How do estate taxes work?

    Published: 06-16-2009
    Views: 11,611
    Estate Expert William Conway discusses how estate taxes work.

    Host: How do estate taxes work?

    William Conway: Estate taxes are assessed on all the assets that one has. On a federal level of assets and access of two million dollars, that includes everything. It includes everything from a lawn mower to the value of jewellery, to the value of life insurance, to the value of a home, foreign plans, cash, securities, whatever might one might have as assets. If someone is married, there is generally no estate tax at the first death. One of the basic tax rules that we have in the U.

    S. is that you can give as much assets either in life or at death to a surviving spouse. So, if Bill Gates with all his billions of dollars left all of his money to his wife Melinda, those billions of dollars will go untaxed when it moves from Bill to Melinda. It is only at the second death that a tax generally occurs and that is where the biggest mistake is made because people assume that because they knew friends or had relatives where there was no estate tax assessed at the first death, that there will never be in estate tax assessed at all. Now, the reason why the money is untaxed at the first death is because of what is called the Unlimited Marital Deduction and that literally is an unlimited sum. If somebody would like to preserve assets from estate taxes at the second death, one has to be aware that there exists what is called the Unified Credit or an available amount of money that would not be servitude to estate tax at the first death if it would have not gone to a surviving spouse and that sum right now is two million dollars. It is scheduled to rise in 2009 to 3.

    5 million dollars; it is scheduled to be totally eliminated. There is no tax in the year 2010, but then the exemption declines to only one million dollars. So, if the current tax level holds by the year 2011, there will be a substantial estate tax that many people would pay, that would otherwise been avoided in the year 2007, 2008, 2009 or 2010. So, the discussion then is how do I preserve this sum of money which may vary in size that I can avoid the taxes on and the answer is that I setup a trust and I setup a trust where I do it as a number that is defined as the maximum number of dollars that I can set aside to avoid taxes at the death of the surviving spouse and that maximum numbers of dollars right now, as I mentioned is two million. So, two million dollars can flow into a trust for the benefit of the surviving spouse. If the deceased spouse had more than two million, then the sum in excess of two million will go into a separate type of trust for a surviving spouse that will be asset protected and creditor protected, but will not be tax protected. The core elements of any trust would be that they are asset protected and creditor protected and future marriage protected, they may or may not be tax protected, they can be tax protected up to the sum of two million dollars.