|
|
November 2007 Estate Planning Unless Congress changes the law, 2010 is the only year that a person will not be taxed for dying. Under the current rules, the estate of an individual will be taxed at a rate of 45% for the value of their estate that is over their exemption. The exemption is currently $2 million for 2007 and 2008, and goes up to $3.5 million for 2009. In 2010 the exemption is unlimited, but reverts back to $1 million in 2011, plus the top tax rate will be progressive starting at 41% increasing to 55%. Let's say a single individual has an estate value of $2.5 million, and dies in 2008. They will have an estate tax bill of $225,000 ($2.5 million less $2 million exemption times 45%). If the same individual dies in 2009, they will have no estate tax due because their estate value of $2.5 million is less than the $3.5 million exemption for that year. Unless Congress changes the laws the same individual will incur $680,000 of estate taxes in 2011 under the progressive tax rate structure. There are a few things that you can do to reduce your estate tax liability without deciding on what date you should die. You can give up to $12,000 each year to multiple individuals without incurring any gift tax or reduction of your exemption. If you are married, your spouse can give $12,000 to the same individuals. Therefore, if you are married and have two kids, you and your spouse can give each child a total of $24,000, reducing your estate by $48,000 each year. Another thing to consider is your basis (cost) in the property. When assets are inherited, the basis of the asset is stepped-up to its fair market value at date of valuation for estate tax purposes. If you gifted the same asset to your child, the basis that your child has in the asset is the same as your basis. Because of the stepped-up basis rule, it is usually better to hold assets that have appreciated greatly in value until death and gift assets that have not appreciated in value. Congress has changed the stepped-up basis rules for property inherited from a person who dies in 2010. In that year, inheritors will receive a stepped-up basis for property worth a total of only $1.3 million. (Surviving spouses receive a stepped-up basis for $3 million worth of property). All property above the limits will carry the same basis as it had for the deceased individual. As you can see, there are many things to consider when looking at what, how, and when to transfer assets to your heirs, and many of these rules are expected to be changed before 2011. It is generally thought that Congress will adjust the exemption to somewhere between $3 and $4 million starting in 2011 or earlier as it seems doubtful that Congress will allow a year with no estate tax; however, nothing has been passed as of yet. If you would like to discuss the potential estate tax you could encounter, or how to reduce that tax, please call us.
|
