Changing the Definition of “Wealthy”

The New Wealthy

Historically, most people have not had to consider the problem of owing Federal estate taxes at their death. With little or no estate planning, most property you own at death is subject to this tax, and will likely include things such as your home, retirement accounts, life insurance policies, investments, and many others. As the law stands right now, however, the group of people subject to the Federal estate tax will dramatically increase in 2011.

In 2009, the Federal exemption amount was $3.5 million, meaning that each estate was not taxed on the first $3.5 million, so long as proper steps were taken to utilize this tax break. In 2010, the Federal estate tax has been repealed, so there will be no Federal estate tax due on the estates of individuals who die this year. In 2011, the Federal exemption amount will be drastically cut to $1 million. With a 2011 Federal estate tax rate of 55% on the value of the estate over $1 million, this is a real problem for those who are going to be subject to this tax.

Among the estate planning industry, there is speculation about whether Congress will actually allow the 2011 estate tax law, as it stands right now, to become effective. The bottom line is that nobody knows what is going to happen, so financial advisors, insurance agents, estate planning attorneys and tax advisors must all work together with clients to devise an estate plan in the light as it currently stands.

A small reprieve in the tax law is that property passed to a surviving spouse is not taxed because of the marital deduction. This means, if you leave everything to your spouse, your estate will not owe estate tax. In essence, the IRS gives you this break and will wait to tax the property at your spouse’s death. Most individuals do not realize though, when they pass everything to their surviving spouse at death, they waste the exemption amount available to them in the year of their death.

There are several basic steps you can take to reduce estate tax liability and to ensure your estate is administered by your wishes. Here are a few fairly simple estate planning steps that you can discuss with your attorney and financial or tax advisor to determine if they are right for you:

Basic Estate Planning Documents

Everyone should see an attorney to have a will drafted. This document is the single most important estate planning document as it lets you dispose of your property in the way you best see fit. It also allows you to name a guardian for minor children, appoint an executor to handle the administration of your estate, and create trusts to hold and distribute your property based on the terms you create while living. It is important to keep this document updated as your wishes may change due to events that occur during your lifetime (i.e., divorce). If you do not have a valid will at your death, the State of North Carolina will determine how your property is distributed using the laws of intestate succession.

It is also advised that you have a durable power of attorney, healthcare power of attorney, and living will drafted to ensure your wishes are met in the event you are unable to make decisions for yourself. Please talk with your attorney to learn more about these documents.

Estate Tax Planning

There are several trust accounts that you can employ to greatly reduce your estate tax liability. The most commonly used strategy is a dual-trust system that would, at your death, spilt your estate into a Family Trust and a Marital Deduction Trust.

The Family Trust would be funded with the maximum amount you can pass estate tax free in the year of your death. This trust would serve three main purposes: save estate taxes, provide income for the surviving spouse’s lifetime, and benefit your children after the surviving spouse’s death.

The Marital Deduction Trust would be funded with the remainder of your estate assets. This trust would be for the benefit of the surviving spouse, meaning he or she would be able to access as much of the funds in the trust as needed during his or her lifetime. Your surviving spouse would have the power to appoint the remaining property in this trust to anyone at his or her death. Note: To take advantage of this two-trust strategy, you will need to split ownership of your assets so that each spouse will have enough individually to fund the Family Trust.


The IRS allows each individual to gift an amount annually without being subject to Federal gift tax. For 2010, this amount is $13,000. Projecting with the 2010 exclusion amount, a couple could gift $26,000 to an unlimited number of people every year until death. For wealthy people, gifting the annual exclusion amount to family and friends each year can be a great wealth transfer strategy. This gift can be in the form of cash, stock, or many other forms. Note, however, that the gift must be a present interest.

As with all financial and tax matters, there are endless estate planning options that can be tailored to your specific situation and implemented to help your estate avoid tax liability. If you think you have a potential estate tax issue, seeking the advice of an attorney and tax advisor could literally save you hundreds of thousands of dollars. Employing an estate plan is no longer something just the CEOs of fortune 500 companies need to consider. Be sure to address these issues early because when the time comes to implement your plan, it’ll be too late!

This is a guest post from Attorney Zeke Bridges and Law Clerk Erin Hurd, both of Western Wake Law Group in Cary, North Carlina.  Zeke practices in the area of Estate Planning Law.

Photo Credit: dblstripe

More Like This

Download our 5 Questions to Ask Your Financial Advisor eBook

We break down some of the most important questions we are asked on a regular basis.

  • Hidden
  • This field is for validation purposes and should be left unchanged.

Blog Categories