Estate Taxes

First of all, please remember that the classification of property as probate or non-probate has no bearing on whether property is subject to estate tax. If you own property, or have sufficient control over property that the government has deemed it close enough to ownership, it is subject to estate tax.

There are two estate taxes we need to consider: the Federal Estate Tax and the Ohio Estate Tax. Each tax system has its own features, but both seek to tax a portion of the value of your property, upon your death. While technically the tax is not upon your property, but rather upon the privilege of being able to transfer your property upon death, it is a distinction without a difference.

Federal Estate Tax

Why do we need to consider the Federal Estate Tax? Didn’t the Bush Administration repeal the death tax? Well, sort of. The much lauded repeal of the Federal Estate tax is scheduled to take place in 2010, with a capital gains tax in its place. Then the federal estate tax then comes roaring back with a vengeance in 2011. So yes, we do need to at least consider the federal system.

In 2009, each person can transfer up to $3.5 million of property, without being subject to the federal estate tax. For many people, that $3.5m exemption is plenty. Absent a change in the law, that exemption will go down to $1 million in 2011. The federal estate tax system taxes all property you own, including real estate, life insurance, stocks and bonds, and retirement plan balances. When added together, especially with life insurance, it is not that hard to exceed the $1m threshold. While it is likely that the exemption will be frozen at some number in the $3.5m to $5m range (what’s the average worth of a US Senator and his or her spouse?), there is no assurance that the exemption will be frozen.

Once you are in the federal estate tax system, it is painful. Each dollar over the exemption amount is taxed at roughly a 45% rate. That’s 55¢ for your family, and 45¢ for your favorite relative, Uncle Sam.

Property passing between spouses is not subject to estate tax, which is good, but it can cause a problem. While each person has an exemption from the estate tax, that exemption cannot be passed to a surviving spouse. So the value of your property may be less than an exemption amount, and the value of your spouse’s property may also be less than the exemption amount, but if you leave all of your property to your spouse (free of estate tax), the value of your property added to the value of your spouse’s property may exceed the exemption amount. This situation can be avoided through the use of a trust to make full use of both exemption amounts.

If your property will be passing to someone other than a surviving spouse, and you are fortunate enough to have property is excess of the exemption amount, there still may be techniques that can be used to minimize the impact of the federal estate tax.

When we work with our estate planning clients, we review and potential federal estate tax implications. If you would like us to help you with your planning, please contact us.

Ohio Estate Tax

After considering the Federal Estate Tax, the Ohio Estate Tax is not nearly so onerous. The maximum tax rate is only 7%. While 7% pales in comparison to the 45% federal tax rate, it can still work out to be a big number. The Ohio Estate Tax kicks in much sooner: the exempt amount is only about $338,000. So many people who do not have to worry about the federal tax still need to be aware of the Ohio tax. One consolation, however, is that Ohio does not tax life insurance, so long as the beneficiary is anyone other than the deceased’s estate.

Because of the differences in estate tax exemption amounts between the Federal and Ohio systems, it becomes important to understand the impact of Federal Estate Tax planning upon the Ohio estate tax. When we help a client with their estate planning, we explain the impact of certain choices on both the Federal and Ohio estate taxes. If you would like us to help you with your planning, please contact us.