Legal Ease: Death and taxes together again

Editor’s note: Legal information listed here is intended to be general preventative measures and legal first aid to help readers avoid problems before engaging legal counsel. These are not a substitute for hiring an attorney and should not be considered to be legal advice specific to any situation.

When President Bush took office eight years ago, he began changing the estate tax system with an eye toward phasing out the “death tax,” which is taxation on an excessive estate. During the Bush presidency, only people with million-dollar estates had to pay taxes. This was not always the case before he took office.

Over the years, the federal government had increased the gate or the level by which the government would start to tax. For instance, there was a time when, if a husband and wife had a combined estate of $1.2 million or less, they would not be taxed federally. But any estate above $1.2 million was taxed between 33 percent and 45 percent, depending upon the size of the estate.

Before his inauguration, President Obama’s administration signaled its displeasure with the elimination of the estate tax. Suggestions from the Obama administration indicate that the threshold figure would be substantially reduced from the levels set during the Bush administration. A recent Wall Street Journal report suggests the Obama administration may be focusing as low as $100,000 on an estate.

At the present time, the largest amount of money possessed in the United States is held by the Baby Boomers, who are gradually retiring, and also dying. If the average citizen has a house of $150,000 and savings of approximately $50,000, under the $100,000 cap the first $100,000 would not be taxed, but any amount over that could be taxed as much as 35 percent. So there would be a $35,000 tax on the $200,000 estate, more than one-third of the estate after the cap is met.

Generally, people think about a will when they die. A will is a good start but if the estate tax gate amount changes, a trust may become a viable option. A trust, for lack of a better comparison, is a sort of company you and your spouse control until one or both of you die. Then, a designated person takes over the management. It allows for a disabled person — child or spouse — to receive care from the trust as long as there is money and a need for it.

New probate laws will be needed, and this brings with it several other problems. For instance, many estates are never “probated,” or taken to court. The estates are moved by transfer through deed by adding a son or daughter. Moving the property by deed would bring its own set of red flags. The Internal Revenue Service monitors such things and capital gains taxes are required. Additionally, one family member may get on the deed and the other kids get nothing.

A trust would be a worthwhile vehicle provided that people put most of their substantial assets that are over the government cap into the trust. All the family is protected and there are no real IRS consequences, depending on the amount of the trust and the estate.

People who are thinking about estates ought to consider a trust before federal legislation changes. There was a time, not long ago, that a trust had to be approved by the Internal Revenue Service (called a Q-Tip trust) thus ensuring regulation of what was happening with unreported trusts. I expect those days to return, too.

A trust document is worth its value and meeting with an estate attorney to go over estate plans is worth the money. A little bit of planning now can save your family a substantial amount of taxes in the future.

Remember, the government has to make up for its budget shortfalls, and taking the money from the deceased meets little resistance for the government. After all, dead people only vote in Chicago — or so I’ve been told.

Mark Osterman is a lawyer in Kenai and has practiced in Alaska, Michigan and federal courts for 19 years doing family, commercial, divorce and criminal law.