Estate and Gift Taxes
Nothing is certain but death and taxes.
And some taxes are due even after you die.
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Your
estate
is the total value of all your savings and retirement accounts, your home, and
any other assets, minus
your debts and the cost of settling your estate. If the value of your estate is
less than $3.5 million in 2009, it will escape federal estate tax if you
die during the year. Estate taxes are scheduled to be eliminated entirely in 2010.
But unless Congress makes the changes permanent, the
tax-exempt
amount will go back to $1 million in 2011 and the top tax rate will be reinstated at
2001 levels of 55%. However, it's also possible that the exempt amounts
will increase or that estate taxes will be permanently reduced. |
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CALCULATING YOUR NET WORTH
It pays to compute your approximate
net worth
while you're still alive. You may be surprised to find that the value of
your possessions, minus mortgages and other debts, has climbed above the
tax-exempt amount.
Be sure to include the amount you have built up in retirement plans, and
an accurate assessment of the market value of your home and your
equity
in it. Other assets to consider are the face value of your life insurance
policies, which could put you over the taxable threshold, and any inheritance
you anticipate.
If your estate is over the taxable amount or seems likely to top that number,
you need an expert tax adviser and a lawyer who specializes in wills and
estates. It pays to review your will and estate plan periodically, especially
if the value of your assets, the make-up of your family, your wishes for
sharing your assets, or the tax laws change, or you move from one state to another.
The value of your property, such as your home, stocks, and bonds is figured at the
fair market value
on the date of your death or six months after - not at what you paid for the property. Your
executor picks the
valuation date. Using the current market value may raise the value
of your estate, but it also means that, in most cases, neither your estate
nor your heirs will pay capital gains tax on any increased value of the
property that occurred before your death.
Under current law, property you leave to
beneficiaries
in your will passes to them at current market value, or what's known as a
step up in basis.
However, that provision is scheduled to change if estate taxes are permanently eliminated.
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GIFT TAXES
You can avoid estate and gift taxes on annual gifts
of up to $12,000 each to as many people as you like. So can your spouse.
For example, a couple with three children may give each child $24,000 a
year and reduce a potentially taxable estate by $72,000 annually.
 In addition to the $13,000 you can
give to individuals, you can pay unlimited
tuition or medical expenses for anyone - a grandchild, perhaps -
without being subject to gift tax. But you must pay the hospital, doctor,
or college directly. You can't give the money to the patient or the student
without incurring potential gift taxes.
You can make taxable gifts during your lifetime, and no tax is actually
due until the accumulated value of the gifts reaches $1 million. Then you
owe tax at the same rate that applies to taxable estates. In 2009 the top
rate is 45%.
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THE MARITAL DEDUCTION
While you're alive, you may make unlimited tax-free
gifts to your spouse. When you die, you can leave your entire estate to
your spouse free of estate tax - provided, in both cases, that he
or she is a US citizen. Your spouse's estate will be taxed at his or her
death at whatever rate applies at that time.
If your spouse is not a US citizen, your tax-free gifts are
limited to $133,000
a year in 2009, an amount that typically increases slightly
from year to year. You probably should consider establishing a
qualified domestic trust to soften the tax blow and make it
easier to share assets. If you're not married but have a domestic partner,
you'll want to work with an experienced tax or legal adviser to find the most
efficient solutions for gifting assets or leaving an estate.
If a wife and husband own property, such as a home, as joint tenants with the
right of survivorship, only half the value is included in the estate of the
first to die. If joint tenants aren't married to each other, the entire value
of the property is usually included in the estate of the first to die. The
estate's representatives can reduce the potential estate tax by proving that
the survivor paid for all or part of the property or received a share of it by
gift or inheritance.
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© 2009 by Lightbulb Press, Inc.
All Rights Reserved.
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