Estate Tax & Reverse Mortgages


The estate tax in the United States is a tax imposed on the transfer of the "taxable estate" of a deceased person, whether such property is transferred via a Will or according to the state laws of intestacy. The estate tax is one part of the Unified Gift and Estate Tax system in the United States. The other part of the system, the gift tax, imposes a tax on transfers of property during a person's life; the gift tax prevents avoidance of the estate tax should a person want to give away his/her estate.

The annual amount exempt from the federal gift tax, called the annual gift tax exclusion, was indexed for inflation beginning in 1997 and has slowly increased over the years. Below is a chart that shows the increases in the annual gift tax exclusion from 1997 through 2010 since recently the IRS issued Rev Proc. 2009-50 which states that the annual gift tax exclusion will remain at $13,000 in 2010. Where the amount will go beyond 2010 depends on inflation, and, as the chart indicates, it can only be increased in increments of $1,000.

Historical Annual Exclusion Gift Amounts


Year Annual Exclusion Amount

1997 $10,000

1998 $10,000

1999 $10,000

2000 $10,000

2001 $10,000

2002 $11,000

2003 $11,000

2004 $11,000

2005 $11,000

2006 $12,000

2007 $12,000

2008 $12,000

2009 $13,000

2010 $13,000


In addition to the federal government, many states also impose an estate tax, with the state version called either an estate tax or an inheritance tax. Since the 1990s, opponents of the tax have used the pejorative term "death tax."  Florida does not have a State Death Tax (in effect).

If an asset is left to a spouse or a charitable organization, the tax usually does not apply. The tax is imposed on other transfers of property made as an incident of the death of the owner, such as a transfer of property from an intestate estate or trust, or the payment of certain life insurance benefits or financial account sums to beneficiaries.


        • Year    Exclusion Amount    Maximum (Top) Tax Rate
        • 2001    $675,000                 55%
        • 2002   $1 million                 50%
        • 2003    $1 million                 49%
        • 2004    $1.5 million              48%
        • 2005    $1.5 million              47%
        • 2006    $2 million                 46%
        • 2007    $2 million                 45%
        • 2008    $2 million                 45%
        • 2009    $3.5 million              45%
        • 2010    * Repealed               * 0% *
        • 2011    $1 million                 55%


* On April 2, 2009, the Senate agreed on S.AMDT.873, an amendment to S.CON.RES.13, a non-binding concurrent resolution setting forth the congressional budget for FY 2010, which was later passed. If enacted in the FY 2010 budget, a new $5,000,000 exemption level will be created with a maximum tax rate of 35%.  As of 12-31-2009 no new Estate Tax rules for 2010 had been implemented.

* UPDATE: 1/4/10 - Temporary Estate Tax Repeal In Effect – At Least For Now. 

On January 1, 2010, the federal estate and generation skipping-transfer (“GST”) taxes temporarily expired — each individual dying in 2010 would have an unlimited federal estate tax exemption.  Ever since the 2010 “repeal” of the estate tax was first enacted, virtually all commentators had expected Congress to keep this repeal from ever happening by enacting a permanent estate and gift tax solution, or, at the very least, temporary legislation maintaining the status quo.  But Congress did not. We will begin 2010 with repeal in effect.  Some in Congress have made clear their intention to enact temporary or permanent legislation in early 2010 reinstating the tax, retroactive to January 1, 2010.  But few, if any, ever expected us to arrive where we are today, so at this point, what will actually happen and when is extremely difficult to predict. 

* NO UPDATE by webmaster since 1/4/10   

Tax avoidance

The first technique many use is to combine the tax exemption limits for a husband and wife either through a Will or create a Living Trust (an A-B Trust). Many, but not all, other techniques do not really avoid the estate tax, rather they provide an efficient and leveraged way to have liquidity to pay for the tax at the time of death. It is very important for those whose primary wealth is in a business they own, or real estate, or stocks, to seek professional advice or they may run the risk of the estate tax forcing their heirs to sell these things at an inopportune time. In one popular scheme, an irrevocable life insurance trust, the parents give their children (within the allowed yearly gift tax limit) money to buy life insurance on the parents in an irrevocable life insurance trust. Structured in this way, life insurance is free of estate tax. However, if the parents have a very high net worth and the life insurance policy would be inadequate in size due to the limits in premiums, a charitable remainder trust may be used. This is where a large asset is flagged to be donated to a charity, sold, and invested. The investment income buys life insurance but the principal goes to the charity when the parents die. Meanwhile the children get the full amount as well in life insurance proceeds. This is a large reason for many charitable gifts, and proponents of the estate tax argue the tax should be maintained to encourage this form of charity.

Estate Planning and Reverse Mortgages

While a home may hold a great deal of emotional value for a family, the reality is that, in most cases, the property is sold after the owner's death and the assets are liquidated. The heirs are often forced to sell the property under "less than ideal" conditions. After the sale, which may drag on due to the state of the real estate market, heirs may be faced with inheritance and/or capital gains taxes on the proceeds. In the end, the net proceeds are often far less than the actual or perceived value of the home. A reverse mortgage, and the use of some of the proceeds to Gift (each client can give away $13,000 per person in 2010), and/or to purchase life insurance, can greatly alleviate many of these issues.

The full value of a home owned outright (mortgage free) is subject to estate tax, but a reverse mortgage lien against the property reduces its value - thus effectively lowering the estate taxes. A reverse mortgage must be repaid when the borrower permanently leaves the property. At death, the full value of the property would not be included in the estate valuation for tax purposes because the accumulated debt of the reverse mortgage would not yet have been repaid thereby reducing the property value, which should lower any applicable taxation.

In addition, accrued interest in the reverse mortgage may be available as a tax deduction upon repayment of the loan (just as forward-mortgage interest is deductible against income.

When tax-free monies from a reverse mortgage are used for the purpose of Gifting or funding life insurance products, it gives homeowners, particularly those with substantial equity built up in their homes, the comfort of having more control over their estate and assuring the legacy they leave retains its value. If the senior homeowner uses some of the tax-free equity released from a reverse mortgage to purchase additional life insurance for their heirs, the net result would be larger death benefits for the beneficiaries without affecting the current (and many times, limited) income stream of the borrower. When the insurance policy pays the benefits to the heirs, they receive tax-free dollars. Upon the sale of the property, any equity over the reverse mortgage loan amount will be subject to estate taxes, but ultimately, still revert to the heirs. With the unknown nature of the future real estate markets, the use of a reverse mortgage provides for greater control of the legacy assets by the senior homeowner. When using a reverse mortgage to enhance the total worth of an estate - the true value of a reverse mortgage is realized.






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Estate Tax and RMs