SaveMillions Logo

Company InfoContact UsHelp  

Learn... Plan... Protect Your Estate

Steps to Build Plan
  Step 1 - Organize documents
  Step 2 - Get educated
  Step 3 - Inventory
  Step 4 - Determine goals
  Step 5 - Develop plan
  Step 6 - Review plan
  Step 7 - Take action
  Step 8 - Get help
Estate Plan Items
  Death Will
  Power of Attorney
  Health Care Directive
  Living Will
  Charitable Giving
  Asset Distribution
  Burial Instructions
Sizing up your estate and what you'll owe

(Article from Kiplinger's Retirement Report, June 2005)

DEATH IS CERTAIN; estate taxes are not. Estates of up to $1.5 million are exempt from estate taxes, unless you live in a state that imposes its own estate tax. Few people die leaving estates big enough for Uncle Sam to tax, and if President Bush gets his way, Congress will vote this year to repeal the federal estate tax for good starting in 2010.

The uncertainties make estate planning--a chore that many people postpone anyway--even more vexing. But whether your estate is presently taxable or not, you need to keep current concerning its financial makeup. Tally your assets, liabilities and potential taxability (using the worksheets on pages 12 and 13) and periodically review these elements. Keeping tabs on your estate will enable you to determine what kind of estate planning you may need, says Stewart Welch III, a financial planner in Birmingham, Ala. For planning purposes, it's a good idea to apply this exercise assuming that your spouse inherits your property and then dies. At that point a substantial estate tax due could be due.

Any amount you leave to your spouse is tax free. Beyond that, this year estates valued at up to $1.5 million can pass free of federal estate taxes. In 2006 through 2008, the minimum will be $2 million, and in 2009, $3.5 million. In 2010, the tax vanishes, only to return the following year, when estates of more than $1 million will face the tax. Federal lawmakers keep talking about nixing the estate tax or increasing the exemption. The House has passed a bill that would kill the tax permanently; the Senate wants a higher, permanent estate exemption.

If your calculations suggest that your estate will be taxed, consider setting up a planned giving program to reduce it.

The first step toward taming your estate is to calculate the estate's net value by adding up its gross value and subtracting its total liabilities. To get this figure, fill in the worksheet on page 12 (provided as Assets and Liabilities tables below).

  • Enter the assets indicated, such as your home, bank accounts, investments, retirement accounts (such as, 401(k) plans and IRAs), and valuable personal property. In the worksheet margin, we've provided tips on the numbers to be included.
  • Enter your liabilities at the bottom of the worksheet, including loans, credit-card debt, taxes owed, anticipated funeral costs and the administrative costs of settling your estate.
  • Take the value of your gross estate and subtract your liabilities to arrive at your adjusted gross estate, also called the net estate.

After you complete the estate worksheet, go to page 13 (provided at the bottom of this page) and fill out the federal-estate-tax worksheet to calculate the estate tax due, if any.

  • Enter the gross estate, total liabilities and net estate total from page 12 (provided below as Assets and Liability tables).
  • Subtract the value of all the property that you intend to leave to your spouse. This amount is shielded from estate taxes by the unlimited marital deduction. The deduction allows you to leave part or all of your estate to your spouse without incurring an estate tax. Generally, it's not a good idea to rely solely on the marital deduction to avoid estate taxes. Doing so loads up the surviving spouse's estate, often resulting in a higher tax after the widow's or widower's death.
  • Subtract the value of assets that you'll leave to charity. The remainder (net estate minus marital and charitable deductions) is your taxable estate.
  • If your state has an estate tax, subtract the amount that you would owe.
  • Next, add the value of gifts you made after 1976 that exceeded the per-person, annual exclusion amount. The total is your estate-tax computation base. Use this amount to determine the tentative tax, according to the rate schedule on page 13 (provided below under the Assets and Liabilities tables).
  • Subtract from the tentative tax any gift tax you've actually paid. This is the tax on any gift that exceeds the current $345,800 gift-tax credit that each person receives. (The credit is equivalent to a $1-million exemption.) The amount that remains is the tax on your taxable estate. Note that this is not the amount your estate would owe the IRS; you still must figure in the federal estate-tax credit (on the next line).
  • Finally, subtract your federal estate-tax credit for an estimate of your final federal estate-tax bill.Trimming a Taxable Estate

If your calculations suggest that your estate will be taxed, consider setting up a planned giving program. The plan can be as simple as reducing your estate with annual gifts to children and grandchildren. You can give as much as $12,000 a year per person to as many individuals as you wish. If you're married, you and your spouse together can give annual gifts of up to $24,000 to any number of persons. Gifts of that size can substantially reduce your estate over time. If you and your spouse both make annual $12,000 gifts to each of your two children and four grandchildren, after five years you will have given away $720,000.

