Avoiding Death Taxes – It’s Not Just For The “Rich”
Most people do not like the idea of the government taking their money after they die. But many people are unaware that: (a) if they died today, their heirs would be forced to pay state and federal estate taxes (“death taxes”), even if the deceased person is far from the typical definition of “wealthy;” and (b) for most married people with potential estate tax issues, their lawyer can help them avoid estate taxes completely and relatively inexpensively.
The state of Washington taxes every dollar in an estate above the state’s $2 million trigger, e.g. if an estate is worth $3 million, the third million faces tax. $2 million has been Washington’s triggering level for several years and may or may not change in the near future. The federal government’s triggering level is a moving target, reset by the legislature every few years. In 2011 and 2012, the triggering level is $5 million, but there is no way of knowing where the legislature will peg that figure in future years. In the last decade, the triggering level has been as low as $675,000. The state and federal estate taxes usually combine to take about half of every dollar in an estate in excess of the triggering level.
Many people may initially think they need no estate tax planning because their net worth is well under $1 million. However, some categories of unobvious wealth will be considered part of a person’s estate for purposes of calculating estate tax. The most common of these is (a) the life insurance death benefit and (b)retirement accounts such as an IRA and 401(k). For example, the Smiths have two college-age children and believe their net worth is $700,000. In that figure, they do not include life insurance and retirement. Believing they will not approach $2 million in the foreseeable future, they execute simple Wills. Husband dies in 2013 and wife receives a death benefit of $2 million from Husband’s no-cash-value term policy. She also receives $500,000 from his 401(k). Wife dies not long after, with the same simple Will and with an unanticipated net worth of $3.2 million. Even if the federal government has not reduced the triggering level of estate tax (which it may), and even if Washington’s estate tax trigger stays at $2 million (with the current budget, the state may reduce it), the estate executor (most likely one of the two children) must cause the estate to pay hundreds of thousands of dollars in taxes. If the federal government had reduced its triggering figure in the meantime, the estate could owe far more in taxes.
Luckily, many people like the Smiths can completely avoid estate taxes with a Disclaimer Trust. This is a trust inserted directly into the Wills of married couples. It requires no additional “trust document” separate from the Will. In short: If drafted properly, the Disclaimer Trust Will allows a surviving spouse to double the triggering level for estate taxes. In the Smith example, if Husband’s Will had contained a Disclaimer Trust, it is very likely Wife could have utilized that Disclaimer Trust to raise the Washington state triggering level to $4 million (a combination of Wife’s $2 million “tax shield” plus Husband’s $2 million “tax shield”). Wife’s estate would pay no taxes, and a couple who thought they were worth only $700,000 would have just saved their children hundreds of thousands of dollars.
Please call William O. Kessler at (425) 776-4100 if you would like to discuss your estate plan and your options.
Beresford Booth (425.776.4100), www.beresfordlaw.com.
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