You should now understand how you can make lifetime gifts to reduce the tax liabilities on your estate. However, you can further reduce your income tax liabilities by understanding the federal tax code. The Internal Revenue Service (IRS) typically considers all gifts as taxable unless they come within the annual gift limits. The IRS does not consider some gifts as taxable. This means that some types of gifts will never trigger income taxes, regardless of the exclusionary rule. Paying an individual’s medical expenses or tuition, gifts to political organizations and spousal gifts are not taxable. Furthermore, gifts to qualified charities are even deductible in addition to being non-taxable! This may be a good year to find a charity that you would like to help by making a cash gift or property donation to serve your estate planning needs.

If you make a cash gift, it’s easy to find the value of your gift for computing your federal income tax liabilities. In other words, a cash gift of $13,000 is worth $13,000. However, for other gifts, you will need to include copies of appraisals or any other formal documents with your federal income tax returns. The IRS typically uses a fair market value approach to establish the value of your gift. You may need a formal appraisal conducted by a professional accountant or valuation company to help you establish the fair market value of property.

In closing, you now understand that making a lifetime gift can reduce your estate taxes by reducing the assets within your gross estate.

This blog is part 3 of 3 on how Federal Gift Taxes cab reduce an estate’s tax liability.  If you’ve missed parts 1 and 2, check out our blog.

Davidov Law Group is a member of the American Academy of Estate Planning Attorneys.

After reading the first part of this three-part series, you now have a basic understanding of why a lifetime gift may reduce an estate’s federal income tax liabilities. Now, I will cover how you can further reduce your estate’s tax liabilities. The Internal Revenue Service (IRS) gives each donor (gift giver) a tax exemption of $13,000 annually for a lifetime gift made to each donee (gift recipient). However, the IRS allows spouses to make gifts together and add their exclusions together. In other words, if you are married, you and your spouse can make an annual gift of up to $26,000 to each donee by combining your annual gift exclusion. Thus, if you have three children, you and your spouse can give each of your children up to $26,000 without triggering federal gift taxes for gifts made on or after Jan. 1, 2009. You can see how this will have the effect of reducing your income tax liabilities imposed on your estate after you die. Furthermore, your children may benefit more from a current gift than they would a future gift.

According to the IRS, donors are typically responsible for paying federal gift taxes. Thus, if you gave someone a gift that exceeded the amount of the annual gift tax exclusion, the person receiving the gift is not responsible for paying the income taxes on the value of his gift. Instead, you are responsible for paying the income taxes absent a special written agreement between you and the recipient.

This blog is part 2 of 3 on how Federal Gift Taxes cab reduce an estate’s tax liability.  Tune in to our blog tomorrow to read Part 3.

Davidov Law Group is a member of the American Academy of Estate Planning Attorneys.

Federal gift tax laws play an integral role in reducing an estate’s income tax liabilities. As a taxpayer, making lifetime gifts can reduce your estate’s gross tax liabilities since these gifts are not included as part of your gross estate at your death in most cases. According to the federal Internal Revenue Code, a gift is one in which real or personal property, cash or any other type of property is given away without consideration or payment in return. A lifetime gift is one in which you retain no other control and is complete at the time of your death.

Each taxpayer is able to exclude up to $13,000 in annual gift taxes. This means that neither the gift recipient nor the gift donor pays federal income taxes for gifts of up to $13,000. The annual gift exclusion applies to gifts of up to $13,000 made to each done. This means that if you have three children, you can give each child a cash or property gift of up to $13,000 per year without paying federal income taxes. As you can see, making a lifetime gift may make sense since it will reduce your federal estate taxes, which is important in estate planning. Your beneficiaries will not have to pay federal income taxes on property given away while you were alive. By giving your children money now, you can help them save money on estate income taxes after your death.

This blog is part 1 of 3 on how Federal Gift Taxes cab reduce an estate’s tax liability.  Tune in to our blog tomorrow to read Part 2.

Davidov Law Group is a member of the American Academy of Estate Planning Attorneys.

Some clients ask whether avoiding probate also avoids the federal estate tax.  Both probate and the federal estate tax deal with your estate, but avoiding one doesn’t avoid the other.  To answer the question, if you avoid probate, you don’t necessarily avoid the federal estate tax.

What is Probate?  What’s the Federal Estate Tax?

• Probate is the process of validating a will, if there is one, and settling an estate.  Probate assets are all those assets that the decedent owned in his or her individual name, but didn’t have a beneficiary designation.

Examples would be a bank account in an individual’s name or a house in an individual’s name.