If you surpass the $12,000 per-person, per year limit, you must file a gift-tax return. The amount in excess of $12,000 starts into your $1-million gift-tax exemption. The exemption permits each person to give up to $1 million during his or her lifetime without incurring a gift tax. Gifts within the $12,000 (or $24,000) annual limit don't count towards the lifetime exemption, but amounts given to individuals over the annual limit do.

You may be able to reduce a taxable estate with last-minute gifts. But some gifts don't qualify. For example, if you give away a life insurance policy that you own and die within three years, the policy's proceeds will be included in your estate.

There are other ways around the annual gift-tax exclusion. For example, there's no limit on gifts that pay for your grandchild's college education or medical expenses. In order to qualify, your payments must be made directly to the institution or health-care provider.

Until 2001, most states collected their share of estate taxes by getting a portion of the federal estate tax. But when the federal law changed, so did the formula that the federal government used to calculate states' shares of the estate-tax coffers. In effect, the changed federal law gradually phased out what states could collect. But states rely on their share of estate taxes and are rewriting their laws. So far, 19 states have changed their tax laws to replace the lost federal dollars. To learn how your state will treat your estate, contact its tax department. Or find links to state Web sites via the Web site of the American Institute of Certified Public Accountants at

For more on federal estate and gift taxes, see IRS Forms 706 and 709 (and their instructions), which are available at, or by calling 800-829-3676.

Enter in your assets in the table at right. When you own only part of an asset, include only that portion in your estate. Include:

  • The full value of property you own solely.
  • Half the value of property that you jointly own with your spouse with right of survivorship (meaning he or she gets your share upon your death).
  • The proportionate share of property you own with others. For example, if you own property equally with three siblings, enter a fourth of its value.
  • Half the value of community property (generally, these are assets acquired in a community-property state during your marriage). Property you inherit or acquire separately as a gift is your sole property, provided you didn't mix any of it with the community property.

Your gross estate also includes:

  • Proceeds from life insurance you own that are payable to your estate or to your heirs. (As a rule, you are considered to own the life insurance when you have the power to change the beneficiary or to borrow against the policy.)
  • The value of certain annuities payable to your estate or heirs, including IRAs and your interest in pension and profit-sharing plans.
  • The value of property, such as life insurance, that was transferred less than three years before your death to an irrevocable life insurance trust.
  • Property you placed in revocable trusts and certain other types of trusts.
Cash in checking, savings, money-market accounts $
Mutual funds
Other investments
Real estate
Personal property, such as furniture, cars, etc.
Art, antiques, collectibles
Life insurance
Retirement plans, such as IRAs
Business interests, such as sole proprietorships and partnerships
Money owed to you, such as mortgages and rents
Loans and notes
Consumer debt
NET ESTATE (assets minus liabilities) $

$ 1 $ 10,000 $ 0 18 % $ 0
10,001 20,000 1,800 20 10,000
20,001 40,000 3,800 22 20,000
40,001 60,000 8,200 24 40,000
60,001 80,000 13,000 26 60,000
80,001 100,000 18,200 28 80,000
100,001 150,000 23,800 30 100,000
150,001 250,000 38,800 32 150,000
250,001 500,000 70,800 34 250,000
500,001 750,000 155,800 37 500,000
750,001 1,000,000 248,300 39 750,000
1,000,001 1,250,000 345,000 41 1,000,000
1,250,001 1,500,000 448,300 43 1,250,000
1,500,001 2,000,000 555,800 45 1,500,000
2,000,001 and up 780,800 47 2,000,000

Gross estate $2,000,000 $
Minus liabilities - 40,000
Net estate 1,960,000
Minus marital deduction (property left to your spouse) -500,000
Minus charitable contribution deduction -30,000
Minus state estate-tax deduction -101,040
Taxable estate 1,430,000
Plus adjusted taxable gifts made after 1976 (value as of the date of gift) + 12,000
Estate-tax computation base 1,442,000
Tentative tax (from tax-rate schedule above) 530,860
Minus gift tax actually paid after 1976 - 0
Actual tax on taxable estate 530,860
Minus estate-tax credit (2005)* - 555,800 - 555,800
Federal estate tax due $0 $
* For 2005, the federal credit is $555,800, which allows a taxable estate of $1.5 million to pass tax-free.