ESTATE TAXES

OVERVIEW
Dead people don't protest taxes. Not surprisingly, the government has discovered that the easiest people to tax are those who have already been buried.  The principal 'death' tax is levied by the federal government. It is known as the Federal Estate Tax, and it is based on the value of the assets in your estate at the time of death. It is a progressive tax; the more you own, the greater the rate of tax. The tax applies at rates beginning at thirty-seven percent and goes all the way to fifty-five percent. As with the federal income tax, there are numerous exemptions and deductions that may apply. These are changing year by year. Texas also has a death tax, but it is far less onerous and generally results in no additional taxes.  With potential tax rates of 55%, it is vital that you structure your affairs so that your estate is eligible for every exemption, credit, and deduction that is available to it. The attorneys at Hargrove & Rea, P.C. can accomplish this for you.

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WHAT ASSETS ARE INCLUDED IN MY ESTATE FOR FEDERAL ESTATE TAX PURPOSES?
Generally, your estate will consist of all property that you owned at your time of death or that will be passing as a result of your death.

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ARE ASSETS HELD IN TRUST SUBJECT TO THE FEDERAL ESTATE TAX?
Generally, for purposes of the federal estate tax, assets held in a revocable trust are treated no differently than if you owned them out-right. While trusts do play an important role in estate planning and protecting your assets from creditors, please understand that merely placing your assets in a trust will have little if any effect on the amount of taxes your estate will owe.

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IS JOINTLY OWNED PROPERTY SUBJECT TO THE FEDERAL ESTATE TAX?
The IRS presumes that if there are joint owners of property, all of its value should be subject to tax at the death of the first joint owner. Fortunately if it can be shown that the surviving joint owner contributed to the value of the joint asset, the amount of such contribution will not be taxed. In addition, regardless of the amount of the contribution, only half of the value of assets jointly owned by a married person may be subject to tax.

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IS LIFE INSURANCE SUBJECT TO THE FEDERAL ESTATE TAX?
Yes. This fact is perhaps them most overlooked by individuals unfamiliar with estate planning. Although life insurance proceeds are not subject to income taxes, they are included in the gross estate for death tax purposes if either the proceeds were payable to the deceased person's estate or the deceased person had what is referred to as "incidents of ownership" in the policy. This means that if the deceased, during his or her lifetime, paid the premiums on the policy or kept the right to change beneficiaries, the value of the policy at death will be included in the taxable estate.

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IS THERE AN ESTATE TAX ON PROPERTY PASSING TO A SPOUSE?
The federal estate tax provides an unlimited marital deduction which means that any amount of assets passing at death to a surviving spouse will go untaxed at that time. However, this deduction is available ONLY if the spouse is a citizen of the United States.

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WHAT AMOUNT OF PROPERTY IS EXEMPT FROM ESTATE TAXES?
The amount changes every year. Currently, in 2003, the exemption stands at $1,000,000. Does this mean that only 'millionaires' need be concerned about estate taxes? Absolutely not. As mentioned above, many families of 'average' wealth are shocked to discover that they too will owe taxes due to the value of their life insurance policies; as morbid as it may seem, in many cases, we are worth far more dead than alive.

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If you would like more detailed information on the federal estate tax, please contact the firm. That attorneys at Hargrove & Rea, P.C. will be happy to answer any questions you may have.