Los Angeles Estate Planning Attorney | Law Office of Philip J. Hoskins | Estate and Gift Taxes
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Los Angeles Estate Planning Attorney | Law Office of Philip J. Hoskins

 Estate Tax issues

The Exemption Amount

Estate taxes have been the subject of much controversy, despite the fact that very few have ever had to pay the infamous “death tax”. Congress in 2010 passed a revision of the tax laws so that estates with a gross value of under $5 million per person will not be subject to any taxation at all.

Warning: The law also provides that unless Congress acts again, the exemption amount will be reduced to $1 million as of 2013.

The gross value of an asset is its current market value before deduction of any mortgage or debt. For estate tax purposes, this includes the proceeds of life insurance proceeds in most cases.

Once you have accounted for the Gross Estate, certain deductions (and in special circumstances, reductions to value) are allowed in arriving at your "Taxable Estate." These deductions may include mortgages and other debts, estate administration expenses, property that passes to surviving spouses and qualified charities. The value of some operating business interests or farms may be reduced for estates that qualify.

 The tax rate for estates over the exemption amount is now 35%.

California continues to not have any estate or inheritance taxes at all.

Retroactive Estate Tax For 2010 – With Election To Forego The Tax

For decedents dying in 2010, the estate tax is retroac­tively restored, with an exemption of $5 million and a top rate of 35%. The estate’s executor, however, is given the option to forego estate tax, but must then also forego a step-up in basis of the decedent’s assets, except to a limited extent.

Portability Of Unused Exemption Between Spouses

Beginning in 2011, this provision will permit a decedent’s unused estate tax exemption to be added to and used by a surviving spouse during the surviving spouse’s lifetime for gifts, or be available at death for estate tax purposes. The unused exemption will be avail­able to the surviving spouse only if a timely election is made on the predeceased spouse’s estate tax return.

The generation-skipping transfer (GST) tax will spring back to life in 2011 with a rate of 35% and an exemption of $5 million. The estate, gift and GST exemption is further increased for inflation for 2012.

All of these changed rates and exemptions will once again “sunset” at the end of 2012, and 2013 will usher in a 55% tax rate and a $1 million exemption.

WHAT ABOUT GIFT TAXES?

New, Higher Exemption Amount

In the recently passed legislation, the lifetime exemption amount for gifts was raised from $1 million to $5 million. The maximum tax rate on gifts over that lifetime exclusion amount is now 35%.

Again, this will go down to $1 million as of 2013.

Who Pays The Gift Tax?

The donor is generally responsible for paying the gift tax. Under special arrangements the donee may agree to pay the tax instead. Please visit with your tax professional if you are considering this type of arrangement.

What Is Considered A Gift?

Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return.

What Can Be Excluded From Gifts?

The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts.

  • Gifts that are not more than the annual exclusion for the calendar year.

  • Tuition or medical expenses you pay for someone (the educational and medical exclusions).

  • Gifts to your spouse.[Note: remember that a Domestic Partner or same-sex spouse is not a “spouse” under federal law]

  • Gifts to a political organization for its use.

  • In addition to this, gifts to qualifying charities are deductible from the value of the gift(s) made.

May I Deduct Gifts On My Income Tax Return?

Making a gift or leaving your estate to your heirs does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than gifts that are deductible charitable contributions). If you are not sure whether the gift tax or the estate tax applies to your situation, refer to Publication 950, Introduction to Estate and Gift Taxes.

How Many Annual Exclusions Are Available?

The annual exclusion applies to gifts to each donee. In other words, if you give each of your children $13,000 the annual exclusion applies to each gift.

What If My Spouse And I Want To Give Away Property That We Own Together?

You are each entitled to the annual exclusion amount on the gift. Together, you can give $26,000.

What Is "Fair Market Value?"

Fair Market Value is defined as: "The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. The fair market value of a particular item of property includible in the decedent's gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate."

  • Included Assets

For estate tax purposes, the gross estate includes all property or interest in property before reduction by debts (except policy loans against insurance) and mortgages, or administrative expenses. Included in the gross estate are items such as real estate, tangible and intangible personal property, certain lifetime gifts made by the decedent, property in which the decedent had a general power of appointment, the decedent's interest in annuities receivable by the surviving beneficiary, the decedent's share in community property, life insurance proceeds (even though payable to beneficiaries other than the estate), inherited property of the surviving spouse, and, with certain exceptions, joint estates with right of survivorship. It may come as a surprise, but you must also include the payoff value of any life insurance. This often puts an estate in range of the need for estate tax planning.

There are a number of other inclusions that can markedly increase the size of a taxable estate. Again, if you are in the vicinity of the exclusion amounts listed in the table above, please discuss with me how to value your estate.
  • Tax Basis Step-up Issues

One of the consideration for estate planning is the tax status of property distributed upon a person's death.  This is a complex topic and we cannot treat it in depth here.  The new tax law significantly alters the rules for basis step up. We urge you to consult an attorney or CPA in this regard. some definitions:

  • Basis - the original cost of an asset plus certain additions, used to calculate the taxable profit of the asset upon sale.

  • Step-up (or down) of basis - The increase or decrease in basis given at the death of the owner.  Usually, the new owner's share of the asset is given a new basis, usually the fair market value at date of death.

There are differences in the step-up in basis depending upon the form of ownership of the asset.  Property owned by an individual receives a step-up in basis to the current market value at the date of death.  Where property is held in joint tenancy, only the share paid for by the deceased joint tenant receives the step-up in basis. The other portion retains the original basis. Proving which party paid what can be very difficult and the IRS presumes the deceased owner paid nothing.

Tenancy in common property, however, is treated differently.  When one owner dies, that entire interest receives a new basis value as of the date of death. This can produce a significantly different tax result upon an eventual sale of the property by the surviving party.

To illustrate, consider an asset purchased for $100,000 by A and B. A dies and the asset has a fair market value of $200,000 on the date of death. The difference in treatment of joint and tenancy in common looks like this:

Joint

Tenants in Common

A's share receives a step up in basis to $100,000

B's share retains its basis at $50,000

A's share receives a step up in basis to $100,000

B's share receives a step up in basis to $100,000

After A's death, B sells the asset for $200,000

B's basis = $150,000

B's basis is $200,000

Taxable gain= $50,000

Taxable gain = $0


This has been a brief summary of some points regarding estate tax issues. If any of the above points applies to your circumstance, we urge you to seek legal counsel before deciding upon a course of action.
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