 Federal Estate Tax (Death Tax) Planning
The federal estate tax is an excise tax levied
on the transfer of a person's assets after death. In actuality, it is
neither a death tax nor an inheritance tax, but more accurately a
transfer tax. There are three distinct aspects to federal estate
taxes that comprise what is called the Unified Transfer Tax:
Estate Taxes, Gift Taxes, and Generation-Skipping Transfer Taxes. Legal
planning to avoid or minimize federal estate taxes is both a prudent and
an important aspect of comprehensive estate planning.
Federal Estate Tax Minimization
If the value of your total estate falls
within the federal estate tax "applicable exclusion amount," no federal
estate taxes are owed. Currently (in 2009) the applicable exclusion
amount is $3.5 million. Depending on your situation, this may or may not
be enough to shelter your estate from estate taxes.
Your Taxable Estate
Clients are often surprised to learn that
the probate estate and the taxable estate are not always the same. For
federal estate tax purposes, your estate includes
- All property interests owned by you, or by a Trust you control
outright, or by a Trust in which you have incidents of ownership
(certain strings attached).
- Proceeds from your qualified retirement plan(s).
- Life insurance proceeds, if the policy is owned outright by the
decedent or made payable "to the estate."
So, while a $3.5 million estate tax
exclusion may seem like a lot, there are many ways that even persons of
seemingly moderate wealth could incur estate tax liabilities when the
value of real estate, retirement plans and life insurance proceeds are
considered.
Also, under current law, unless the President and Congress makes changes,
the federal estate tax will be repealed for just one year in 2010. It is
then reinstituted (with a vengeance) in 2011, with a $1 million
exemption and a maximum rate of 55 percent. Therefore, in addition to
taking advantage of the applicable exclusion amount, it is wise to
consider estate planning strategies to minimize federal estate taxes.
Gift Taxes
While the federal estate tax is set for
repeal in 2010, gift taxes live on. There is currently a $1 million
shelter for lifetime taxable gifts and a $13,000 exclusion (per donor)
per year. The $13,000 annual exclusion does not count against the $1
million lifetime gift exclusion nor the applicable exclusion amount for
estate taxes. If you give away more than the annual gift exclusion limit
($13,000 in 2009) however, to any one person in a year, the gift counts
against your $1 million lifetime taxable gift exclusion and, ultimately,
against your applicable exclusion amount ($3.5 million in 2009) for
estate tax purposes. So, if you gave your child a gift of $113,000 this
year, you would have used up $100,000 of your $1 million lifetime
taxable gift exclusion and, in turn, that ultimately reduces your
exclusion for estate taxes, too.
Married couples can double their annual gift exclusion
by "gift splitting," whereby a gift made by one is considered to be
made by both, even if only one spouse actually owned or contributed the
property. Lifetime gifting strategies can be prudent ways to minimize
federal estate taxes. Not only do such gifts reduce the value of your
current estate, but such gifts remove the future taxation and
appreciation of such assets as well.
Generation-Skipping Taxes
The Generation Skipping Transfer (GST) tax
was enacted in 1976 to prevent families from avoiding the estate tax for
one or more generations by transferring assets directly to grandchildren
or great-grandchildren rather than passing them through each generation.
The GST exemption amount is equal to the estate tax exemption amount, or
$3.5 million in 2009. Planning to minimize estate taxes often includes
trusts designed to utilize the GST exemption ($3.5 million in 2009) as
well as the estate tax exclusion (also $3.5 million in 2009).
California Estate Taxes
California's estate tax is a "pick-up" tax equal to the state death tax
credit under federal estate tax law. Since this credit has been repealed
for the period from 2005 through 2010, there are currently no estate
taxes imposed by the state. |
