It is possible for people with substantial assets to plan their estates to minimize or even eliminate estate taxes. Such planning is particularly important for business and farm owners who want to pass the business to family members because estate taxes could cripple or destroy the business and leave little or nothing for heirs.

Every situation is different, and each requires careful analysis to determine the best way to accomplish the goal of reducing or avoiding estate taxes. Scott Law Firm provides estate-planning services in this area and also recommends consultation with a tax accountant.

A common misconception is that people seeking to minimize or eliminate estate taxes must have a trust rather than a will. Actually, this goal can be accomplished through either a will or a trust, although if done by will it will usually involve creation of one or more trusts in the will.

An important point to understand about estate taxes is that they are based on all money or property passing to any person as a result of the taxpayer’s death. Therefore, certain assets are subject to estate taxes whether or not they pass through any probate process. Examples are life insurance proceeds and interests in jointly owned property which pass automatically to a survivor. Therefore, for the purposes of this discussion, the term "estate" refers to all property passing as a result of person’s death, whether or not the property would be subject to probate.

For many years, there was a $600,000 exemption from the federal estate tax, meaning that an estate of $600,000 or less was not subject to the tax. The exemption amounts began increasing in 1998 under the Taxpayer Relief Act of 1997. Further changes were made by the Economic Growth and Tax Relief Reconciliation Act of 2001. For persons who die from 2001 through 2009, the estate tax exemptions are as follows:

Under the Economic Growth and Tax Relief Reconciliation Act of 2001, the federal estate tax is repealed altogether for the year 2010. However, a "sundown" provision in the act will reinstate the federal estate tax as it existed before the Act beginning in 2011, with an exemption amount of $1,000,000. Supposedly this "sundown" provision will force Congress to re-examine the estate tax before 2011.

The primary technique for eliminating or minimizing estate tax is to take advantage of both the exemption mentioned above and a 100% marital exemption from the estate tax applicable to all property passing to a surviving spouse. Thus, for example, either a will or trust can allocate assets covered by the estate tax exemption to persons other than the surviving spouse, with the surviving spouse receiving the remainder of the assets. This can entirely eliminate estate taxes upon the death of the first spouse to die. Depending on how soon the second spouse dies, however, it may not be possible to totally eliminate estate taxes upon the death of other spouse.

Another technique to eliminate or reduce estate taxes is to make lifetime gifts of property to children or other persons. For example, each year, an individual may give up to $10,000 apiece to as many people as he or she chooses without owing gift tax. This means, for instance, that a married couple could give up to $20,000 per year to each of their children without any gift tax liability. Obviously, a gift program of this nature, if continuously pursued, will have the effect of reducing the amount in a person’s estate at the time of his or her death, with consequent elimination or reduction of estate taxes. However, there is also a lifetime gift tax exemption that must be considered. Gifts made during a person's lifetime which exceed the exemption are subject to gift tax even if the annual gift limit is not exceeded. Under the Economic Growth and Tax Relief Reconciliation Act of 2001, the lifetime gift tax exemption remains at $675,000 in 2001, but increases to $1,000,000 in 2002 and remains at that level.

If federal estate taxes are owed, the marginal tax rates range from 18% to 55% in 2001, depending on the taxable estate. Beginning in 2002, the highest estate and gift tax rate will decline to 50% in 2002, 49% in 2003, 48% in 2004, 47% in 2005, 46% in 2006, and 45% in 2007-09. As noted above, the estate tax is repealed in 2010, and the gift tax rate for 2010 will be the top individual income tax rate. 

It should be noted that if no federal estate tax is owed, no Missouri estate tax will be owed because the Missouri estate tax is tied to the federal estate tax.

While Congress has theoretically repealed the federal estate tax as of 2010, the Economic Growth and Tax Relief Reconciliation Act of 2001 makes another important change which could cause heirs to owe more income tax upon the sale of inherited property. Under the old rules, all inherited property received a "stepped-up basis" equal to the fair market value of the property at the time of death of the person from whom the property was inherited. Thus, if an heir then sold the property, capital gains tax was owed only on the excess of the sale price over the stepped-up basis. Under the 2001 Act, the stepped-up basis rule as it now exists will end in 2010. From then on, heirs can choose to take a stepped-up basis for only $1,300,000 worth of inherited property. Any property inherited in excess of $1,300,000 will have a basis equal to the lesser of the deceased person's basis or the fair market value as of the date of death. Some commentators have suggested that additional capital gains taxes resulting from these changes in the basis rules will equal or exceed the reduction in estate taxes collected as a result of the 2001 Act.

This has been a very brief overview of some of the issues involved in planning for estate taxes. The specific recommendations in any individual’s or couple’s case will depend on a complete assessment of assets and goals.

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