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Death and Taxes: Planning for Both

When you die, the assets and property interests you leave behind are your estate. Every state has a court-supervised process for winding up your affairs and distributing the property left in your estate. This process is known as probate. Some of your estate may be excluded from probate through the use of joint property rights or the designation of a beneficiary on life insurance or pension plans. Thus, your probate estate might be quite small. Despite the size of your estate, probate can be a complicated process. If you want to minimize the complications for your survivors, or if you are in the midst of probate right now, an experienced probate lawyer can answer your questions and put your mind at ease.

When someone passes away, they leave behind a taxable estate. Under current law your taxable estate for federal estate and gift tax purposes can be significantly larger than your probate estate. Unfortunately, your taxable estate includes everything, such as:

  • All your property interests. Includes any property interests you own and property interests in a trust controlled by you outright or by a Trust to which you have significant “strings attached.”
  • All your qualified retirement plan proceeds. Qualified retirement plan proceeds are included unless you retired no later than 1984. Persons retiring no later than 1984 may qualify for a full or partial exclusion of these proceeds.
  • All life insurance proceeds. Proceeds from life insurance policies owned by you at the time of your death or payable to your estate are part of your taxable estate.

In addition to federal estate and gift taxes, there are also state inheritance or estate taxes. These taxes have historically been of little concern due to the “state death tax credit.” The state death tax credit used to allow a deduction of the state death tax against the federal estate taxes owed. However, this tax credit was discontinued in 2005.

Recent federal tax law changes have also altered the amount individuals can shelter through the “standard” exemptions from estate and gift taxes. To understand these changes, it is important to realize that there are both estate taxes and gift taxes.

Estate taxes: The amount of money you can shelter under the general estate tax exemption increased from $1 million in 2003 to $1.5 million in 2004. It will gradually increase to $3.5 million in 2009. The estate tax is scheduled to be repealed in 2010. Thus, those dying in 2010 will pay no federal estate tax. What happens after 2010 is up to Congress. If Congress does nothing, the estate taxes will revert to the 2001 standards.

Gift taxes: The standard “lifetime” amount you can shelter is currently $1 million dollars. The highest federal gift tax rate on the unsheltered portion of your estate is currently 49%. These taxes are scheduled to gradually decrease by 1% per year until 2009. In 2010 the federal gift tax rate is scheduled to be equal to the top individual income tax rate.

In addition, you can give annual outright gifts to an unlimited number of recipients in the amount of $11,000.00 per recipient. The gift can be cash or property (e.g. stock) and does not count against your lifetime $1 million shelter.

Clearly, the tax issues surrounding your estate can be quite complex. An experienced estate planning attorney will help you address these tax issues and minimize the impact of taxes on your beneficiaries through the use of a carefully drafted combination of Wills, Trusts and other insurance and gifting Instruments.

DISCLAIMER: This site and any information contained herein in intended for informational purposes only and should not be construes as legal advice. Seek competent legal counsel for advice on any legal matter.

Wills Trusts Estates
Wills and Trusts – An Overview
A Users Guide to Probate
Death and Taxes: Planning for Both
Wills and Trusts FAQ
Wills and Trusts Resource Links
Wills and Trusts Contact Form

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