Advice and Updates:
Understanding Estate and Gift Taxes
As many are aware Federal Estate Taxes have been repealed as of January 1, 2010, but are scheduled to return on January 1, 2011. To make the matter more uncertain, a number of Congressmen and Senators in Washington have stated they plan reinstate the estate tax in 2010 and make it retroactive to January 1, 2010. This means it is possible a person who died after December 31, 2010 when there were no taxes could find out later that taxes are in fact due. However, given the late date, and the lack of cooperation in Washington, that looking less and less likely. GIFT TAX A gift tax is imposed on the transfer of money or other property by gift. The gift tax is partially integrated with the estate tax such that an individual can transfer a certain dollar value of assets to beneficiaries other than a spouse tax free during life and at death. (There are no gift taxes on transfers to spouses.) The donor is responsible for the payment of gift tax, although donee is secondarily responsible. While all Taxable Gifts must be reported to the IRS, gift taxes are collected only on taxable gifts over and above the AApplicable Exclusion Amount@. The Applicable Exclusion Amount is currently $1,000,000.00. Taxable gifts are gifts over and above certain exclusions. A gift of money is valued at the amount of money given. A gift of other assets is based on the fair market value of the asset as of the date of the gift. Once a gift is identified as a taxable gift it reduces the Applicable Exclusion Amount until the amount is exhausted. After the Applicable Exclusion Amount is exhausted tax is collected on Taxable Gifts. In determining whether a gift is a Taxable Gift, the following exclusions apply: 1. The Annual Exclusion is currently $13,000 by a person or $26,000 by a married couple per donee per year. This amount is generally adjusted up annually to reflect the rate of inflation. Unfortunately, unless changes are made to current law, this amount will reduce to $11,000 ($22,000 for a married couple) per donee per year on January 1, 2011. Example: A makes a gift of $12,000 to Child 1 and $15,000 to Child 2 during the same calendar year. A has made Taxable Gifts of $3,000. Assuming A has made no other taxable gifts he now has $997,000 of Applicable Exclusion Amount to use against future Taxable Gifts. Subject to a few exceptions, the Annual Exclusion only applies to gifts of present interests (i.e. outright gift). No annual exclusion for gifts of future interests, such as reversions, remainders interests in property, and gifts in trust. Further, a gift is not complete until the donor parts with dominion or control over the transferred property interest. The donor has not made a complete transfer until he no longer has the power to change the disposition of the property either for his own benefit or for that of others. 2. The Direct Payment of Medical Expenses (including medical insurance) or Educational Expenses as defined in the code for another person - Unlimited Amount Example: During the same year A takes the following actions: He pays College Tuition for Grandchild 1 of $20,000. He pays medical insurance for Grandchild 1 and Grandchild 2 of $2,400. He pays a Hospital bill for Child 2 totaling $15,000. He gives Child 1 $10,000 and Child 2 $10,000. A has made no Taxable Gifts. 3. Marital Deduction - unlimited amount of direct gifts to a spouse who is a U.S. Citizen. Gifts in trust for a spouse, gifts of partial interests in property to a spouse, and gifts to a spouse who is not a US Citizen have different rules. Example: Mr. A makes a Gift of $1,500,000 to his wife. No gift tax is due and there is no reduction to Mr. A’s Applicable Exclusion Amount. 4. Charitable Deduction - unlimited amount of direct gifts to 501(c) (3) charitable organization. Gifts in trust for a charity, gifts of partial interests in property to a charity, and gifts to an entity that has not been granted 501(c) (3) status have different rules. Also gifts to charity have income tax consequences. Example: Mr. A makes a Gift of $1,500,000 to the Red Cross. No gift tax is due and there is no reduction to Mr. A’s Applicable Exclusion Amount. Gifts by Power of Attorney. You cannot presume that the holder of a power of attorney has the authority to make gifts with that power. In fact, under South Carolina case law, if the power of attorney does not specifically authorize the making of gifts, the holder of the power has no authority to make gifts of the principal's assets. Gift Tax Returns. We are frequently asked, “if I do not owe gift taxes do I have to file a gift tax return?” A Gift tax return is due on April 15 of year following any calendar year an Individual or couple makes a taxable gift or gifts. No tax is collected until the total Taxable gifts less allowable deductions for the current year and all prior year exceed the Applicable Exclusion Amount (currently $1,000,000). Nonetheless, the return is due even if no tax is due, and it is a criminal act to knowingly fail to file a return.
Estate Taxes:
One of the questions most frequently asked of Estate Planning Attorneys is "Will my family owe taxes when I die?" Unfortunately this is not a question we can fully answer at this time. The good news is that the vast majority of Americans will owe no Estate Tax at the time of their death.
