the years 2011 and 2012. If no permanent change is made to these laws before the end of 2012, the rates will revert to those in effect in 2000. This will re-impose an Applicable Exclusion Amount of $1 million and increase the estate tax from 35% to 55%.
Our attorneys will work with you to understand and minimize these tax considerations in making a comprehensive estate plan that is aligned with your wishes and goals.
We put our experience at your disposal.
To learn more about transfer taxes, click here.
Federal Gift Tax
Federal Gift Tax is assessed against asset transfers made during the taxpayer's lifetime. The other four transfer taxes apply to asset transfers made upon death ("post mortem"), regardless of whether those transfers are made by will, trust or contract. Examples of post mortem contract transfers include joint tenancy, tenancy by the entirety, beneficiary designations, pay on death accounts, and the like.
Transfer taxes are determined with reference to the value of the asset transferred and are uniformly assessed against asset transfers with only a few exceptions. For estate planning purposes, the principal exceptions to the application of transfer taxes are the "Annual Exclusion" for federal gift taxes and the "Applicable Exclusion Amount" for both the federal gift tax and post mortem transfer.
- The "Annual Exclusion" for Federal Gift Tax is tied to inflation. For the year 2011, the Annual Exclusion amount is $13,000. This means that in the year 2011, a taxpayer can give up to $13,000 to each of an unlimited number of individuals without incurring any gift tax.
- The "Applicable Exclusion Amount" is the amount of exemption allowable to each individual from both gift tax and estate tax. Gifts made during a benefactor's lifetime will reduce the amount available for transfers upon death. This means that if a person makes a gift or gifts in excess of the Annual Exclusion of $1 million during their lifetime, there will only be $4 million available to shelter estate tax transfers at the benefactor's death. In Illinois at the present time, the Applicable Exclusion is $2 million, meaning that while an Illinois resident may not have a federal estate tax due upon death, a state estate tax may be payable.
It is important to remember that calculation of the evaluation of an estate includes Life Insurance and other assets that you might not ordinarily think of as part of your estate. It is also important to remember that in making this calculation, the assets owned by a married couple are often considered together upon the passing of the survivor.
Our estate planning attorneys are knowledgeable about the variety of trusts, wills and other methods that help reduce or eliminate the potentially devastating effects of transfer taxes. The more expertise your attorney has in this field, the greater the chances will be that your family members will pay as little tax as possible during one of the most difficult times in their lives—the passing of a loved one.
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