Estate Taxes

Most estates are not currently subject to estate taxes.

Unless the property that a person owned when he or she passed away was worth more than $11.6 million (for 2020), no estate taxes apply. Instead, the entire estate is considered exempt from estate taxes if it is below that total value.

As is noted, below, for a married couple, each spouse is entitled to the $11.6 million exemption so that, together, they can leave property and possessions worth $23.2 million without any estate taxes applying.

If a person’s property was worth more than $11.6 million, the tax rate only applies to the portion that is over that exempt amount. But the tax rate on those excess assets starts at 40% and goes up from there depending on the size of the estate.

Also note that Congress has indexed the exemption amount to inflation and made it “permanent” (meaning, until Congress changes its mind, again).

The truth at this point is that the estates of the vast majority of people here in Idaho will not be subject to estate taxes when they pass away.

Partners Daniel Patchin and Ben Monaghan count it a privilege to assist clients with their Estate Planning needs. After years of working together, Peters Patchin & Monaghan specializes in the preparation of Idaho Wills, Trusts, and related documents that are short, simple, and affordable. The unique circumstances of each client are studied and assessed in determining and preparing your best Estate Plan possible.

But what can be done to reduce or eliminate estate taxes for persons who do have assets in excess of $11.6 Million? The current law has been crafted to make it difficult to avoid paying estate taxes.

But one significant method of relief is available to married couples who elect to establish a Family Trust or Family Trust. This relief comes from the fact that the exemption stated, above ($11.6 million) is available to each spouse. So, a married couple can protect twice that amount, once for the husband and once for the wife.

With a properly prepared Family Trust, those two exemptions can be preserved so that, when the estate ultimately passes to the next generation, up to $23.2 million can pass tax free.

Subject to the “portability” comments, below, a Simple Will cannot accomplish this. When a spouse passes away and just leaves everything to his or her surviving spouse, the normal exemption applies to that estate. But after that, the surviving spouse owns twice as much — both his or her half plus the deceased spouse’s half. When the surviving spouse later passes away, the estate will typically be twice the size since it now includes both his half and her half. Depending upon the size of the estate, that could result in dramatically higher taxes than would have been imposed if the couple had instead set up a Family Trust or a Living Trust.

Because of this risk — as well as the costs and delays associated with probate — most married couples with a substantial net worth will opt to utilize a Family Trust or a Living Trust here in Idaho. Doing so will avoid probate altogether and reduce or eliminate the risk of estate taxes, as well. A definite win-win situation for most married couples.

A concept called “portability” was added by changes to laws adopted in 2010. Greatly simplified, this allows one spouse to take advantage of the other spouse’s unused estate tax exemption. Here’s how that might work:

1. Assume a married couple has total assets of $20 million of which $4 million are the husband’s and $16 million are the wife’s.
2. If the husband passes away first, all of his $4 million in assets are fully exempt because they are less than the $11.6 million exemption.
3. When the wife later passes away, without the concept of “portability,” her $16 million in assets would be subject to an exemption of just $11.6 million. But her remaining $4.4 million in assets would be taxed at a 40% rate, resulting in taxes of almost $1.8 million.
4. However, under the new “portability” concept, the unused $7.6 million of the husband’s exemption is “portable” to the wife so that she now has a total available exemption of $19.2 million (her own $11.6 million exemption plus her husband’s unused exemption of $7.6 million).
5. As a result, when the wife dies, instead of paying nearly $2 million of taxes, this portability protects the heirs entirely so no taxes are due.
6. But please note that the portability must be claimed by the surviving spouse no later than 9 months after the death of the first spouse.

While this arrangement can help in the situation outlined, above, it is not as flexible as the options available in a Family Trust. For example, in the foregoing illustration, if the wife passed away first leaving her $16 million directly to her children, there would have been taxes of about $1.76 million due on the part of her estate that exceeded the exempt amount. Since her estate exceeded the exemption amount, there would have been no unused portion of her exemption that would have been portable to her husband.

Because of this limitation, the use of a Family Trust or Living Trust with appropriate provisions is the better solution to the problem here in Idaho.

If you would like to learn more about these topics, please give us a call at 208-939-2600 to schedule your free initial consultation. Or you can schedule an expedited appointment at your convenience by clicking on either of the gold “Schedule Now” boxes on our Home Page.