Cutting your estate taxes -- tips based on '76 rules
Here are some more tips on reducing estate taxes. Previous "Moneywise" columns have noted the tax-saving advantages to a couple through leaving assets to children or other beneficiaries in a trust. This avoids taxes on the survivor's assets at his or her death. The tax-saving trust is particularly important for people with substantial assets, and the break-even point involves trust must be established while a married couple still lives. A tax-saving trust of this type is not available to a single person.
The 1976 Tax Reform Act established new rules for taxing estates, along with a new uniform schedule for gift and estate taxes. Instead of the former $60,000 exemption, a series of credits was established. The credit is enough to offset the taxes on an estate valued at $175,625 for 1981 and thereafter.
An executor may divide the total taxable estate for a couple roughly in half or exempt up to $250,000 as a marital deduction for the survivor. For an adjusted gross estate up to $425,625, an executor could elect to take the full $ 250,000 marital deduction, thus postponing payment of any estate taxes until the surviving spouse passes on. Such a plan may not reduce overall taxes, because the later total may reach into higher rates on the uniform schedule.
At this $425,625 estate amount, $175,625 could be determined as the adjusted gross estate of the first partner of a married couple to pass on. The offsetting credit nullifies the tax due on the $175,625. The surviving spouse retains $250,000 as a marital deduction. The $175,625 is transferred to trust for the benefit of a couple's children or other beneficiaries, with income from the trust going to the survivor. Since the trust conveys that property to the beneficiaries at the second death, however, the trust assets are not taxed again. All of the property kept out of the estate at the first death under marital deduction in excess of $175,625 is taxed after the second death.
For an estate to escape federal estate tax after both deaths, the maximum dollar value of the adjusted gross estate would be twice the $175,625 figure, or first death through the second death -- unlikely -- half of the estate would be subject to tax at the first death, but credits would exactly offset any tax due. Those assets could then be put into a trust. At the second death the remaining
One major difference affects overall taxes once an estate exceeds the level offset by credits. Under the old rules $60,000 of assets were excluded and the taxes were figured at a low level, beginning with a rate of 7 percent. Under the unified gift- and-estate-tax schedule, the tax is figured on the estate at progressively higher rates. The credit is applied and any remaining taxes not offset by the credit is due and payable. At the $175,625 level where t axes become payable, the rate is 32 percent.