Things
You Should Know About Gift
and Estate Taxes
Gift
and Estate Taxes are,
strictly speaking, not taxes
on property, but rather
taxes on transfers of
property. Thus an
appropriate collective term
for the two taxes is
“transfer taxes”.
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In 2001 Congress
enacted, and the
President signed,
legislation that will
gradually phase out the
estate tax through 2009,
repeal it in 2010, and
usher the tax back in
after 2010 (IF congress
takes no further
action). I seriously
believe action will be
taken before then, and I
predict legislation with
more certainty will be
enacted after the
upcoming round of
Congressional/Presidential
elections (either
retention at a fixed
level or repeal,
depending upon the
election outcome).
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The size of the probate
estate may have little
to do with the size of
the federal taxable
estate. The taxable
estate includes all
property owned by you or
by a trust you control
outright, or by a trust
to which you have
significant "strings
attached," qualified
retirement plan
proceeds, and life
insurance proceeds, if
the policy is owned by
the deceased or payable
to the estate.
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In 2006, persons dying
may "shelter" up to
$2,000,000 worth of
property that is not
subject to the federal
estate tax. The
“shelter” applies to
each individual; a
married couple could,
with proper planning,
“shelter” twice that
amount. Under the
current scheme (see
comments in item1 above)
this amount is due to
increase to $3,500,000
in 2009, and then . . .
who knows? Lifetime
gifts made by the
deceased may use up some
of this shelter amount.
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Under the current (2006)
federal scheme, only
lifetime gifts of up
$1,000,000 may be
sheltered (as a simple
example, someone with a
$1,500,000 estate could
give it all to a child
and subject nearly
$500,000 to gift tax;
had the person instead
died and left it all to
the child, there would
be no estate tax).
North Carolina also has
a gift tax that may be
triggered even when
there is no federal gift
tax liability. North
Carolina has a
lifetime gift tax
“shelter” amount of
$100,000 applicable to
gifts to descendants and
ancestors. Beware:
Gifts to more remote
relations and in-laws
could well be taxable.
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You may make annual
lifetime gifts of
$12,000 to an unlimited
number of recipients,
which gifts are excluded
from both federal and
North Carolina gift and
estate tax and do not
use up any of your
"shelter" amount.
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A spouse may leave his
or her entire estate to
the surviving spouse
without the estate being
subject to the federal
estate tax. However,
the estate left to the
surviving spouse will be
subject to the federal
estate tax upon the
death of the surviving
spouse.
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Using a trust to keep
property out of the
taxable estate will only
work if you give up
control of the trust.
It must be an
irrevocable trust!
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It is better to make
lifetime gifts of
property that is
expected to go up in
value in the future
because the increase in
value will escape estate
taxation or delays
taxation for another
generation. Conversely,
it is better to give
property that has
already significantly
increased in value
through a will because
the person receiving the
property gets a
"stepped-up basis" equal
to the property's value
at the time of your
death and if the
property is sold,
capital gains taxes will
be the difference
between the value at
your death and the price
obtained rather than the
amount you paid for it
and the price obtained.
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Finally United States
and North Carolina
income tax returns must
be filed on behalf of
the deceased, and with
respect to the estate if
there is an ongoing
administration.
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North Carolina also has
an estate tax that is
indirectly tied to the
federal estate tax. In
other words, an estate
must calculate what
amount, if any, federal
estate tax is due and
from those calculations
determine what amount,
if any, North Carolina
estate tax is due.
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We render many estate
administration and
post-mortem planning
services to our
clients. We work with
certified public
accountants in planning
and preparing federal
and state tax returns
for the deceased, and
care prepare the many
other documents that are
necessary to close out
the deceased's estate.
In Summary
Many
state and federal tax
regulations impact estate
planning, but a carefully
crafted estate plan can
reduce the tax burden on an
estate and survivors. Both
state and federal rules and
regulations are extremely
complex, and the advice of
an estate planning attorney
to maximize tax savings is
highly recommended,
particularly if an estate is
likely to be substantial.
