Under the federal law of the United States, your gross estate includes all property (of any description and wherever located) in which you have any interest at your death. Your adjusted gross estate is basically your gross estate less all of your indebtedness. Federal law currently imposes a tax on the value of your adjusted gross estate. This is called the estate tax. The current maximum rate of that tax is 40%.
Fortunately, federal law also allows a significant credit against the estate tax. This credit is called the unified credit. Under current law, the amount of the unified credit exempts all but the largest estates from the federal estate tax. The maximum unified credit is currently equal to $2,125,800. This is the equivalent of $5,450,000 of adjusted gross estate (referred to as the applicable exclusion amount). In other words, under current law, a taxpayer’s adjusted gross estate must exceed $5,450,000 before he or she will owe any estate tax.
Here’s an illustration of how the federal estate tax works as applied to an adjusted gross estate of $8,000,000:1
If you are married and you leave all of your property to your spouse, there will be no estate tax on your estate. This is called the unlimited marital deduction.2 Note, however, that if you leave all of your property to your spouse, his or her estate will have increased in value by the value of your adjusted gross estate. This could cause your spouse’s estate to be subject to the estate tax. Fortunately, federal law now permits a decedent’s spouse to apply the decedent’s unified credit to reduce the value of the surviving spouse’s adjusted gross estate. This is referred to as portability. To achieve portability, the surviving spouse must file a federal estate tax return (Form 706) for the decedent to claim the decedent’s unified credit.
Another way to preserve a decedent’s unified credit is through the use of a living trust. This is usually a better alternative than portability because property valued up to the decedent’s applicable exclusion amount (and any subsequent appreciation on that property) can be excluded from the estate of the surviving spouse altogether.
Estate tax may also be payable to a state if you are domiciled in that state or own property in that state. However, for estates of decedents dying after 2004, Arizona no longer imposes an estate tax.3
We Can Help!
While federal and state death taxes may have a considerable influence on estate planning, there are many other things to think about when planning your estate. We often assist our clients with a wide variety of estate-related matters such as business succession planning, business acquisition agreements, entity selection, buy-sell agreements, deferred compensation, family business structures and planning for charitable gifts.
To take steps towards protecting your estate from unnecessary estate taxes, contact a member of our team now at 480-461-5300.
1 This chart illustrates the federal estate tax as modified by The American Taxpayer Relief Act of 2012 (“ATRA”) which was enacted January 1, 2013. ATRA made the estate, gift and GST applicable exclusion amount of $5,340,000 permanent and provided that the $5,340,000 exemption will be adjusted annually. The applicable exclusion amount in 2016 is $5,450,000.
2 To qualify for the unlimited marital deduction, the surviving spouse must be a citizen of theUnited States or the decedent spouse must have created a qualified domestic trust (“QDOT”) for the benefit of the non-citizen spouse.
3 Prior to 2005, like many other states, Arizona’s estate tax law was designed to “pick up” the maximum allowable federal credit for state death taxes when the decedent was domiciled in Arizona or owned real or tangible property in Arizona at the time of death. However, for decedents dying after 2004, the federal Economic Growth and Tax Relief Reconciliation Act of 2001 (P.L. 107-16) completely repealed the state death tax credit. Since Arizona’s estate tax law was based on the federal credit, the enactment of this federal law effectively did away with Arizona’s estate tax. The Arizona legislature repealed the Arizona estate tax provisions in 2006.