Common Questions About Estate Tax Portability

Jan 27, 2014  /  By: Geoffrey H. Garrett, Estate Planning Attorney  /  Category: Estate Planning, Taxes

Many people have questions about estate taxes, portability, and what it all means for them. While estate, gift, and generation-skipping transfer tax calculations can be a little intimidating, there are some basic concepts that can help you easily understand them. When it comes to portability, asking the right questions will give you a better understanding of what it means for you, your spouse, and your estate.

Question 1. What is the estate tax?

The estate tax is a federal tax that applies to property left behind by a deceased person. If you die leaving behind property, your estate may, through your estate representative, have to pay a portion of its value as a tax.

Question 2. Do all estates have to pay an estate tax?

No. Federal law allows every estate to exempt a specific amount of property from the estate tax. The exemption is the amount of money your estate gets to keep before it has to pay a single dollar in estate taxes. In 2014, the estate tax exemption limit is $5.34 million. This means that if you die in 2014 and have an estate worth under $5.34 million, your estate will not have to pay any estate taxes at all.

Question 3. What is the estate tax portability?

Estate tax portability applies to married couples who want to use the individual estate tax exemptions together. Essentially, portability allows spouses to combine their individual exemptions.

Here’s how it works. Let’s say you are married and your spouse dies leaving behind an estate worth $3 million. Several years later you die leaving behind an estate worth $6 million. Because your estate is worth more than the $5.35 million exemption limit, your estate would have to pay some estate taxes if you died as a single person.

However, because your spouse died before you did and did not use all of the exemption, there is still a little left over that you can add to your own. If your spouse died leaving behind an estate of $3 million, there would be $2.35 million in unused exemptions. Through portability you can apply a spouse’s unused exemptions to your own. In this situation, your exemption would total $7.7 million. Because your estate is worth $6 million, this means that your estate won’t have to pay a single penny in estate taxes.

However, applying the portability concept to any individual situation does require some careful attention to detail. For example, you’ll have to ensure that your estate administrator files the appropriate IRS form in order to gain the full benefit of portability. For more information about this, contact our office so we can discuss the concept in more depth.

Byrd : Garrett, PLLC is a member of the American Academy of Estate Planning Attorneys.

Gift Tax Exemption Mostly Disappearing at End of Year

Jun 30, 2012  /  By: Geoffrey H. Garrett, Estate Planning Attorney  /  Category: asset protection, Estate Planning, Taxes

For individuals and families with significant assets, the time to use the $5 million gift tax exemption is running out. As soon as January 1st, 2013 rolls around, the $5 million exemption will be reduced to $1 million, and any gifts above that amount will be taxed at a 50 percent rate.

The gift tax exemption applies to gifts that parents give to their families during their lifetimes, instead of through a will. Currently, parents can give individuals up to $13,000 per year as non-taxable gifts up to the $5 million limit. That limit will significantly decrease in about 6 months.

Estate planning attorneys are already dealing with an influx of clients seeking to take advantage of the exemption, though doing so isn’t always as easy as it sounds. Gift giving strategies sometimes take weeks, or even months, to structure properly and make sure they mesh with the other elements of a complete estate plan. In other words, those who wait until the end of the year to try to take advantage of the gift tax exemption may wait too long.

Gifting also often involves creating trusts to handle turning over major assets, such as real estate. Trusts may also be important when the parents wish to give gifts to children who are too young to manage the property.

Regardless of the method of gift giving, anyone with significant assets should speak to an estate planning lawyer as soon as possible to discuss how the gift tax exemption might apply to your estate.

Byrd : Garrett, PLLC is a member of the American Academy of Estate Planning Attorneys.

Trusts and Federal Income Taxes: Part 3 of 3

Jan 16, 2012  /  By: Geoffrey H. Garrett, Estate Planning Attorney  /  Category: Estate Planning, Financial Planning, Taxes, Wills and Trusts

Making gifts to a trust may or may not impose federal gift taxes. In general, the Internal Revenue Service does not tax gifts made by taxpayer-donors to their irrevocable trusts. An irrevocable trust is one that a grantor cannot change. If a grantor places the gift in the trust without retaining any control of the property and without retaining the ability to change the designation of the gift, the trust may be an irrevocable trust.

