Estate Taxes

Sherrie Bennett

When someone is planning the distribution of property after death or when someone dies and leaves property, there is usually a question as to what kinds and amounts of taxes are due and who has to pay them. The answer to that depends on federal and state laws. On the federal side, there are estate taxes and gift tax credits to consider. On the state side, there are inheritance taxes.

Federal Estate Taxes

The Economic Growth and Tax Relief Reconciliation Act of 2001 reduced the maximum federal estate and gift taxes, and it increased the unified credit, which is a lifetime "credit" toward the gift tax. The Act gradually limited federal estate taxes so that:

• If you die in 2008, you won't pay federal estate taxes unless your estate is worth more than $2,000,000
• If you die in 2009, you won't pay federal estate taxes unless your estate is worth more than $3,500,000

The Act repealed the estate tax for decedents dying after December 31, 2009. However, the repeal is only transitory as the pre-Act estate tax law, which includes higher estate tax rates and a smaller unified credit, is resurrected for estates of decedents dying after December 31, 2010. So, this is a time of great uncertainly for the future of the estate tax.

In determining the size of your estate for federal tax purposes, you'll include the value of:

• Property
• Personal possessions
• Cash
• Pensions and retirement accounts
• Life Insurance
• Any other assets

Gift Taxes

The federal government and some states tax a transfer of wealth to another person during the giver's lifetime. The gift giver - called the "donor" - is liable for paying federal gift tax. But if the donor doesn't pay, the person who receives the gift is personally liable for paying it.

You can gift up to $12,000 without being taxed, as long as what you're giving is a "present" (current) interest in property. You also won't be taxed on:

• Direct payments of someone's tuition or medical expenses
• Gifts to charitable organizations
• Gifts between spouses

You're also entitled to a lifetime "credit" against the gift tax. This credit is known as the "unified credit" and is a dollar-for-dollar reduction of any tax due. The total amount of taxable gifts that will be sheltered from tax is $1,000,000.

Couples may "split" their gifts, as if each spouse made a gift equal to one half of the value of the total gift. If a gift is split, each spouse is entitled to use both the $12,000 annual exclusions and their own unified gift credit.

The giver of a taxable gift is required to file a federal Gift Tax Return on Form 709 or 709-A. Gift tax returns are due by April 15th of the year after the gift is made. The maximum gift tax rate in 2008 and 2009 is 45 percent, and in 2010 it will be 35 percent. Unless legislation is enacted, the maximum rate will return to the pre-Act rate of 55 percent in 2011.

Generation Skipping Transfer Tax

You'll have to pay Generation Skipping Transfer ("GST") Tax if you:

• Make taxable gifts to grandchildren or others considered to be two or more generations younger than you
• Leave property to someone two or more generations younger than you, based on your family relationship or the difference in your ages
• Transfer property to a non-relative who's more than 37 1/2 years younger than you

You can make taxable gifts of or leave $1,000,000 to grandchildren without having to pay GST tax.

The GST tax will not apply to generation-skipping transfers made after December 31, 2009. However because of the ''sunset'' provision of the Act, on December 31, 2010, the Act is repealed and the pre-Act rules apply.

State Taxes

States impose an inheritance tax on beneficiaries inheriting property, based on the relationship between the deceased and the beneficiary, and the value of the property passed on.

Many states also tax estates separately, based on the value of property directly connected to the state.

Drafting for Tax Apportionment

You may apportion the burden of taxes in an estate plan. In doing that, you should consider both inheritance taxes and estate taxes. An inheritance tax is a tax on the beneficiary's right to receive property under the will or by succession. Generally, the tax is deducted from the beneficiary's share or is paid by the beneficiary.

An estate tax is a tax upon the decedent's right to transfer property upon his or her death. The executor is primarily responsible for the payment of the federal estate tax. The general rule regarding payment is that in the absence of a state law or a direction in the will to the contrary, the ultimate burden of an estate tax falls on the residuary estate if the residuary estate is sufficient for the payment of the tax. The residuary estate is the property that is left after charges against the estate and specific bequests have been paid.

Many states have laws requiring apportionment of estate taxes among the beneficiaries in the absence of a contrary direction in the will. State laws also may require that non-probate assets, which are included in determining a decedent's taxable estate, such as insurance proceeds, must pay their fair share of taxes incurred by the estate in the absence of a will provision to the contrary.

A will may contain a provision which stipulates who or from what share death and inheritance taxes will be paid. If there is not a tax clause in the will, state laws should be examined to determine how payment of taxes will be made. Payment of taxes will reduce the value of the assets that pass to the beneficiaries.

Questions for Your Attorney

• If someone dies in 2009, how much of his estate passes to his beneficiaries without federal estate taxes being due?
• Are there going to be any federal estate taxes after 2009?
• How much in gifts over $12,000 can I give away during my lifetime without incurring a gift tax?

Related Resources on Lawyers.com ^sm

- Life Event>Write a Will>Does Everything Have to Go through Probate> Alternatives to Probate (not yet written)
- Estate Planning articles and information

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