Federal estate tax is slated to be abolished in January 2010, but Senate Democrats are likely to pass a temporary measure early in the year to reinstate death tax and make it retroactive to January 1st.
At present, estate tax is assessed at the rate of 45-percent for inheritances valued above $3.5 million for individuals and $7 million for couples. Smaller estates are exempt from taxation. However, as the estate tax hangs in limbo, beneficiaries may soon find they will be charged a capital gains tax on inheritance property gifted through decedent's last will and testament.
Capital gains taxes are levied against the difference between the original price paid by the decedent and the amount of its value when sold. For example, if the decedent purchased real estate for $250,000 thirty years ago and the property is sold for $2.5 million today, capital gains tax would be assessed on $2,250,000.
While spouses can take an exemption of the first $3.5 million, only $1.3 million can be exempted by heirs. If the property is gifted to heirs, estate tax would be assessed on $950,000 at the rate of 45-percent for a total tax of $427,500. Few people are sitting on nearly half a million dollars to pay toward inheritance tax.
One option for minimizing estate tax is to establish payable on death (POD) and transfer on death (TOD) beneficiaries. POD beneficiaries can be assigned to bank accounts; individual retirement accounts (IRAs); and certificates of deposit (CDs). Transfer on death beneficiaries can be established for automobiles, motorcycles, recreational vehicles (RVs) and water craft (motorboats, sailboats and jet skis).
Inheritance property which is transferred to a trust is generally exempt from estate tax. Different types of trusts exist, so it is important to consult with an estate planner or probate attorney to determine which trust is best suited for each individual. The main benefit of establishing trusts is they remove ownership of assets from the taxable estate. The disadvantage of trusts is the property owner releases ownership rights and control of their property.
Another option to minimize estate tax is through irrevocable life insurance trusts. Life insurance trusts are essentially a container which exempt proceeds from taxation and probate. Probate is required in all 50 states unless inheritance assets are protected through a trust. The probate process typically extends for six to nine months and can deplete inheritance money reserved for heirs.
Estate tax can be avoided by gifting money and property to heirs prior to death. The Internal Revenue Service (IRS) permits gifting of up to $12,000 per person or $20,000 per married couple, per year tax-free. Recipients of larger gifts are required to submit annual gift tax returns.
Although estate tax is currently in chaos, it is still important to engage in estate planning measures. At minimum individuals should execute a last will, durable power of attorney and healthcare proxy.
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Published on January 07, 2010 at 02:33 AM