Trusts are also useful estate planning tools for certain individuals. For example, if you have a niece who loves to spend money gambling, you may think twice before leaving a significant bequest to her since you may be afraid that she will throw her money away in casinos pretty quickly. However, if you create a trust for her, you may be able to control how much money your trustee gives her to ensure she will not dissipate her inheritance too quickly. As the beneficiary of your trust, your niece will be responsible for paying income taxes on her trust income. However, trusts must pay separate income taxes. Similar to the separate entity rules regarding corporations and shareholders, the IRS considers trusts as separate entities, and trusts retaining property in excess of the federal tax limits will have to pay income taxes on the retained income.


Byrd : Garrett, PLLC is a member of the American Academy of Estate Planning Attorneys.

Trusts and Federal Income Taxes: Part 2 of 3

Jan 15, 2012  /  By: Geoffrey H. Garrett, Estate Planning Attorney  /  Category: Estate Planning, Financial Planning, Taxes, Wills and Trusts

Contrary to popular belief, trusts rarely produce large tax savings. Many people create trusts to avoid placing their assets through probate courts. Thus, although trusts can help you save money on probate expenses, they may not reduce your federal estate taxes. If you create an irrevocable living trust, you may be able to reduce your income tax liabilities because you can effectively remove the assets within your irrevocable trust from your probate assets. You may also want to create a trust to help preserve privacy. Because wills are made as part of public records in probate courts, you can preserve anonymity and the identity of your beneficiaries by creating a trust.

You can create a revocable or irrevocable living trust. An irrevocable living trust is one that is not modifiable. You cannot change the terms of an irrevocable trust instrument or change your beneficiaries. However, if you create a revocable living trust, you can change the terms your trust document or revoke the entire instrument. Although a revocable living trust is more flexible than an irrevocable living trust, you may be able to reduce your tax liabilities by creating an irrevocable trust. This is because the federal tax code considers a gift to an irrevocable living trust as property of the trust since you retain no control over its disposition. However, since you can change the disposition or beneficiary of a revocable living trust, you may not receive any tax benefits. Carefully considering tax implications is an important part of estate planning.


Byrd : Garrett, PLLC is a member of the American Academy of Estate Planning Attorneys.

Trusts and Federal Income Taxes: Part 1 of 3

Jan 14, 2012  /  By: Geoffrey H. Garrett, Estate Planning Attorney  /  Category: Estate Planning, Financial Planning, Taxes, Wills and Trusts

The Internal Revenue Service (IRS) uses special tax rules for trusts. Understanding these tax rules is imperative for estate planning attorneys. According to the IRS, a trust established under state law must comply with the federal tax laws regarding tax liabilities of trusts. By creating a trust, the owner or grantor of the trust appoints a trustee to become a fiduciary of the trust instrument. A trustee retains legal ownership to administer the assets on behalf of the grantor for the benefit of the trust and its beneficiaries. The written trust document must clearly state the beneficiaries of the trust and appoint a trustee. A trust must also have trust property or assets within the trust. The IRS requires that all trustees or grantors file annual tax returns during tax years in which the trust includes at least $600 of trust assets or income and during each year a beneficiary named in the trust is a nonresident alien.

In limited situations, some trusts are never required to file tax returns. The trust tax return is IRS Form 1041, U.S. Income Tax Return for Estates and Trusts. Contrary to popular belief, an individual cannot impute his tax liabilities to a trust for federal income tax purposes. Because the IRS prohibits assignments of income, individuals are still liable for their income taxes even where their incomes go directly to their trusts.

Byrd : Garrett, PLLC is a member of the American Academy of Estate Planning Attorneys.

If I Don’t Have a Taxable Estate, How Will a Revocable Living Trust Help Me?

Dec 30, 2011  /  By: Geoffrey H. Garrett, Estate Planning Attorney  /  Category: Taxes

Many people associate saving taxes with trusts and with estate planning, in general.  However, there are MANY benefits to revocable living trust planning that have nothing to do with saving taxes.

