Estate Taxes

What's the deal with estate taxes?

Estate taxes result when the value of your estate exceeds the applicable exclusion limit. The maximum estate tax rate is gradually lowered from 55% to 45%, and is repealed for one year in 2010. However, as soon as 2011 rolls around, the exclusion limit and maximum tax rate revert back to 2001 levels.

If the value of your estate exceeds the applicable exclusion limit in the year of your death, you must file IRS Form 706. (Generation-skipping tax is the tax owed on property left to grandchildren or great-grandchildren.)

If the value of your estate exceeds the applicable exclusion limit in the year of your death, your beneficiaries are responsible for filing the IRS Form 706.

The 2001 tax law makes estate planning especially complex at this point in time. Also, this law is set to expire in 2010, at which point a new set of tax laws may come into place. For this reason it is important not to forget these other aspects of estate planning:

Unexpected events. It is often necessary to have determined a means for important financial decisions to be made on your behalf should you fall ill or become involved in an accident. To ensure that your estate will be handled as you would like, you can establish a living will, power of attorney agreement or revocable living trust.

Marital deduction. The marital deduction rule allows the entire value of an estate to pass from the deceased spouse to the surviving spouse, free of estate taxes. While this rule allows for a tax-free transferal, the marital deduction is not a tax-avoidance strategy because as soon as the surviving spouse dies, the estate (which is now the combined value of both estates) may become liable for estate taxes.

Estate Planning Options and Gifting. Beginning in 2003, estate laws have allowed you to give up to $11,000 to any individual or charitable organization a year, completely free of gift-taxes. This means that the recipient will not have to pay taxes on any gift up to $11,000. However, there is no yearly limit for qualified educational expenses. One of the perks of this form of distribution is that the value of your estate is lowered and your wealth is distributed while you are still living. With gifting it is important to consider the fact that while distributions made to charitable organizations are often tax-deductible, gifts to heirs are not.

Unified tax credit. Unified credit is a form of cumulative tax credit. With this form of estate planning, taxes owed on amounts that exceed the $11,000 per-person/charity yearly limit are subtracted from your unified credit. Gifts that exceed the yearly limit must be recorded, so it is necessary to complete IRS Form 709 (for gift tax), which is the sister of Form 706 (for estate tax).