Estate taxes are different from and in addition to probate expenses (which can be avoided with a revocable living trust) and final income taxes, which must be paid on income you receive in the year you die.  Federal estate taxes are expensive (historically, 40%-55%) and they must be paid in cash, usually within nine months after you die.

Your estate will have to pay federal estate taxes if its net value when you die is more than the exempt amount set by Congress at that time. In 2013, the federal exemption is $5.25 million (adjusted for inflation in 2014) and the tax rate is 40%. The history of federal estate taxes includes many changes in the rate and exemption amount. Some states have their own death or inheritance tax, so your estate could be exempt from federal tax and still have to pay state tax.




Year of Death

Exempt Amount

Top Tax Rate


$5.25 million


                 2014 and thereafter

    adjusted for inflation



To determine the current net value, add your assets, then subtract your debts. Include your home, business interests, bank accounts, investments, personal property, IRAs, retirement plans and death benefits from your life insurance.

In the simplest terms, there are three ways to reduce or eliminate estate taxes:

  1. If you are married, use both estate tax exemptions.
  2. Remove assets from your estate before you die.
  3. Buy life insurance to pay any remaining estate taxes.

You can remove the face value of your insurance from your estate by making an irrevocable life insurance trust (ILIT) the owner of the life insurance policy. As long as you live three years after the transfer of an existing policy, the death benefits will not be included in your estate. Usually the ILIT is also beneficiary of the policy, giving you the option of keeping the proceeds in the trust for years, with periodic distributions to your spouse, children and grandchildren. Proceeds kept in the trust are protected from irresponsible spending, creditors and even a new spouse.

If there is any chance your estate might be subject to estate tax, it is wise to discuss your options sooner rather than later.Often, the strategies must be put in place and exercised for a number of years to make a difference in your tax exposure. I look forward to discussing your situation and suggesting options to reduce or eliminate your estate tax exposure


Wealth Counsel Advisor Forum Estate Planning