Estate Tax issues
The Estate Documents Set is designed specifically for persons
whose total estate is worth less than the federal Estate and Gift
Tax Exclusion.
The reason for this limitation is that if your estate is
presently or likely to grow above this limit, you may need estate
tax planning. We will very briefly look at the topic here.
If you are above or near this estate size, I suggest you
consider estate tax planning.
The Federal Estate Tax system taxes all
gifts during one's lifetime and disbursements upon death. Basically,
this means that you should keep track of all gifts during your
lifetime, add that total up, and then at your death the gross value
of your estate is added to that amount.
The resulting figure is known as your taxable estate. Federal
law imposes a tax upon this amount.
WARNING: Congress is likely to make changes to the estate and gift tax
provisions during 2009 and California probably will as well.
As of 2009, each person has a lifetime
estate tax exemption
of $3.5 million. Each person also has lifetime gift tax
exemption of $1.2 million.
In practice, this means that you can make gifts of up the amounts
shown during your lifetime and/or at death to other persons or
organizations without paying any federal estate tax. In other words,
you add up the value of all your gifts during your life and whatever
you pass upon death to arrive at the total.
In addition, you can make a gift during your
lifetime of up to $13,000 per year, per person, to any number of
people. This permits a very large transfer of assets during your
lifetime without any federal estate or gift tax liability.
For estate tax purposes, the gross estate
includes all property or interest in property before reduction by
debts (except policy loans against insurance) and mortgages, or
administrative expenses. Included in the gross estate are items such
as real estate, tangible and intangible personal property, certain
lifetime gifts made by the decedent, property in which the decedent
had a general power of appointment, the decedent's interest in
annuities receivable by the surviving beneficiary, the decedent's
share in community property, life insurance proceeds (even though
payable to beneficiaries other than the estate), inherited property
of the surviving spouse, and, with certain exceptions, joint estates
with right of survivorship. It may come
as a surprise, but you must also include the payoff value of any
life insurance. This often puts an estate in range of the need for
estate tax planning.
There are a number of other inclusions that can
markedly increase the size of a taxable estate.
Again, if you are in the vicinity of the exclusion amounts
listed in the table above, please discuss with me how to value your
estate.
One of the consideration for estate planning is the tax status of property
distributed upon a person's death. This is a complex topic and we cannot
treat it in depth here. The new tax law
significantly alters the rules for basis step up. We urge you to consult an attorney or CPA in
this regard. some definitions:
- Basis - the original cost of an asset plus certain additions, used to
calculate the taxable profit of the asset upon sale.
- Step-up (or down) of basis - The increase or decrease in basis given
at the death of the owner. Usually, the new owner's share of the
asset is given a new basis, usually the fair market value at date of
death.
- Community property - California is a community property state with
extensive provisions for ownership rights.
There are differences in the step-up in basis depending upon the form of
ownership of the asset. Property owned by an individual receives a
step-up in basis to the current market value at the date of death. Where
property is held in joint tenancy, only the share paid
for by the deceased joint tenant receives the step-up in basis. The other
portion retains the original basis.
Community property, however, is treated differently. The entire asset
is given a step up in basis upon the death of one married partner. This
can be a significant benefit to the surviving spouse.
To illustrate, consider an asset purchased for $100,000 by A and B, a
married couple. A dies and the asset has a fair market value of $200,000 on
the date of death. The difference in treatment of joint and community property
looks like this:
| Joint |
Community |
| A's share receives NO step up in basis |
B's share retains its basis at $50,000 |
A's share receives a step up in basis to
$100,000 |
B's share retains its basis at $50,000 |
| After A's
death, B sells the asset for $200,000 |
| B's basis = $100,000 |
B's basis is $150,000 |
| Taxable
gain= $100,000 |
Taxable
gain = $50,000 |
This has been a brief summary of some points regarding
estate tax issues. If any of the above points applies to your circumstance, we urge you to
seek legal counsel before deciding upon a course of action.
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