The federal and
North Carolina gift tax
augments state and federal
estate taxes by regulating
gifts to individuals while
living; gifts exceeding
$12,000 per recipient per
year will require state and
federal gift tax returns and
may result in taxes being
payable if an individual has
exhausted his exclusion (or
“shelter”) amount.
See Items 3, 4
and 5, above. This
provision prevents people
from giving away their
assets in order to avoid
estate or inheritance tax.
As
explained above, some gifts
from a will do not require
tax payments. Current
federal tax laws allow
testators to leave up to
$2,000,000 tax-free to one
or more individuals other
than a surviving spouse.
See Item 3.
The surviving spouse may
receive an unlimited amount
without taxes; however, if
the estate is quite large
and the entire estate is
left to the surviving
spouse, upon the surviving
spouse’s death estate taxes
that might not have
otherwise been payable may
be due. This is because
gifts and bequests to a
spouse do not use up any of
the decednt’s or donor’s
exclusion (or “shelter”)
amount. Any unused shelter
amount is buried with the
decedent! The surviving
spouse, in the meantime, has
only his or her own shelter
amount.
For
example, Jane and John Doe
each have $2.0 million
estates. Jane dies and
leaves everything to John.
Although there will be no
taxes due on Jane’s death
because she left her estate
to her spouse, she also
failed to use any of her
shelter amount because she
left everything to her
spouse. Shortly after
Jane’s death, John dies with
a $4.0 estate (his plus what
he inherited). Because John
has a shelter amount of $2.0
million, the other $2.0
million will be subject to
estate taxes. Had Jane done
some relatively simple trust
planning estate taxes could
have been entirely avoided.
Estate planning specialists
can assist people with
potentially large estates to
create trusts that may allow
transfers without any or
limited tax consequences.
None
of these taxes form a
substantial source of
revenue for state or federal
government. Most estates are
not affected substantially
by the various tax rules
because they do not exceed
taxable minimums.
Nevertheless, transfer taxes
have been in the federal
code in something like their
current form for nearly 100
years and strongly held
public opinion exists on
both sides of the issue.
Over the last several years
the impact of the estate and
gift taxes has lightened
considerably as Congress has
raised the exclusion amount
from $600,000 a few years
ago to the current
$2,000,000. Even proponents
of the estate tax are
arguing to retain the tax
high exclusion levels that
would have been unthought of
recently. The future of the
Estate Tax is extremely
uncertain, which makes
planning difficult. Before
Hurricane Katrina, the
Estate Tax was doomed.
Proponents of repeal backed
off after Katrina. The
future depends entirely on
the make-up of Congress
after the 2006 mid-term
elections.
In
the meantime, look for the
states to retain estate and
inheritance taxes in an
attempt to enhance
revenues. State taxes were,
for the most part,
overlooked because their
impact was rarely felt. The
federal estate tax once
allowed a credit (a
dollar-for-dollar reduction
of the tax otherwise
payable) against federal
estate taxes for any state
death taxes that were
payable. The credit amount
was allowed up to a certain
percentage limit. The
states, in turn, simply
enacted statutes that levied
a tax equal to whatever the
maximum allowable federal
credit was for the estate.
North Carolina was one of
those many states. The 2001
federal tax legislation
converted the old credit for
state taxes payable to a
smaller deduction for state
taxes payable (most tax
payers who itemize
understand that a one dollar
deduction does not result in
one dollar less taxes –
unlike a credit).
Meanwhile, many states
(North Carolina included)
have continued to peg their
state estate taxes to
whatever the old
federal credit was (before
the 2001 legislation). In
other words, an estate will
pay the same amount to the
state, but pay more to the
federal government because
the estate is only getting a
deduction instead of the old
credit.
As you can see, all of this
is quite complex. With
years of experience in the
area, we are here to help.
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