There are a handful of taxes people need to be concerned with in estate
planning. For the most part, only the very wealthy must concern themselves
with them. The $10,000 per year per donee exclusion was recently raised to
$12,000. People make gifts like these in order to reduce their
taxable estate at death. However, if your estate does not near the $2,000
mark, such planning will not be necessary. Understand that these "tax
free" transfers are not "penalty free" transfers according to the Medicaid laws.
This is a common misperception.
The Estate Tax - imposed on the wealthy
Most estates -- at least 99% -- don't pay
the federal estate tax. The federal
government imposes estate tax at your death
only if your property is worth more than a
certain amount, which depends on the year of
death. But all property left to a spouse is
exempt from the tax, as long as the spouse
is a U.S. citizen. Estate tax is also not
assessed on any property you leave to a
|Year of Death
|2006, 2007 or 2008
||No estate tax
||$1 million unless Congress
The Gift Tax - imposed on the wealthy before and after death
Unlike the Estate Tax, Congress did not repeal the federal gift
tax. It did raise the lifetime exemption and lowered the maximum tax
rate. The lifetime gift tax exemption has gone up to $1 million and
will stay there (unlike the estate tax exemption). That means you
will be able to make a total of $1 million of taxable gifts over
your lifetime before owing any federal gift tax.
In addition, you can make an unlimited number of $12,000 gifts
(to different recipients) of cash or other property each calendar
year, completely tax-free.
This is an extra federal tax on transfers made from older folks
to someone in their grandchildren's generation. When the estate tax
is repealed in 2010, the generation-skipping tax will also
disappear. Until 2010, the exemption amount will be the same as the
estate tax exemption amount (shown in the table below).
If you're married, estate tax is most likely to be an issue when
the second spouse dies. (When the first spouse dies, everything left
to the survivor passes tax-free.) But if the second spouse owns all
of the couple's property, and it's worth more than the estate tax
exemption, estate tax will be due. So if you and your spouse
together own more than $2 million (the current estate tax
exemption), you may want to think about using a special trust,
making gifts during life, leaving a portion of your estate to
charity, or using another tax-avoidance strategy.
Basis of inherited property. A change with far more
widespread implications is the end of the "stepped-up basis" rule
for inherited property. Under current law, when you inherit
something, your tax basis (used to calculate taxable profit when you
sell something) is the market value of the property on the date of
the former owner's death. So if the property's value has gone up
significantly since the former owner acquired it, the basis is
"stepped-up" to the date-of-death value. That means you get a big
tax break when you sell, because your taxable profit is based on the
date-of-death value, not the lower basis of the former owner.
That rule will end when the estate tax does, in 2010. From then
on, when you inherit property, you can choose to take a stepped-up
basis for only $1.3 million of it. If you inherit more than that,
for the rest of the property, your basis will be the former owner’s
basis or the date-of-death market value, whichever is smaller.
You’ll have to choose which of the assets get the stepped-up basis.