Estate Taxes

Will my estate be subject to death taxes?

What is my taxable estate?

What is the unlimited marital deduction?

What is a Credit Shelter or A/B Trust and how does it work?

What is a Qualified Personal Residence Trust (QPRT) and how does it work?

What is an Irrevocable Life Insurance Trust and how does it work?

What is a Family Limited Partnership and how does it work?

Q: Will my estate be subject to death taxes?


An estate tax is dependent on the overall value of a person’s total assets and not based upon who will inherit the estate. A “death tax” refers to those taxes that are collected upon a person’s death. There are two types of death taxes that you should become informed about. The first is a federal estate tax. Federal estate tax is a percentage that is derived from your net estate. After certain deductions have been made, what results is essentially your net taxable estate. Typically, these deductions are made to fund funeral and burial costs. At this present time, estates with assets of $5,000,000 or above are taxed, but this is expected to change in 2013. If Congress takes no action, the exemption may be reduced at that time.

Despite the fact that you may not be affected by federal estate tax, there is a possibility that you may be subject to state estate and inheritance taxes. Currently, only seven states collect a state inheritance tax, which varies greatly from an estate tax since it is assessed against whom receives the assets and not the overall value of the property.  Because the value of assets may change at any given moment and over time, it is important that you review your estate plan with an experienced estate planning attorney on a regular basis.

Back to the top.

Q: What is my taxable estate?


Your home, business interests, accounts, and life insurance policies all make up your taxable estate. However, this is true once all liabilities and deductions have taken place. Your taxable estate includes the share of any jointly-owned property or accounts, qualified retirement accounts, life insurance proceeds and property held in a trust. In order to determine how much security you have assured for your family, you may calculate the income from each asset after determining your taxable estate. This should be done in the event of death, retirement, and disability. Prior to distribution to beneficiaries can take place, taxes imposed on the estate will be paid out of the estate itself.

Back to the top.

Q: What is the unlimited marital deduction?


During life or death,  all U.S. citizens can take an Unlimited Marital Deduction for property without imposed federal gift or estate taxes so long as the property is transferred to a spouse who is also a citizen of the U.S. This deduction allows married couples to delay estate tax payments upon the death of the first spouse because all assets that amount over the applicable exclusion will be included in the survivor’s taxable estate.  It is imperative to remember that the Unlimited Marital Deduction is only applicable to citizens of the United States.

Back to the top.

Q: What is a Credit Shelter or A/B Trust and how does it work?


The Credit Shelter Trust is perhaps the best-known estate tax reducer. This trust, also known as Bypass or A/B Trust, is intended to allow married couples to take advantage of the lifetime exemption for estate taxes, while also minimizing federal taxes on their combined  estates. A benefit of this trust is the allowance of a one-time exemption from a death tax or gift tax. In addition to, a married person may possibly eliminate estate taxes by leaving the entire estate to their surviving spouse.

Although there are no limits to the amount of tax-free assets that a married person may leave a surviving spouse, there is an exception. Those persons who possess substantial assets, are only allowed to delay estate taxes, as opposed to completely eliminating them. When the entire estate is left to the surviving spouse, the amount for the lifetime exemption of the first spouse is voided. As a result, the surviving spouse then only has one lifetimes exemption to protect their combined estates. Furthermore, if the second spouse dies and the estate’s worth surpasses the exemption amount, the estate is subject to estate tax. The primary purpose of a Credit Shelter Trust is to prevent the first spouse’s estate tax credit to be wasted.

With an A/B Trust, a married person can assign a surviving spouse as a beneficiary for life. The spouse who created the trust may also decide to implement the use of lifetime payments however he/she desires. Primarily, the surviving spouse is capable of receiving income supplemented by principal payments.

Maintaining the surviving spouse’s financial security is the Credit Shelter Trust’s priority. Upon the death of the surviving spouse, the remaining assets can be distributed to the children or can remain in the trust for their use at a later time. However, because the surviving spouse has limited control, the assets in the Credit Shelter Trust are not a part of the surviving spouse’s taxable estate.

Although you may question its necessity at this present time, tax laws are constantly changing, and thus it is advisable to create a plan that allows for flexibility.

Back to the top.

Q: What is a Qualified Personal Residence Trust (QPRT) and how does it work?


A Qualified Personal Residence Trust (QPRT) allows you to remove the value of a residence from your estate by using a reduced gift tax value. This allows you to give away your home at a discount and even freeze its value for tax purposes despite the fact that you are still living in it.

