Estate Planning
What Is An Estate?
When we hear the word "estate," many of us envision a large mansion with a Rolls or two parked in the garage.
However, if you own anything at all -- real estate, bank accounts, mutual fund accounts, stocks, bonds, personal property (an automobile, jewelry, furniture, etc., then YES, you have an estate.
Will My Estate Have to Pay Taxes After I Die?
It depends. The federal government imposes estate tax at your death only if your property is worth more than a certain amount, which depends on the year of death. But all property left to a spouse is exempt from the tax, as long as the spouse is a U.S. citizen. Estate tax is also not assessed on any property you leave to a tax-exempt charity.
What Are The Rate For Federal Estate Taxes?
The rates are steep, starting at 37%. The maximum is 55% for property worth over $3 million. The maximum rate is scheduled to decline gradually to 45% in 2009. There will be no estate tax in 2010, if the current tax law (passed in 2001) is not amended.
Are There Ways to Avoid Federal Estate Taxes?
Yes, although there are fewer ways than many people think, or hope, there are. Here are some of the most popular:
Tax-free gifts .You can give up to $10,000 per calendar year per recipient without paying gift tax. You can also pay someone's tuition or medical bills, or give to a charity, without paying gift tax on the amount. This reduces the size of your estate and the eventual estate tax bill.
An AB trust. Spouses leave their property in trust for their children, but give the surviving spouse the right to use it for life. This keeps the second spouse's taxable estate half the size it would be if the property were left entirely to the spouse.
A "QTIP" trust, which enables couples to postpone estate taxes until the second spouse dies.
Charitable trusts, which involve making a sizable gift to a tax-exempt charity.
Life insurance trusts, which let you take the value of life insurance proceeds out of your estate.
Can't I Just Give All My Property Away Before I Die and Avoid Estate Taxes?
No. The government long anticipated this one. If you give away more than $10,000 per year to any one person or non-charitable institution, you are assessed federal "gift tax," which applies at the same rate as the estate tax.
Making gifts of less than $10,000, however, can yield substantial estate tax savings if you keep at it for several years. Some other kinds of gifts are exempt from the gift/estate tax as well. You can give an unlimited amount of property to your spouse, unless your spouse is not a U.S. citizen, in which case you can give away up to $101,000 per year free of gift tax. Any property given to a tax-exempt charity avoids federal gift taxes. And money spent directly for someone's medical bills or school tuition is exempt as well.
Do Some States Impose Death Taxes?
A handful of states impose death taxes. These taxes are of two types: inheritance taxes and estate taxes.
Inheritance taxes are paid by the people who inherit your property, not your estate. Typically, how much they pay depends on their relationship to you. For example, Nebraska imposes a 15% tax if you leave $25,000 to a friend, but only 1% if you leave the money to your child. These rates vary from state to state.
State estate taxes are similar to the estate tax imposed by the federal government. Your estate must pay this tax no matter who your beneficiaries are. Every state except Ohio has abolished these taxes, at least in effect. The states just take part of any estate tax that you owe to the feds; it's a matter for accountants and tax preparers, but doesn't increase the tax bill. This may change, however, as the federal estate tax is phased out over the next few years; to make up the revenue shortfall, states may decide to impose their own death taxes.
Can I Avoid Paying State Death Taxes?
If your state imposes death taxes, there probably isn't much you can do. But if you live in two states -- winter here, summer there -- your inheritors may save on death taxes if you can make your legal residence in the state with lower, or no, death taxes.
