Tax Planning for Estate Tax due upon Death

Whether there will be any tax to pay upon your death depends on the size of your estate and how your estate plan works.  Please note that for estate tax calculation your estate includes all of the assets held in your sole name, your interest in any joint assets, your retirement accounts (pensions are excluded), life insurance, assets titled into your Revocable Trust, any life estate you have, and certain assets for which you have a power of appointment.

Tax Rates:

There has been a lot of discussion over the years on Capitol Hill about changing the federal estate tax.  Subject to possible changes in the future, the current federal estate tax for U.S. citizens and long-term U.S. residents is the following:

  • In 2009, there was no estate tax if the net total of your assets was below a $3.5 million threshold.  A maximum tax rate of 45% could apply to assets transferred above this threshold.
  • In 2010, the estate tax was repealed for one year, but replaced by the elimination of “stepped-up” meaning that capital gain tax is paid upon the sale of estate assets.
  • In 2011 and 2012, the threshold is $5 million with a maximum tax rate of 35%.
  • In 2013 the threshold will be reduced to $1 million and the maximum tax rate will be 55% with a 5% surtax on certain transfers over $10 million.

Basic Tax Planning Technique:

One of the techniques to reduce estate taxes is for a couple to use both exemptions.  Upon the first death, a trust called “family trust” or “credit shelter trust” is funded with the amount of assets that can pass free of tax using the exemption, then the rest is bequeathed to the surviving spouse either outright or into a marital trust.  The surviving spouse has access to the family trust and is often its trustee.  

For instance, John and Mary have $3 million in assets, each owning half.  Upon the death of John, his estate is estimated at $1.5 million.  By using the family trust funding with approximately $1 million and bequeathing the rest, $500,000 to Mary, there will be no tax due.   

Upon the death of Mary, her estate is estimated at $2 million, composed of her own $1.5 million and her deceased husband’s bequest of $500,000.  Her estate will benefit from an exemption of $1 million and will pay estate tax on the other $1 million at a maximum tax rate of 55%. 

We have now a “Portability Exclusion Amount between Spouses.” The unused applicable exclusion from the death of a spouse who dies after December 31, 2010 and before December 31, 2012, is generally available to the surviving spouse as an addition to the $5 million exemption. An election must be made on a timely tax return of the predeceased spouse even if a return would not be required otherwise. This election is irrevocable.

Charitable Tax Planning Technique:

Charitable bequeaths are free of tax.  Certain charitable bequests provide income or trust balance to family members.  Because a portion of the bequest is given to a charity, this drastically reduces the amount of the estate tax.

For further information on estate tax planning techniques, please call Miorini Law, PLLC at (703) 448-6121 or email to