Examples of NON-probate assets include assets owned as joint tenants with right of survivorship (with a spouse or another individual), life insurance, retirement accounts, and annuities.

• The federal estate tax is a tax on everything an individual owns at death, regardless of whether the asset goes through probate, or not.

Examples of assets that are subject to the federal estate tax include all assets you own such as bank accounts, investment accounts, retirement accounts, a house, and annuities, no matter how you own them.  If you have a right to them or control them in some way, those assets are subject to the federal estate tax.

Although avoiding one, doesn’t necessarily mean that you avoid the other, both probate and the federal estate tax can be avoided, when you work with a qualified estate planning attorney.

Davidov Law Group is a member of the American Academy of Estate Planning Attorneys.

After the death of a loved one, there is much concern about paying taxes.  One of the first questions beneficiaries ask is, “Do I have to pay taxes on my inheritance?”

The good news for beneficiaries is that all inheritance and estate taxes will be paid from the estate before you receive your inheritance.   Therefore, you do not have to pay taxes on your inheritance; they’ve already been paid before you receive it.

However, if the assets appreciate in value from the date of death of a loved one to the date you sell them, you may owe capital gains taxes on the sale, depending on your income and current law.  For example, if you inherit a stock portfolio worth $50,000 at your loved one’s date of death and you sell the stocks and receive $60,000, you will owe capital gains on $10,000 ($60,000 – $50,000 = $10,000.)  The amount of tax due will be based upon the current rate of capital gains and how long you owned the asset (i.e. short term or long term.)

Another good thing about inheriting assets is that you do get a full step up in tax basis to the date of death value of the assets.  Consider the example we used above.

If your loved one purchased the stock portfolio for $30,000 and gave the stocks to you during his or her lifetime, you would receive the transferred basis of $30,000.  So, when you sold them for $60,000, you would owe taxes on the increase in value of $30,000 ($60,000 – $30,000 = $30,000.)

In contrast, when you receive the assets at your loved one’s death, you only owe taxes on the gain from the date of death until the date of sale.  If the long term capital gains rate is 15%, inheriting the assets instead of receiving them as a gift, means paying $1,500 in taxes as opposed to paying $4,500 in capital gains taxes ($10,000 x 15% = $1,500 versus $30,000 x 15% = $4,500.)

For specific advice on your inheritance and taxes, consult with a qualified estate planning attorney.

Davidov Law Group is a member of the American Academy of Estate Planning Attorneys.

The term “portability” is an odd word to associate with the federal estate tax.  However, the use of the term is in tax law is similar to our everyday usage; it means that you can move something from one place to another.  In the federal estate tax law context, “portability” refers to the ability of the second spouse to die to use the deceased spouse’s unused exemption amount.  The deceased spouse’s unused exemption amount is abbreviated, “DSUEA.” 

The goal federal estate tax portability law is to give full federal estate tax exemption to all married couples, even those who didn’t engage in comprehensive estate planning and whose estate plan didn’t include tax planning or proper asset allocation.  This is a great concept; however, the law itself has many issues that doom it to failure, in most cases.

• Portability law ends January 1, 2013; so, unless you and your spouse are both set to die in the next year or so, you will not benefit from portability.

• Portability benefits require the executor of the first estate to both file a federal estate tax return and indicate on the return that the surviving spouse is permitted to use the DSUEA.  What if the executor doesn’t comply as may be the case in a blended family?

• What if the surviving spouse gets remarried and that second spouse dies before her?  When measuring DSUEA, only the “last” spouse to die counts.

Portability law and benefits are uncertain; there is likely to be much confusion and litigation.  To avoid the potential portability quagmire, consult with a qualified estate planning attorney and include comprehensive federal tax planning and proper asset ownership in your estate plan.   It is likely in your best interests to act as if portability doesn’t exist.

Davidov Law Group is a member of the American Academy of Estate Planning Attorneys.

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Davidov Law Group is a member of the American Academy of Estate Planning Attorneys.

When you give gifts to the people who you would be leaving an inheritance to after you pass away you remove the value of these gifts from the overall value of your estate, and that is going to provide you with estate tax efficiency. Of course there is the gift tax that stands in the way of simply giving away all of your estate before you die to avoid the estate tax. However, there are gift tax exemptions that can be taken advantage of and you can use them quite creatively and gain some genuine enjoyment as you put a portion of your inheritance plan into action.

