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Barron's International Tax Service

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Ennobling Your Legacy

Many people never involve themselves in estate planning with the consequence that the primary beneficiary of your estate becomes the government.  Indeed as many as 70% of Americans never prepare a will!  You might therefore want to determine the outcome of the trappings you leave behind if only to beat the tax man!

As a foreign resident, the country wherein you reside will likely apply inheritance taxes to any property within its frontiers.  As a U.S. citizen, however, Internal Revenue Service requires that your estate include all property you own worldwide.  In spite of the $1.5 million exclusion currently available, this requirement may result in your estate paying substantial taxes.  Indeed, for estates valued between $1.5 million and $2 million, Uncle Sam will assess 45%!

What is the value of your estate?  The fair market value of real estate holdings including your home and investment property; cash on hand, bank accounts, and certificates of deposit; coin and stamp collections; insurance proceeds; mortgages, notes and accounts receivable; shares in partnerships and corporations; cars, jewelry and household items; retirement accounts and annuities; stocks, bonds and stock options; revocable trust property; jointly owned property; business property; and essentially anything else you own are included in the gross estate.

From the gross estate may be deducted mortgages, notes and accounts payable; insurance, consumer, margin and student loans; taxes; funeral, medical and administrative expenses; and anything else you legitimately owed.

After these expenses are deducted from the gross estate, subtract this year's federal estate tax exemption amount to arrive at the taxable estate.  The exemption amount is $1.5 million in 2005, $2.0 million from 2006 - 2008, and $3.5 million in 2009.  Given a taxable estate in 2005 of $500,000 ($2 million - $1.5 million), the estate will owe $225,000 in taxes ($500,000 x 45%).

Of course, the unlimited marital deduction does allow a surviving spouse to inherit a deceased spouse's estate tax free.  Consequently, in the above example, the deceased spouse's estate transferred to the surviving spouse would owe no taxes.  On the other hand, suppose that each partner's estate was valued at $2 million and the surviving spouse does not outlive his or her mate by more than a few months.  Under this scenario, the combined estate would now owe $1,165,000 ($4 million - 1.5 million x 46.6%) in estate taxes.

Such a hefty assessment can be greatly mitigated if the married couple sets up a Bypass Trust.  This trust means that your property can be bequeathed to your children while enabling the surviving spouse to draw on trust funds as needed.  To understand the outcome of this maneuver, suppose the surviving spouse does not outlive 2005.  The estate will owe $460,000 ($4 million - 1.5 million - 1.5 million x 46%); a savings of $705,000 ($1,165,000 - $460,000 in estate taxes!

Estate planning should be an annual event.  Not only is the value of property constantly changing but so are tax laws.  Presently these laws appear favorable with increases in the federal estate tax exemption amounts.  But given the potential loss in tax revenues as the generation that fought in World War II passes away and leaves behind billions of dollars in accumulated wealth, Congress could decide to reverse this trend.  Regardless of whether loved ones mourn your passing or covet your trappings, attention to planning the distribution of your estate will not only deprive the tax man but ennoble your legacy.