What is the Estate Tax?
by admin
In the United States, estate tax is a tax on the “taxable estate” of a decreased person. Estate tax is also known as inheritance tax. The starting point in calculation the estate tax is the “gross estate”. The gross estate is considered the value of all property interests of the descendent at the time of death. Many different interests are included in the gross estate, as well as life insurance benefits.
Once the gross estate is determined, the law provides “deductions” at the value of the taxable estate. Funeral expenses, administration expenses, claims against the estate, charitable contributions and items left to the surviving spouse are potential deductions. The most important of the deductions is when property is passed on to the surviving spouse. This is because it can eliminate any federal estate tax for a married decedent. The unlimited deductions does not apply to the surviving spouse if they are not a United States citizen.
If you’re not interested in paying the estate taxes, there are many insurance companies that have developed networks of life insurance agents who work with tax avoidance. Law firms, brokerage and financial planning firms also work to form techniques for estate tax avoidance.
One estate tax avoidance technique is to combine tax exemption limits through a will or a living trust. Other techniques don’t necessarily avoid estate tax. Instead, they provide an efficient and leveraged means to have liquidity to pay the tax at the time of death. Those who own businesses, own real estate or stocks are advised to seek professional advice. If professional advice is not used, the owners may have the risk of the estate tax imposing on the heirs to sell items at undesired times.
As of 2009, heirs are free of federal taxes if the amount left is $3.5 million and under. In previous years, the amount was $2 million. However, for every dollar over the $3.5 million limit, the government will take 45 cents. While current law calls for repeal of the federal estate tax in 2010, it isn’t necessarily likely to happen. More likely than not, the $3.5 million exemption will become permanent. Investing in the exemption and relatively simple strategies will, in most cases, help prevent federal estate taxes.
In order to avoid estate tax on life insurance, you can set up an irrevocable life insurance trust to own the policies on your life. Be careful, though. If you transfer an existing policy to a life insurance trust, it’ll take three years for it to become separate of your estate.
If you’re fairly certain of a decease date, you can gift up to $13,000 per year to an heir without owing any federal gift tax. If married, the current tax-free limit is $26,000 if you and your spouse make joint gifts. If the money goes toward an educational institution for tuition or to a medical service provider for uninsured expenses, there is an unlimited amount that can be gifted.