Non-Tax Revocable Living Trust Benefits

  • Staying in control of your assets, though disability planning.  This avoids court interference and saves time, money, and hassle, while keeping your private affairs private.
  • Choosing who will help you with financial matters should you become disabled and when you die.
  • Protecting and planning for your family, including your spouse, children, grandchildren, and pets.  This means giving what you have to who you want, when you want, and how you want.
  • Protecting your children from unintentional disinheritance.
  • Providing for a special needs beneficiary, without disqualifying him or her from receiving governmental assistance.
  • Protecting an addicted or spendthrift beneficiary.
  • Protecting inheritances from court interference by creating trusts for minors and naming a succession of trustees for all beneficiary trusts.
  • Creating a common trust for minor children so they receive the same support and footing as older siblings, just as you would in a family.
  • Protecting your loved ones’ inheritances from creditors, divorcing spouses, and predators.
  • Including incentive trusts to encourage family legacies.
  • Avoiding probate; thus saving time, money, hassle, and keeping family and financial affairs private.

Though saving taxes is what drives many clients through their estate planning attorney’s door, they are happy to discover an entire list of non-tax reasons estate planning, specifically, revocable living trust planning is right for them.

Byrd : Garrett, PLLC is a member of the American Academy of Estate Planning Attorneys.

How to Avoid the Federal Estate Tax

Nov 23, 2011  /  By: Geoffrey H. Garrett, Estate Planning Attorney  /  Category: Taxes

Fortunately, the federal estate tax is a tax that can be minimized or completely avoided, depending upon your other estate planning goals.  Each individual is entitled to transfer a certain amount of assets during his lifetime or at his death, without incurring the wrath of the federal estate tax.  This exemption is a good thing because in 2011 and 2012, the top federal estate tax rate is 35%; and, in 2013, the top rate jumps to 55%.  It’s worth planning around.

If you die soon, in 2011 and 2012, the exemption is $5 million.  That’s a huge amount and covers most (but not all) families.  But, we’re certainly not suggesting dying in the next 14 months is a good estate plan.

Under current law, that exemption is reduced to $1 million at the very beginning of 2013.  At that time, many families will be affected.  This means that your family will lose about half of everything over $1 million dollars; it will go to the government.  If you have $2 million over the exemption, your family will pay $1 million in taxes.  Those are real dollars, and, yes, people really pay it.

To determine whether your family will be affected by the $1 million exemption and the federal estate tax, add up everything you own:  life insurance policies, retirement accounts, real estate, investment accounts, bank accounts, collections, vehicles, and family heirlooms and other personal property.  Consider growth of your assets over time.

If you’re close, you need to plan to avoid or minimize the federal estate tax.  When you consult with a qualified estate planning attorney, he or she will guide you through an analysis to determine the best way to do so.  Some options are gifting programs, charitable trusts, life insurance trusts, grantor annuity trusts, and personal residence trusts.

Byrd : Garrett, PLLC is a member of the American Academy of Estate Planning Attorneys.

The Federal Estate Tax is a Voluntary Tax

Apr 17, 2011  /  By: Geoffrey H. Garrett, Estate Planning Attorney  /  Category: Taxes

The federal estate tax (FET) is a voluntary tax?!  That’s right.  You volunteer to pay the tax if you don’t plan.

With advanced estate planning techniques, no estate tax need ever be paid.  Even Bill and Melinda Gates can avoid the FET.

Here’s how:

  • First consider that the FET is a transfer tax.  It’s a tax on everything you own when you die.  So, if you don’t own it, it’s not taxed.


  • There are many techniques for getting assets out of your estate while still allowing you to enjoy them.


  • Irrevocable Life Insurance Trust (ILIT) is used to get cash value and proceeds from life insurance out of your estate.  This is a great way to leverage the FET and the generation skipping tax (GST.)


  • Charitable Lead Trust (CLT) and Charitable Remainder Trusts (CRT).  These trusts can be used in conjunction with one another to provide an ongoing income stream to you and your family and benefit your favorite charity.


  • CRTs are often used in conjunction with ILITs.  The income stream from the CRT pays for the life insurance policy.


  • Family Limited Partnerships (FLPs) are used to discount the value of assets so that super gifting, using the FET exemption, can be made.


  • A Qualified Personal Residence Trust (QPRT) is used to get the value and appreciation of a home out of your estate.  You can have 2 QPRTs for 2 different homes.


