ESTATE PLANNING BASICS

Taxes

Death Taxes On Your Estate:
Many people think that estate taxes were abolished by the 2001 Tax Act. But actually, estate taxes at the federal level were scheduled by the 2001 law to stick around through 2009 (see Figure 3), and then be replaced with some loss in step-up in basis. The loss in basis step-up means that your heirs will not receive your assets with a basis which is equal to the fair market value of those assets. As a result, when the heirs sell those assets they must pay capital gains taxes on the gain (profit). That gain is the difference between what you paid for the assets and what your heirs sell them for. Under pre 2001 tax law, heirs received a full basis step-up to fair market value, and never had to pay a capital gains tax. Further, estate and inheritance taxes at the state level are often quite significant, and they were not abolished by the federal Tax Act of 2001.

This is all very complicated, but the bottom line is this: If you as an individual expect to be worth upwards of $1 million by the time of your death, or the year 2010 if that comes earlier (and if you are married, that is upwards of $2 million), then your estate faces death taxation issues. And, if you did pre-2001 estate planning, your existing trust or other estate planning needs to be revisited and probably adjusted.

The 2001 Tax Act did increase the amount of exemption from federal estate taxes which is allowed to estates. But what if that exemption is not enough for your estate?
What if estate tax rates are allowed to return to pre-2001 law, as is presently scheduled in 2011?
Or what if your estate faces capital gains taxes due to the loss of basis step-up? There could be a problem considering the appreciation and growth that your estate will enjoy before your death, especially when you add in the inheritances you may receive, death benefits from your life insurance and remainder amounts of your pension plan. Good estate planning can easily increase death tax exemption amounts by several million dollars for married couples, but some type of trust is required for maximum reduction of death taxation. Neither a will, beneficiary arrangements nor joint tenancy ownership of property are sufficient to take care of death taxation issues for either married or single estate owners.

Gift Taxes:
Gift taxes were not eliminated from the 2001 Tax Act, though the Act allows larger gifts and lower tax rates. Anyone can make a gift to any other person of up to $11,000* per year with no federal gift taxes. A married couple can then give $22,000 to one person in any given year. A married couple can give $44,000 to another married couple or to two children. For annual gifts within those limits there is little tax planning to do and no gift tax return to be filed. In many of the cases of gifts which exceed those limits, they are made because the estate is too large for estate tax purposes and the estate owner is likely to die before 2010 (die before the elimination of federal estate taxes). These extra large gifts then will usually be made to provide estate tax relief, by reducing the size of estate that will be left to the heirs. Gifts exceeding the $11,000/22,000* annual exclusion do require special planning and gift tax returns. Many of these larger gifts will need to be done with special trust or family limited partnership programs to reduce or avoid gift taxes altogether.

* The $11,000 annual gift tax exclusion is tied to inflation, so that the amount is scaled up every few years. $11,000 is the amount in effect as of the year 2005.

>INTRODUCTION

>WHY DO ESTATE PLANNING?

>PROBLEMS

>TAXES

>ESTATE TRANSFER & HEIR PLANNING

>TRUSTS vs. WILLS, WHICH IS BEST FOR YOU?

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