Estate Tax Planning

By Kris Koonar

keywords: Sacramento CPA Firm California Tax Help

The estate of a deceased person is subject to estate tax levied by the government. This tax is levied on his taxable estate, the value of which is arrived at by reducing his gross estate by something known as allowable deductions, where the gross estate is the total value of all the assets owned by the deceased at the time of his death. The allowable deductions are funeral expenses of the deceased that are paid out of his estate, marital deductions, deductions for payment to charity as expressed by the deceased, estate administration expenses, and outstanding debts at the time of death. The determination of the taxable estate is done by the IRS.

To arrive at the value of the assets, the fair market value is taken as the standard. The fair market value is the price that the assets fetch if sold in the open market. An option is given to the representative of the benefactor of choosing the date of the evaluation. It can either be the date on which the benefactor died or a date six months thereafter. The purpose is to give the benefit of a lower tax liability. The liability of estate tax arises with the death of the benefactor, and has to be paid within nine months of the date of death. It is incumbent upon the representative of the benefactor to file various forms related to the assets of the benefactor and the income derived therefrom.

Amongst these, two forms are very important: one is Form 706 that contains the details of all the assets, which cumulatively form the estate of the benefactor, and the second is Form 1041, which is meant to give the details of the income derived from the estate. However, all estates do not come under the estate tax net. At the moment, any estate that is less than the gross value of $2,000,000 is not subject to estate taxation. Looking at the structure of estate tax for the forthcoming years you will find the estate tax burden being reduced progressively each year, to be eliminated in the year 2010, and reinstated in 2011. The details are as under:

If the benefactor dies within 2006 to 2008, the exemption limit is $2m. For 2009, the exemption limit is raised to $3.5m, whereas 2010 will be an estate tax free year. In 2011, estate tax will be reinstated with a basic exemption limit of one million dollars and a maximum tax limit of 55%.

Estate tax is mandatory under law. However, the burden can be reduced through intelligent estate tax planning. There are several techniques that can be employed legally to allow a greater part of your assets to be transferred to your loved ones instead of serving to fill the coffers of the government through estate taxes. When you have decided whom you wish to benefit from your estate and by how much, instead of waiting for you demise, you could start gifting them amounts which do not attract gift tax in your lifetime. At present, a single individual can gift up to $12,000 in a year to one person without attracting gift tax. There is a lifetime exemption of $1m on gifts.

This means you can make unlimited numbers of $12000 gifts to various people in one calendar year. You just need to make sure that the gift(s) to a single recipient does not exceed $12000 in a year. The gifts can be made to one or more persons within the total limit of $1m in your lifetime without attracting gift tax. Apart from cash, the exemption limit also covers gifts in the form of a percentage of real estate, business, stocks etc.

Another way is to transfer assets to your spouse during your lifetime. According to the law, such transfers are free from gift or estate tax, irrespective of the value of the transferred asset. This tax benefit is permissible under a provision known as marital deduction, which is considered when the estate tax is calculated after your demise. But the assets will be subject to estate tax (if in excess of the exemption limit) on the demise of the surviving spouse, unless he/she remarries and transfers all assets to the new spouse. Another way would be to create a bypass trust in which the property is held in trust for minor children until they grow up, while continuing to provide for the surviving spouse. Bypass trusts can include insurance trusts, irrevocable trusts etc.

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