When you transfer the title of your home or property to your QPRT, it is considered a gift to the ultimate beneficiaries, such as a relative or family member. Because you are able to continue living in the house prior to making the transfer,  the worth of the gift cannot be equal to the market value of the property on the day of the transfer. Essentially what this means is that you will be making a gift to your beneficiaries that cannot be used for several years. The property, including any appreciation in its value, will be transferred to your designated beneficiaries once you live there to the end of the established time period. If you should continue to live in the property after this time has elapsed, you must pay rent to your beneficiaries in order to prevent your home from becoming a part of your estate. The IRS can no longer assess an estate tax on something that you no longer own. Therefore, by utilizing a QPRT and outliving the income period, you are able to leverage the use of your gift and tax exemptions effectively. However, if you should die prior the established income period, then the value of the your property will be added to your estate.

Back to the top.

Q: What is an Irrevocable Life Insurance Trust and how does it work?


A number of people are unaware that all of the proceeds from life insurance policies that they own will be transferred into their estate for tax purposes after their death. The owner of the policy is allowed to withdraw cash and change the beneficiary, and consequently, the policy owner and the IRS  would be able to tax the proceeds at death. Many people erroneous believe that life insurance proceeds are not subject to estate tax. Although, your loved ones may receive the income generated from a life insurance policy tax-free, these proceed will still be part of your taxable estate and your beneficiaries may lose nearly half of its value to estate taxes. An Irrevocable Life Insurance Trust (ILIT) is one way you can avoid the taxing of life insurance proceeds at death. This type of trust is designed to hold and own life insurance policies.  Upon setting up the Life Insurance Trust, you can transfer the life insurance proceeds to the Trustee of the ILIT. You may not however, appoint yourself as a Trustee. Doing so will result in an incident of ownership (indicating legal title of the property for tax purposes) in your life insurance, you may appoint your children or spouse as Trustees.

The Irrevocable Life Insurance Trust was created as a primary beneficiary of your life insurance policies. This means that once a person passes, the insurance proceeds will be deposited into the trust. These proceeds are held in the ILIT for the benefit of your spouse during his/her lifetime. When your spouse passes, the remaining amount will then be passed on to your children or other beneficiaries. In addition to this, an Irrevocable Life Insurance Trust is a means to provide cash to fund your estate tax bill and not cause your tax burden to increase.

The ILIT will also be designated as the primary beneficiary of your life insurance policies. Thus, after you die, the insurance proceeds will be deposited into the ILIT and held in trust for the benefit of your spouse during his or her remaining lifetime, and then the balance will pass to your children or other beneficiaries. Aside from this, the ILIT can provide your family with a quick source of cash to pay your estate tax bill while at the same time not increase your overall estate tax burden.

There are several options available with an Irrevocable Life Insurance Trust. Therefore, it is important that you seek the advice of a skilled estate planning attorney, who can review your case individually and find a plan that meets your needs.

Back to the top.

Q: What is a Family Limited Partnership and how does it work?


A Family Limited Partnership, commonly known as an FLP, is a limited partnership that consists of two types of partners: Gerneral Partners or Limited Partners. A General Partner controls all management decisions, including investments, and is held 100% liable.  On the other hand, a Limited Partner lacks control and marketability of assets. They have no control to direct or influence how the FLP is managed and have no liability beyond their capital contributions.

Typically, in an FLP, senior family members (such as parents and grandparents) contribute assets in exchange for a small general partner interest and a large limited one. These family members are allowed to give the entire limited partner interest or a portion of it to their children or grandchildren. This interest can be set aside in a trust, or be given to the heirs directly.

Using an FLP can be very beneficial because it may reduce the taxable estate of senior family members, but still allow them to retain control over the decisions and management of the investment. General Partners can control the income and profits of the partnership and may choose not to distribute it whatsoever. They may also decide to reinvest said proceeds. In addition to, General Partners can have control over Limited Partners by restricting them from transferring, selling or even losing their ownership interest. Furthermore, an added advantage of owning an interest through an FLP is its built-in credit protection. A Family Limited Partnership is very flexible. This is what makes it primarily different from an Irrevocable Trust. An FLP can be modified or terminated if all of the involved members agree to it.

Back to the top.

David F. Anderson attorney at law located in Miami, Florida specializes in long term care, Condominium law, Medicaid planning, Corporate structures, Residential real estate, Asset protection, Commercial real estate, Family law, Title insurance, Bankruptcy, Mortgage law, Association Law throughout Dade County, FL and the surrounding area

Comments are closed.