Death and Taxes: Planning for Both
When you die, the assets and property interests you leave behind minus any debts make up your estate. Whether your assets go through probate or you have set up alternative means for transferring your property, any estate or other taxes owed at the time of your death must be paid. While taxes cannot be avoided, an estate planning attorney can help you minimize your estate's tax burden as much as possible.
Taxable Estate
When someone passes away, he or she leaves behind a taxable estate. The taxable estate is not the same as the probate estate and can be significantly larger than your probate estate. Your taxable estate includes:
- All your property interests. Including any property interests you own and property interests in a trust controlled by you outright or by a trust to which you have significant "strings attached."
- All your qualified retirement plan proceeds. Qualified retirement plan proceeds are included unless you retired no later than 1984. Persons retiring no later than 1984 may qualify for a full or partial exclusion of these proceeds.
- All life insurance proceeds. Proceeds from life insurance policies owned by you at the time of your death or payable to your estate.
Estate Taxes
Federal estate taxes are imposed on property transferred at death. In addition, many states also impose estate or inheritance taxes on the same property. The amount of the tax is set on a gradual scale which increases with the size of the estate. These taxes decrease the amount of the share that ultimately will be distributed to the beneficiaries.
The federal estate tax was repealed for the estates of those dying in calendar year 2010. Unless Congress makes the repeal permanent or enacts new legislation, the estate tax will be reinstated in 2011 with a maximum tax rate of 55% and a $1 million exemption. However, it is anticipated that Congress will enact legislation during 2010 to restore the estate tax in 2011 at the more-favorable 2009 tax rates (maximum of 45%) and exemption ($3.5 million) and applying the estate tax retroactively to estates of those dying in calendar year 2010.
Gift Taxes
One way to minimize the amount of estate taxes that must be paid upon death is to transfer property while still alive. While there is a gift tax imposed on these types of transfers, many can take advantage of the gift tax exemption. Under current tax law, the standard "lifetime" amount you can shelter is $1 million. This means that throughout a person's life, he or she can give up to a total of $1 million away and not have to pay gift taxes on it.
The annual federal gift tax exclusion allows a single person to give up to $13,000 per person to an unlimited number of people per year while married couples can double it to $26,000 per person. Gifts that qualify for the annual federal gift tax exclusion are not subject to gift tax and do not count against the $1 million lifetime exemption.
The gifts you give each year are totaled and once you have gifted over $1 million, that amount is subject to the gift tax. Thus, if you have gifted $1.5 million, $500,000 will be subject to the gift tax. The current maximum gift tax rate is 35%. As with the estate tax, if Congress does not make the change permanent or enact legislation affecting the gift tax rate, the rate will jump to 55% in 2011. Given the complexities of estate and gift taxes, it is important to work with a tax professional to take full advantage of these exemptions.
Conclusion
The tax issues surrounding your estate can be quite complex. An experienced estate planning attorney will help you address these tax issues and minimize the impact taxes have on your beneficiaries.
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