Estate Planning & Taxes

Estate Planning & Taxes

ESTATE TAXES

The federal government imposes a transfer tax on the value of property transferred to your beneficiaries at the time of your death (estate tax). Such property is taxed at graduated rates that begin at 18% and reach as high as 45%. For calendar year 2009 the first $3,500,000 of property transferred at death is exempt from this tax. Currently, for calendar year 2010, the estate tax is repealed and there is no estate tax. Then in 2011, the old estate tax rules ($1 million exemption from the tax) will apply. It is very likely that new estate tax legislation will be enacted before the end of 2010. Currently, there is no Florida estate tax. This may change in the near term as well. For those of you who have net estates worth more than $1 million, you should continue to monitor the estate tax legislation to see whether or not you need to consider estate tax planning as part of your strategic plan.

GIFT TAXES

The federal government imposes a transfer tax on the value of property transferred gratuitously during your lifetime. So if you make a gift to a friend or family member, there may be a gift tax cost associated with the transfer. You may make a gift of up to $13,000 (the Annual Exclusion) to any one individual during 2010 without any gift tax consequences. You can also pay certain educational and health care expenses of a beneficiary without any gift tax consequences. Should you exceed the Annual Exclusion amount, you will need to file and report the gifts. You are allowed to make $1 million in taxable gifts during your lifetime before you have to pay gift taxes. Should your goals include making gifts to friends or family members during your lifetime, you should further educate yourself on these specific rules so that you can accomplish your goals as efficiently and cheaply as possible.

GENERATION-SKIPPING TAXES

The federal government imposes another transfer tax (on top of and in addition to the estate and gift taxes) on the value of property transferred either during your lifetime or at death to individuals who are generally in your grandchildren's generation level. Basically, the government wants to collect its estate taxes as wealth is transferred from one generation to the next. Some folks have figured out that they could minimize the estate tax by skipping their children (the next generation) and leaving assets to their grandchildren. To combat this, the government enacted the GST Tax to impose a second estate tax on the skip. This is a very onerous tax (I had an audit once where the effective tax rate on the property transferred to the grandchildren was 82%). Should your goals include transferring assets to grandchildren (or someone else who is two generations or more younger than yourself) you need to educate yourself on the applicable GST Tax rules.

INCOME TAXES

Income taxes are often overlooked during the estate planning process, but can have a significant financial impact on the recipient of your assets. For example, if you gratuitously transfer an asset to your child, they will have an income tax basis in the asset equal to whatever your income tax basis was in the asset. If, on the other hand, you leave the asset to your child at your death, they would have an income basis in the asset equal to its fair market value as of the date of your death. That means, if the asset has appreciated while you owned it, they could sell the asset after your death for little or no taxable gain. Pension and IRA assets are typically taxed as ordinary income by the recipient. So if you leave your pension or IRA to a child, they have to report the pension distributions from the account as ordinary income when they receive the funds. There are very specific rules about when they must take the funds out of these types of accounts (typically over 1 or 5 years), but you can do some planning that may enable the child to take the funds out over their lifetime. This means the tax liability can be spread over a much longer period. So if you have pension accounts, or are planning on making a lifetime gift, you may want to explore the income tax consequences of the transfer before you make the gift.

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