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Death and Taxes, They do go together!
The application of the old cliché about death and taxes is certainly appropriate for today’s article. Because the issue of taxation invariable arises when the subject of estate planning is discussed, it’s wise to educate yourself about the ramifications of one upon the other. Here are a few of the most basic and frequently misunderstood tax-related facts to keep in mind as you consider your own estate planning situation:
- Estates with a gross value of under $2 million are exempt from federal estate taxes (for deaths occurring in 2006, 2007, and 2008). In 2009, the exemption amount will rise to $3.5 million.
- Benefits paid from life insurance do count in calculating your estate's total value. The beneficiary (for instance, your surviving spouse) won't have to pay income tax on life insurance benefits, but if your estate exceeds the exempt amount stated above, estate taxes will be levied against the total, including life insurance.
- Federal estate taxes are levied at high rates, up to 46 percent for the highest tax brackets. Be sure that you know the total value of your estate, so that if it’s likely to be greater than the exempt amount, you can take steps to protect it. When life insurance, real estate, and perhaps a small business or other assets are combined, a seemingly modest estate can quickly exceed the exempt amount. Trusts and other plans to avoid or lower estate tax liability can be instituted for relatively little time and cost, and can potentially save your heirs bundles of money.
- A living trust does not affect the value of your estate for purposes of calculating estate taxes, though it can help in lessening probate costs. Other types of trusts can be established to help you avoid or ease the estate tax bite.
- Making gifts during your lifetime (also known as inter vivos giving) up to the gift tax exempt amount, which is $12,000 per year to each recipient for the 2006 tax year, can be an effective way to avoid capital gains tax and certain other tax hits. But if you make gifts greater than the exempt amount, the value of the gift above the exempt amount -- minus any gift tax that you paid -- may be added to the total value of your estate for the purpose of calculating whether and how much estate tax will be levied.
- The beneficiaries of your estate won't be required to pay federal income tax on what they receive, but a number of states do charge inheritance taxes. Some states' inheritance taxes are structured in such a way that they will only apply to estates that are subject to federal estate taxes and may be deducted from any federal taxes paid; so there is, in effect, no additional charge beyond the federal estate taxes. Other states’ inheritance taxes are applied differently and do amount to an additional tax burden.
Be assured that many other issues may arise depending upon your particular familial circumstances and estate plan. The advice of an experienced planner can aid you and your heirs immeasurably.
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