Estate Taxes

The trust must also contain the appropriate provisions in order to minimize federal taxes payable upon the death of either spouse. It is important to point out that estate taxes can be minimized with either a properly drawn will or a properly drawn revocable trust. The revocable trust does not provide any tax advantages that are not available to a person using a will or some other form of trust in order to accomplish a transfer of his property. But as long as you are using this type of trust to avoid probate and to take advantage of its unique features, you should make sure that the estate tax provisions are properly handled.

Federal taxes are imposed on most transfers of property during your lifetime or at the time of your death. Prior to 1977, estate taxes for transfers at death were distinct from gift taxes that were applied to transfers of property during lifetime. The gift tax rate was 75 percent of the estate tax rate. In 1977, this dual rate structure was abolished and a uniform rate was established for both gift and estate tax purposes. Additional changes in later years up to the most recent changes in 2001 allow individuals for the for the current 2003 year to each transfer a total of $1 million during lifetime or at death, free of estate and gift taxes. Any amounts in excess of the exemption amount will be subject to a maximum estate tax rate of 49%.

The law also provides that annual gifts of $11,000 and under are excluded from estate and transfer taxes. This implies that a husband and wife together can give $22,000 per year. This amount applies to each person to whom a gift is made. A husband and wife could give, as an example, a total of $110,000 per year to their five children and grandchildren.

Further, the 1981 law adopted a provision known as the Unlimited Marital Deduction. All amounts transferred between husband and wife, during lifetime or at death, are exempt from tax. This means that if a husband leaves all of his property to his surviving spouse, there will be no estate taxes on his death regardless of the size of his estate. The estate taxes will arise on the death of the second spouse, as she transfers her property to her children or other relatives.