CONFUSION AT PRESENT!
Additionally, while Gift taxes remain in place for gifts in excess of $1,000,000.00. The rates are reduced.
If no action is taken in congress, estate taxes will come back into existence on January 1, 2011 at the same level they were in the year 2001. If this occurs estates in excess of one million dollars would be potentially subject to estate tax.
As we stated the good news is that if your net worth is less than one million dollars ($1,000,000.00), there are currently no bills pending which would result in your having a taxable estate. Further, even if your estate exceeds one million dollars, frequently some relatively simple estate planning can solve the problem. For example, if you are married both you and your spouse can exempt up to one million dollars. So with proper planning, together you can pass two million to your heirs before tax would be due. IT IS IMPORTANT THAT YOUR ESTATE PLANNING DOCUEMENTS BE STRUCTURED TO TAKE ADVANTAGE OF BOTH SPOUSE'S EXEMPTION AMOUNT. A SIMPLE WILL WILL NOT ACCOMPLISH THAT. IMPROPERLY STRUCTURED DOUCMENTS CAN RESULT IN A LOSS OF YOUR EXEMPTION, AND RESULT IN UNNECESSARY TAXES!!!
To add to the confusion, the basis rules for inheritance have change for the year 2010. A persons tax basis in an asset, such as stocks and real estate, is the amount, you deduct from the sales price of the asset to determine whether you owe capital gain tax. For example if your tax basis in a parcel of real estate is $20,000 and you sell it for $50,000 you will potentially owe capital gain tax on $30,000.00 (50,000 - 20,000). Under the old inheritance rules, if you inherited an asset from a person your tax basis in that asset was the date of death value of the asset. That rule has been modified for the year 2010 ONLY. If a person dies in the year 2010 and leaves assets to family member the rules are as follows. Inherited estate assets will get a "modified carryover basis" which may require cumbersome cost basis tracing and substantiation. Essentially an individuals estate will be allowed to allocate up to 1.3 million in basis to assets passed to persons other than a spouse and 3 million for assets passing to a spouse. This means little to you if your assets are less than one million dollars, but for larger estates, post death planning will become critical.
So the question on every one's mind is, What do I do now??? If you are confident you will survive the 2010 year or Congress will reinstate the estate tax retroactively, you may choose to do nothing. However, if you have any doubt about that or want to reduce the risk, you may want to consider revising your current estate plan. The current uncertain future of the federal estate tax law also creates a window for some unusual estate planning opportunities for very large estates. However, be prepared to be flexible in your new estate plan since no one knows what Congress might do for the rest of 2010. If you are concerned you may owe, estate or gift tax at your death contact us. We can help you with this planning.
Further, if your taxable estate could exceed one million dollars, we believe you should seek the advice of a competent estate planner now, to determine your planning options. We can assist you in structuring your assets to minimize the tax at any level.
In determining whether you have a taxable estate in excess of one million dollars, the first question to answer is, "What is in my estate?" For most people, the estate includes everything you own, or hold an interest in plus insurance payable to anyone or to your estate by reason of your death. The sum total of these assets less any outstanding liabilities you may owe is your Adjusted Gross Estate. Once the Adjusted Gross Estate has been determined, certain deductions are allowed in arriving at your Taxable Estate. These deductions include, among others, the marital deduction (for all assets left to a spouse), the charitable deduction (for assets left to a charitable organization) and the deduction for expenses incurred in the administration of your estate. The Adjusted Gross Estate less the allowable deductions is the Taxable Estate.
So with all this confusion, shouldn't I just wait and see what happens??? That is up to you, but keep a couple of things in mind. First life is uncertain, and we may not be able to fix your estate plan after your death. Second, death is not the only risk. Changes to a person's estate plan may be impossible, if the individual becomes incompetent, whether by reason of dementia, stroke, accident or otherwise. Even the young and healthy are not immune.
We know this is complicated, so please contact us with any questions you may have!!!
Also, check back often, we try to keep things up to date here; and for the most up to date information, check our SC Elder Law Blog. This will be starting in mid-July, 2010.
IF YOU ARE INTERESTED IN DISCUSSING ESTATE PLANNING, WE CAN ASSIST YOU IN WORKING YOUR WAY THROUGH THE APPLICABLE LAWS, TO ACHIEVE YOUR GOALS.
The forgoing information is subject to change at any time, and other more complex rules may apply. Do not rely on this information for any action or inaction as you may not fully understand these topics. If you need help in this area seek the assistance of a experienced estate planning attorney. This site is not intended as legal advice.