How Do Estate Taxes Work
Estate taxes are assigned and implemented on all assets that an individual claims ownership of. When considering assets on a federal level of evaluation, these assets include anything up to two million dollars excess. In general, assets can include pretty much anything, from a lawn mower to cars and boats, etc. However, other things are considered assets as well that one may be unaware of. These include documents and policies such as life insurance as well as retirement savings accounts such as a 401K. Jewelry and other items are also considered.
When considering the prospect of estate taxes when one is married with a spouse this is a different scenario. If one spouse passes away, there is generally no estate tax assigned on the event of one individual’s death. One of the laws that are upheld in the United States entitles an individual to give and assign as many assets to a spouse and partner in death and life with no penalties. Thus if one spouse decides to give all assets to the other individual in the event of death, all of those assets would move to the other individual without any of them requiring the pay of taxes.
Only in the occurrence of the second death of the couple does the estate tax come into play. Here is where most individuals make their biggest mistake. Many individuals assume from hearing of other accounts of friends or relatives not being assessed an estate tax at the first death that in this circumstance no estate tax is assessed at all. However, estate taxes are assessed after the second death in all circumstances.
The reason that the first death does not bring with it the estate taxes is because of a legal term referred to as “the unlimited marital deduction”. And this refers to the unlimited sum
transfer discussed prior. If someone is looking to preserve their assets from being exposed to estate taxes in the future when a second death occurs, one needs to become knowledgeable of a subject referred to as unified credit. This refers to an available amount of credit that does not have to be subject to taxes if the first death did not transfer assets to a surviving spouse.
The sum right now that can be used as unified credit is 2 million dollars and will rise in 2009 to 3.5 million dollars. This estate tax will be eliminated in the year 2010 altogether. There will be no tax, but exemption declines begin at one million dollars. By 2011 there is a substantial estate tax that many people will pay that was avoided in previous years. So now many people are concerned with figuring out how to preserve a certain amount of money without having to pay the hefty estate taxes on that amount.
The way to go about this is to set up a trust. You should set up the trust with a number being the maximum amount that one can set aside and still avoid the taxes on that amount. That maximum amount again is two million dollars. Two million dollars can be set up in a trust and one can avoid paying the estate tax on that amount. If the trust individual had more than two million dollars the excess should be put into another trust that is asset protected, however, it will not be tax protected. A trust should be asset protected, credit protected, future marriage protected, and then tax protected up to the sum of two million dollars. In general, trusts give one the control over their finances and what occurs in the future.