Karl H. Magnus

Attorney at Law

Plaza Office Park

121 S. Wilke, Suite 407

Arlington Heights, IL 60005

E-Mail

Fax (847) 352-2964

Phone (847) 368-0000

  • TRAFFIC / DUI

 

All attempts are made to provide accurate information. However, nothing contained herein should be relied upon as legal advice or legal authority. Nothing contained herein should be substituted for the advice of competent legal counsel.   

Tax disasters that Only Uncle Sam dreams about

INTRODUCTION

Most tax disasters involving your estate can be avoided with careful planning and properly drafted instruments. Your estate may be subject to Income Tax, Gift Tax, Estate Tax, and Generation Skipping Tax ("GST"). These taxes are generally referred to as transfer taxes. For example, transferring property to someone other than your spouse during life or upon death may subject to your estate to transfer taxes. The purpose of this article is to demonstrate by example when and how these taxes apply.

The most common type of tax disaster involves wasting your Unified Credit (the amount that Uncle Sam allows you to use in order to reduce or eliminate your transfer taxes). Wasting your Unified Credit may cause an additional transfer tax burden for your beneficiaries of as much as $345,000 in the year 2011 and beyond.

Tax Disaster #1

John and Mary are married to each other and have a combined estate worth $2,000,000 in the year 2011. In his Will, John leaves his half of the estate ($1,000,000) to Mary outright. Although John's estate does not incur any transfer taxes because of the Unlimited Marital Deduction (the amount that Uncle Sam allows you to transfer to your spouse without incurring transfer taxes), John's Unified Credit is wasted. When Marry dies soon thereafter, her estate must pay Uncle Sam $345,000 in federal estate tax. This is because Mary's estate has now increased to $2,000,000 and Mary can only one Unified Credit (her own) to be applied towards transfer taxes.

Tax Disaster #2

Grandpa worked hard all his life and accumulated a considerable estate. His estate is in excess of $3,000,000 and includes an IRA (Individual Retirement Account) worth $2,000,000. Grandpa's children are successful and independently wealthy members of society. Grandpa feels that his children will not need the bulk of his estate when he departs and decides to leave his IRA to his only grandchild Penelope. Unfortunately, Penelope will only receive a fraction of her grandfather's estate when he dies. Without proper estate planning, Uncle Sam will get the bulk of grandpa's estate.

  

Balance in Grandpa's IRA when he departs

 

$2,000,000 

Less Federal estate tax (45% of $2,000,000) 

($1,100,000)

Balance

   $900,000

Less Generation Skipping tax (50% of $900,000) 

($ 495,000)

   

Balance

   $405,000

Less Income tax (39.6% of $405,000)

($160,380)

Balance to Penelope (without considering state income tax)

  $244,620