  • Any gifts to charity are taxed at a 0% FET rate so FET is totally avoided.


  • Gifts to a spouse are also taxed at a 0% FET rate, but this delays the tax until the surviving spouse’s death.  It does not avoid it all together.


  • Use your exemption.  This year and next, your exemption is $5,000,000.  You can give $5,000,000 of assets away in these two years without taxation.


There are other advanced planning, FET avoidance techniques as well.  If you don’t want to volunteer for the federal estate tax, consult with a qualified estate planning attorney.

Oh, and as a bonus, all legal fees for FET avoidance are 100% tax deductible for income tax purposes.

Byrd : Garrett, PLLC is a member of the American Academy of Estate Planning Attorneys.

What is the Difference between Inheritance Taxes and Estate Taxes?

Dec 10, 2010  /  By: Geoffrey H. Garrett, Estate Planning Attorney  /  Category: Taxes

The number one difference between estate tax and inheritance tax is whether the tax must be paid by the estate or by the heir(s), and to whom the tax is paid. In recent years, several states have removed their inheritance taxes. Estate taxes are paid to the federal government. Though in 2001 the Economic Growth and Tax Relief Reconciliation Act began phasing out the federal estate tax, the U.S. congress continues to debate the ongoing issue.

Inheritance taxes are placed on assets and money that are paid to an heir from the estate of someone who has died. Beneficiaries must pay taxes on the assessed value of everything they inherit. There are several exemptions that beneficiaries can claim in order to reduce inheritance taxes. Typically, the largest exemption a non-spouse heir can claim (if they qualify) is the state’s minimum tax threshold. If the amount inherited is less than this threshold amount, they do not have to pay any inheritance tax. If the inheritance is over the minimum tax threshold, then the heir must pay taxes on the difference.

How much inheritance tax is owed also depends on the relationship to the deceased. As a rule of thumb, the closer a beneficiary is, the less they must pay in inheritance taxes. For example, a child or parent of the deceased will typically pay less inheritance tax than a sibling, and certainly less than a non-family member. The closeness is figured by linearity –that is if the beneficiary is a descendant or ancestor they are considered closer than siblings as far as inheritance taxes are concerned.

Estate tax is a tax on the entire value of the estate plus any money and assets left by the deceased. The estate’s executor is responsible for paying federal estate taxes. These taxes are paid from the estate’s holdings, such s real estate, trusts, stocks, investments, cash and so on. Estate taxes are assessed and paid before beneficiaries receive their inheritances.

Byrd : Garrett, PLLC is a member of the American Academy of Estate Planning Attorneys.

Is A Health Care Savings Account Right For You?

Aug 05, 2010  /  By: Geoffrey H. Garrett, Estate Planning Attorney  /  Category: Financial Planning, Incapacity Planning, Taxes

A Health Savings Account (HSA) is a savings account for the purpose of paying medical expenses. This special account is used in tandem with a high deductible health insurance plan and is designed to cover medical expenses until your deductible is met and your plan takes over.

Basic Requirements

In order to open a Health Savings Account, you must have a health insurance plan with a high deductible. The current required deductible for a family is 2,400 dollars per year. If you are covered by Medicare or any other medical plan you are not eligible for this special account. You also cannot be a dependent of anyone else.


There are quite a few benefits associated with a Health Savings Account. The biggest is the low premiums connected to the required high deductible plan. You also cannot beat the tax savings. Funds deposited into your health savings account may be pre-taxed income. If you deposit post-tax money, you can deduct it on your yearly tax return.

No matter what your income level is, you are eligible for an HSA. Some employers are beginning to offer these accounts as a supplement to their health care plan. If your account is sponsored through your employer, but you choose to move to a new job, you can take your HSA with you.

At the end of the year all money you have deposited into your account is available in the New Year. Starting an HSA when you are young and healthy is a great way to save for medical expenses when you are older and may require more medical care.


The main drawback to a Health Savings Account is the high deductible plan. If you cannot put enough money into your account each year to pay the deductible, then this type of account and plan may not be right for you.

Byrd : Garrett, PLLC is a member of the American Academy of Estate Planning Attorneys.