Estate planning is always evolving before our eyes. Tax laws change from year to year and laws passed in 2012 have carried an abundance of consequences. Obviously the more money you have the more significance estate planning tends to carry. How should we go about estate planning in this restructured environment?
Although income and capital gains taxes have risen significantly for upper tax brackets but in 2013 the federal estate taxes exemption was raised to $5.25 million up from $5.12 million in 2012. While $5 million sounds like a lot if you own a family business or a farm it may not be as much as you think. And with Estate tax rates for 2013 rising from 35% to 40%, who wants to give 40% of their estate to Uncle Sam? So there are still tactical shifts individuals and couples must consider in an effort to keep your taxable estate below the limit.
Gift exemptions have risen annually, which means that individuals ought to reconsider their strategies in that aspect. As of January 2013 you can give $14,000 to each person or if you own property as a couple you can give $28,000 per year to any individual without any tax being due. So if you are nearing the limit or think that the inflation rate will pick up multiplying your estate value you should consider giving some of it away before you pass away. For instance if you have an estate just above the limit, by giving some assets away you might avoid the 40% tax altogether.
This is where income taxes takes a larger role in estate planning: When gifting appreciated property, the recipient takes on the same tax basis incurred by the giver. With rising income taxes on higher brackets, this aspect must be considered in a different light than previously. Even though you might be below the estate tax limit, it might still pay to move some of your appreciated or income producing assets to your children if they are in a lower tax bracket thus reducing the overall tax burden and keeping more money in the family.
Used properly life insurance can pass assets to your intended beneficiaries outside your estate so if you are near the estate tax limit you might want to make your insurance specialist aware of that fact and discuss estate planning issues. For instance, one strategy you might discuss is whether it is beneficial to have the beneficiary as the owner of the policy even though you make the payments.
Estate Tax Deductions
According to the IRS there are five major areas of deductions available to reduce estate taxes:
- Marital Deduction: One of the primary deductions for married decedents is the Marital Deduction. All property that is included in the gross estate and passes to the surviving spouse is eligible for the marital deduction. The property must pass “outright.” In some cases, certain life estates also qualify for the marital deduction.
Charitable Deduction: If the decedent leaves property to a qualifying charity, it is deductible from the gross estate.
Mortgages and Debt.
Administration expenses of the estate.
Losses during estate administration.
There is also a special deduction available for Family Farms:
“Generally, the fair market value of such interests owned by the decedent are includible in the gross estate at date of death. However, for certain farms operated as a family farm, reductions to these amounts may be available. In the case of a qualifying Family Farm, IRC 2032A allows a reduction from value of up to $1,070,000.”
State Estate Taxes and Probate
In addition to Federal Estate Taxes, it also pays to take into account the variation in state estate taxes. What state you officially reside in can make a big difference in how much estate taxes you owe. Over 20 states impose laws of their own, some with lower exemption rates than at the federal level. For example, in New Jersey, estates worth more than $675,000 may owe state estate tax although there are exemptions for surviving spouses while Connecticut has a limit of $2 million, Maryland, Minnesota, Massachusetts and New York have a $1 million limit. Many states simply tie their taxes to the Federal Level. A complete list of the various State death tax limits is available here.
According to Los Angeles-based estate planning law firm, Wajda Law Group in California, a will in itself is not sufficient enough to avoid the state’s involvement in the probate process. Many individuals with a basic understanding of estate tax laws may be inclined to plan their estates in a manner that may incur them more liability. In the ever-shifting landscape of tax code, it’s essential that estate planning be done properly.
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