Estate Taxes Text Size:

Estate taxes can be the proverbial thorn in a beneficiary's side. In most cases these taxes are paid on the property left to an heir when someone dies. There can be several types of taxes involved and it's a benefit to you and your heirs to know beforehand if taxes need to be paid and to whom.

Federal and state taxes may apply to your estate depending on the type of property you give, what it is classified as, and to whom you are giving the property to. On the federal side, usually estate taxes and gift tax credits apply to the estate. On the state side, normally inheritance taxes are applied.

Federal Estate Taxes

In 2001, the government passed the Economic Growth and Tax Relief Reconciliation Act to reduce and gradually limit federal estate taxes so only large estates pay these taxes. In fact, unless your estate totals over $3.5 million ($3,500,000) in 2009, you don't pay any taxes. (In 2008, your estate had to be over $2 million ($2,000,000)).

The Act also repealed the estate tax for beneficiaries after December 31, 2009, but the repeal is only temporary. The pre-Act estate tax law, which includes higher estate tax rates and a smaller unified credit, will be returned after December 31, 2010. This is a time of great uncertainty for the future of the estate tax.

To determine the size of your estate, you'll need to consider the value of these items:

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

Gift Taxes

During your lifetime, you can make gifts to others. In 2008, as long as you gift $12,000 and less, the person who received the present doesn't have to pay taxes. This "annual exclusion" amount is $13,000 for gifts made in 2009. Over that amount, either the donor or receiver must pay taxes on the gift.

Other gifts you won't be taxed on:

• Direct payments of someone's tuition or medical expenses
• Gifts to charitable organizations, which may be tax deductible
• 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 also gift jointly. This is called "splitting a gift." Each spouse is considered to contribute half of the total gift. By splitting a gift, each spouse can use both the annual exclusions and their own unified gift credit.

Taxable Gifts

When giving a taxable gift, you're required to file a federal Gift Tax Return on Form 709 or 709-A. These are due by April 15th the year after the gift is made. In 2008 and 2009, the maximum gift tax rate is 45 percent, and in 2010 it will be 35 percent. Unless new legislation is passed, the maximum returns to the pre-Act rate of 55 percent in 2011.

Generation Skipping Transfer Tax

The US Generation-Skipping Transfer ("GST") is a tax on gifts and transfers in trust to or for persons two or more generations younger than the donor, like a grandchild. You'll have to pay 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 won't apply to GSTs 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

Many states impose an tax inheriting property. Some tax rates can be high depending on the relationship between the deceased and the beneficiary, the value of the property or the exemptions you claim.

Drafting for Tax Apportionment

You can divide the burden of taxes among your heirs in your estate plan. Be sure to consider all types of taxes your estate might be subject to and know how taxes are paid from the beneficiaries' shares to be equitable.

In the Necessary Will Provisions Tax Apportionment section, you can determine how taxes are paid so your heirs' tax burden is reduced and taxes are paid out of the remainder of the estate.

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 in 2008 can I give away during my lifetime without incurring a gift tax?

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