The Federal Estate Tax
The Federal Gross Estate
Two of the primary goals of estate planning are to minimize the tax load and cut the administrative costs and red tape involved in probate.
Under current tax law, the Federal Estate Tax (FET) applies, to varying extents, to almost all types of property, whether contained in a trust, solely owned, jointly owned, or under many types of beneficiary designation. All of these types of property are lumped in what is called the Federal Gross Estate. Just about the only financial entity that is truly free from federal estate tax is the irrevocable life insurance trust (ILIT).1
The Federal Estate Tax Credit
However, all is not lost. The Federal government recognizes a social and fiscal advantage to keeping wealth in families across generations through inheritance; they therefore offer a "coupon" or credit on the (sole-owned) assets you leave your survivors. This credit is currently $2 million per person, so that only assets over $2 million are taxable under the FET. Therefore, if you and your spouse have structured your assets properly (so each of you owns less than $2 million), you can both avoid federal estate tax entirely. However, if your property is jointly held, whatever is in excess of the exemption will be taxable on the death of the second to die.
The Probatable Estate and Trusts
Probate is the process by which courts ascertain the validity of Wills and the authority of executors named in them to dispense the funds named therein. The probatable estate - the part of your estate that must be probated in court - includes only Sole Owned property. To avoid the delay and expense of probate, assets can be moved to trust vehicles such as Revocable Living Trusts or Charitable Trusts; to joint-owned property; or to beneficiary plans. These assets will pass in a predetermined way to survivors in the ways designated in the plan, outside the direct purview of the court, allowing a greater degree of control and specificity than can be obtained in Will-based plans.
State Inheritance Taxes
In addition to Federal taxes, State and Local governments may apply inheritance taxes which must be paid on a schedule. Often a credit is given for timely execution of these payments; in Pennsylvania, for example, the State Inheritance Tax is due after nine months; but if it is paid within 90 days, a 5% credit applies. Keeping your estate plan current helps to expedite these processes.