Los Angeles Estate Planning Attorney | Law Office of Philip J. Hoskins
| Estate Tax issues
Estate taxes have been the subject of much controversy, despite the fact
that very few have ever had to pay the infamous “death tax”. Congress
has just passed a revision of the tax laws so that estates with a gross
value of under $5 million per person will not be subject to any taxation
at all.
The gross value of an asset is its current market value before deduction
of any mortgage or debt. For estate tax purposes, this includes the
proceeds of life insurance proceeds in most cases.
Once you have accounted for the Gross Estate, certain deductions (and in
special circumstances, reductions to value) are allowed in arriving at
your "Taxable Estate." These deductions may include mortgages and other
debts, estate administration expenses, property that passes to surviving
spouses and qualified charities. The value of some operating business
interests or farms may be reduced for estates that qualify.
The tax rate for estates over
the exemption amount is now 35%.
California continues to not have any estate or inheritance taxes at all.
For decedents dying in 2010, the estate tax is retroactively restored,
with an exemption of $5 million and a top rate of 35%. The estate’s
executor, however, is given the option to forego estate tax, but must
then also forego a step-up in basis of the decedent’s assets, except to
a limited extent.
Beginning in 2011, this provision will permit a decedent’s unused estate
tax exemption to be added to and used by a surviving spouse during the
surviving spouse’s lifetime for gifts, or be available at death for
estate tax purposes. The unused exemption will be available to the
surviving spouse only if a timely election is made on the predeceased
spouse’s estate tax return.
The generation-skipping transfer (GST) tax will spring back to life in
2011 with a rate of 35% and an exemption of $5 million. The estate, gift
and GST exemption is further increased for inflation for 2012.
All of these changed rates and exemptions will once again “sunset” at
the end of 2012, and 2013 will usher in a 55% tax rate and a $1 million
exemption.
WHAT ABOUT GIFT TAXES?
In the recently passed legislation, the lifetime exemption amount for
gifts was raised from $1 million to $5 million. The maximum tax rate on
gifts over that lifetime exclusion amount is now 35%.
The donor is generally responsible for paying the gift tax. Under
special arrangements the donee
may agree to pay the tax instead. Please visit with your tax
professional if you are considering this type of arrangement.
What Is Considered A Gift?
Any transfer to an individual, either directly or indirectly, where full
consideration (measured in money or money's worth) is not received in
return.
What Can Be Excluded From Gifts?
The general rule is that any gift is a taxable gift. However, there are
many exceptions to this rule. Generally, the following gifts are not
taxable gifts.
Gifts that are not more than the annual exclusion for the calendar year.
Tuition or medical expenses you pay for someone (the educational and
medical exclusions).
Gifts to your spouse.[Note:
remember that a Domestic Partner or same-sex spouse is not a “spouse”
under federal law]
Gifts to a political organization for its use.
In addition to this, gifts to qualifying charities are deductible from
the value of the gift(s) made.
May I Deduct Gifts On My Income Tax
Return?
Making a gift or leaving your estate to your heirs does not ordinarily
affect your federal income tax. You cannot deduct the value of gifts you
make (other than gifts that are deductible charitable contributions). If
you are not sure whether the gift tax or the estate tax applies to your
situation, refer to
Publication
950, Introduction to Estate and Gift Taxes.
How Many Annual Exclusions Are
Available?
The annual exclusion applies to gifts to each donee. In other words, if
you give each of your children $13,000 the annual exclusion applies to
each gift.
What If My Spouse And I Want To Give
Away Property That We Own Together?
You are each entitled to the annual exclusion amount on the gift.
Together, you can give $26,000.
What Is "Fair Market Value?"
Fair Market Value is defined as: "The fair market value is the price at
which the property would change hands between a willing buyer and a
willing seller, neither being under any compulsion to buy or to sell and
both having reasonable knowledge of relevant facts. The fair market
value of a particular item of property includible in the decedent's
gross estate is not to be determined by a forced sale price. Nor is the
fair market value of an item of property to be determined by the sale
price of the item in a market other than that in which such item is most
commonly sold to the public, taking into account the location of the
item wherever appropriate."
For estate tax purposes, the gross estate
includes all property or interest in property before reduction by
debts (except policy loans against insurance) and mortgages, or
administrative expenses. Included in the gross estate are items such
as real estate, tangible and intangible personal property, certain
lifetime gifts made by the decedent, property in which the decedent
had a general power of appointment, the decedent's interest in
annuities receivable by the surviving beneficiary, the decedent's
share in community property, life insurance proceeds (even though
payable to beneficiaries other than the estate), inherited property
of the surviving spouse, and, with certain exceptions, joint estates
with right of survivorship. It may come
as a surprise, but you must also include the payoff value of any
life insurance. This often puts an estate in range of the need for
estate tax planning.
There are a number of other inclusions that can
markedly increase the size of a taxable estate. Again, if you are in the vicinity of the exclusion amounts
listed in the table above, please discuss with me how to value your
estate.
One of the consideration for estate planning is the tax
status of property distributed upon a person's death. This is a complex
topic and we cannot treat it in depth here. The new tax law significantly
alters the rules for basis step up. We urge you to consult an attorney or CPA in
this regard. some definitions:
-
Basis - the original cost of an asset plus certain additions,
used to calculate the taxable profit of the asset upon sale.
-
Step-up (or down) of basis - The increase or decrease in
basis given at the death of the owner. Usually, the new owner's share of
the asset is given a new basis, usually the fair market value at date of death.
There are differences in the step-up in basis depending upon the form of ownership of the asset. Property owned by
an individual receives a step-up in basis to the current market value at the
date of death. Where property is held in joint tenancy, only the share
paid for by the deceased joint tenant receives the step-up in basis. The
other portion retains the original basis. Proving
which party paid what can be very difficult and the IRS presumes the deceased
owner paid nothing.
Tenancy in common property, however, is treated differently.
When one owner dies, that entire interest receives a new basis value as of the
date of death. This can produce a significantly different tax result upon an
eventual sale of the property by the surviving party.
To illustrate, consider an asset purchased for $100,000 by A
and B. A dies and the asset has a fair market value of $200,000 on the date of
death. The difference in treatment of joint and tenancy in common looks like
this:
|
Joint
|
Tenants in Common
|
|
A's share receives a step up in basis to $100,000
|
B's share retains its basis at $50,000
|
A's share receives a step up in basis to $100,000
|
B's share receives a step up in basis to $100,000
|
|
After A's death, B sells the asset for $200,000
|
|
B's basis = $150,000
|
B's basis is $200,000
|
|
Taxable gain= $50,000
|
Taxable gain = $0
|
This has been a brief summary of some points regarding
estate tax issues. If any of the above points applies to your circumstance, we urge you to
seek legal counsel before deciding upon a course of action.
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