Bush Tax Cuts Still Up in the Air

The tax cuts enacted in 2001 and 2003, more commonly known as the Bush tax cuts, are set to expire on December 31, 2010 if Congress does not change the current law. If and when these tax cuts expire, the estate tax exemption equivalent shall be reduced to $1 million. What this means is that the government will tax the amount of your net worth that exceeds $1 million at a top rate of 50%-60% (i.e., graduated rates up to 55% plus a possible 5% surcharge). For instance, if your estate is worth $2 million when you die, $1 million will pass tax free, and $435,000 out of the remaining $1 million will go to the IRS. What makes up your estate? Essentially, anything you own minus your debt counts towards the value of your estate. Even a life insurance policy is considered an asset of your estate if you have any incidents of ownership over the policy (i.e., the ability to change the beneficiaries). To illustrate, assume you have a house worth $500,000, a $1.5 million life insurance policy, and no other assets when you die. The IRS would take $435,000!

However, there are some very effective ways to get around these high taxes, especially for married couples. A husband and a wife can set up what is known as a QTIP / Bypass Trust. This type of trust allows a married couple to double the amount of money they can pass to their heirs tax-free by fully utilizing each spouse's exemption amount. For illustration purposes, let us assume we have a married couple who has an estate worth $2 million, and that the husband dies first. When the husband dies, $1 million is placed into a bypass trust. The other $1 million can pass tax-free to the wife (either outright or in trust) because of the unlimited marital deduction. The wife can gain access to the bypass trust during her lifetime, but the money in the bypass trust will not be considered part of the wife's estate when she dies. Thus, if her trust (or outright gift) has a value of $1 million when she dies, the couple has successfully passed $2 million to their heirs without the government getting one dime. If you have any questions or would like to discuss this type of trust in greater detail, please contact the Law Office of Conrad Willkomm, P.A. Take advantage of our free consultation!

Law Office of Conrad Willkomm, P.A.
3201 Tamiami Trail North, Second Floor
Naples, FL 34103
Tel: (239) 262-5303
Fax: (239) 262-6030