There is a $1 million lifetime gift tax exclusion so you can give gifts of up to one million dollars over the course of your lifetime without incurring any gift tax liability. But there is also an annual $13,000 per person exemption. So for example, you could give an heir $13,000 each year for 20 years if you planned on leaving them $260,000. You could also use this annual gift to purchase life insurance and make your heir the beneficiary. In this manner you are transferring these assets to your heirs tax-free and reducing the overall value of your estate in the process.

The way to actively participate in this plan beyond just handing a loved one a check is to do some creative giving. You can use your annual exemption to give any type if gift; it could be a motorcycle, a musical instrument, a piece of jewelry, a vintage Billy Martin jersey, or a work of fine art. This is a really fun way to take advantage of your gift tax exemption and gain estate tax efficiency while you give your family members thoughtful gifts that will have special meaning to them for the rest of their lives.

Davidov Law Group is a member of the American Academy of Estate Planning Attorneys.

One of the big changes that the new year is going to bring along that has an impact on estate planning is the return of the estate tax. One of the provisions of the sweeping tax cuts of 2001 was a repeal of the estate tax in 2010, but it will be returning again in 2011. This in and of itself is highly relevant, but in addition to its mere reappearance, the estate tax exclusion amount in 2011 will be just $1 million; it was $3.5 million when we last saw the tax in 2009.

For this reason a lot more people are going to have to do what is necessary to reduce the taxable value of their estates. One way of achieving this is to give tax-free gifts. Of course the IRS is well aware of the fact that people might try to avoid paying the estate tax by giving away their assets before they die, so there is a gift tax in place as a roadblock. However, there are gift tax exemptions that can be used to create some space and potentially keep your estate under the exclusion amount.

First off, there is a $1 million lifetime gift tax exclusion (as of this writing). So you can give gifts of up to a million dollars throughout your life without incurring any gift tax liability. But in addition to this, there is also a $13,000 per person annual exemption. What this means is that each individual can give gifts of up to $13,000 to as many recipients as they want to each year free of the gift tax. It is useful to emphasize the fact that this $13,000 exemption is for each taxpayer; so a married couple could pool their respective individual exemptions and give as much as $26,000 to an unlimited number of people in any given year.

Giving gifts is a great way to gain tax efficiency, and it is something that can be an invaluable estate planning tool under certain circumstances. In addition, you get to enjoy that special feeling that will come along with giving these gifts in the flesh, and that may be the biggest benefit of all.

Davidov Law Group is a member of the American Academy of Estate Planning Attorneys.

An estate tax is imposed by the federal or state government and can be as much as 46% of the value of the estate.

Who pays Estate Taxes?

Estate taxes are usually only imposed on ‘affluent’ estates, meaning only the wealthy are subject to this tax. Currently there is no federal estate tax, but next year the federal estate tax is likely to return, and most people estimate it will affect estates valued at $1 million or more. Additionally, since 2004, New York State has imposed its own estate tax for estates valued at $1 million or more.

Estate taxes do not apply to the transfer of an estate to a spouse or a charity. However, any other transfer is subject to taxes.

How are Estate Taxes different from Gift Taxes?

Estate and gift taxes are not the same, but they are imposed in the same manner by the government. Estate taxes are imposed by the federal government and also by some states, including New York State. A federal gift tax also applies to estates valued at over $1 million. Sometimes these taxes also go by the term ‘inheritance tax’ or even ‘death tax.’

How is my Estate Value Calculated?

There are several factors that go into calculating the value of your estate. The starting point is taking the total value, called the ‘gross estate.’ This includes your real property, property owed to you, annuities, some life insurance policies, and any property that might become yours if you survive someone else.

Next, certain subtractions are made from the gross estate to arrive at the ‘taxable estate.’ This is the value which will be subject to tax, hence the name ‘taxable estate.’ Subtractions may include funeral expenses, anything being transferred to your spouse and any charitable contributions.

Beware of Loopholes

None of us want to surrender our money to the government in the form of taxes, even after our death. Some people choose to pass along their estate to their grandchildren in hopes of avoiding the estate tax through a generation skip. Unfortunately, this may be a big mistake because doing so can nearly double the amount of taxes owed on the estate.

Another common practice to avoid paying an estate tax is to gift or deed your estate to your loved one(s). However, the federal government imposed a gift tax to apply to these instances too, making it an estate tax in disguise.

How can I avoid making costly mistakes for my loved ones after I die?

Taxes are a complicated matter, so unless you have a background in law, you probably won’t have much success on your own. For help on estate planning and to make sure your loved ones pay as little tax as possible upon your death, consult an estate planning attorney.

Davidov Law Group is a member of the American Academy of Estate Planning Attorneys.