The Economic Growth and Tax Relief Reconciliation Act of 2001 reduces the estate tax every year until 2010.

Please take a look at the changes in the estate tax exemptions in the next few years.

Year Exemption Top Tax Rate
2007 $2,000,000 45%
2008 $2,000,000 45%
2009 $3,500,000 45%
2010 n/a 0%
2011 $1,000,000 55%

As you can see in 2010 the estate tax is repealed, meaning it is gone. If a wealthy family member happens to pass away in 2010 then you may sidestep the estate tax.

However, the repeal is temporary. That is, if your wealthy benefactor makes it to 2011, the entire estate tax is scheduled to be back with just a $1 million exemption. You see, in order to meet budgetary restrictions; the Tax Relief act contains a so-called “sunset” provision that brings the old estate tax rules back in full force in 2011.

What is the Estate Tax?

The Estate Tax is a tax on your right to transfer property at your death. It consists of an accounting of everything you own or have certain interests in at the date of death. The fair market value of these items is used, not necessarily what you paid for them or what their values were when you acquired them. The total of all of these items is your “Gross Estate.” The includible property may consist of Cash and Securities, Real Estate, Insurance, Trusts, Annuities, Business interests and other assets.

Once you have accounted for the Gross Estate, certain deductions 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.

After the net amount is computed, the value of lifetime taxable gifts (beginning with gifts made in 1977) is added to this number and the tax is computed. The tax is then reduced by the available unified credit. Presently, the amount of this credit reduces the computed tax so that only total taxable estates and lifetime gifts that exceed $1,000,000 will actually have to pay tax.

Are You Affected?
Most estates (almost 99%) pass free of federal estate tax. You can leave an unlimited amount of assets to a surviving spouse without having it be subject to federal estate tax.

You can currently leave your other survivors up to $2,000,000 (the 2007 amount) without paying federal estate tax. Whatever is left after the marital deduction and the $2,000,000, is taxed at a top tax rate of 45% in 2007. In addition to the federal estate tax, state inheritance taxes, which vary from state to state, must also be considered.

How To Reduce Your Estate Tax

With the outcome of the estate tax repeal in debate, one way to reduce estate tax is to give away property during your lifetime.

A gift must be gratuitous, complete, voluntary and composed of property. Currently, the law allows for a person to give an unlimited number of $12,000 gifts of cash or other property each year, tax-free. This annual gift exclusion amount is indexed for inflation and will rise as the cost of living increases. The annual exclusion amount is per donee and therefore, an individual gift must be $12,000 or less in a calendar year for the gift to remain tax-exempt.

Example: Here are a few examples of how the $12,000 annual exclusion works:

A gift of $30,000 is given to a child, $12,000 of the gift is exempt from gift tax, while the remaining $18,000 is taxable.
A gift of $12,000 each to your three children. None of the $36,000 is subject to gift tax.
Both you and your spouse can individually give annual gifts, thereby increasing the amount of the gift to $24,000 tax-free per year, per donee. Certain gifts for medical expenses and tuition payment can also be exempt from federal tax, if they are considered “qualified transfers”. Please consult us for further information on the Federal gift tax.

Note: The Federal estate and gift tax regulations are complex and interrelated with lifetime limits. To maximize your estate, we recommend that you call us to discuss the prospects for estate tax repeal and what planning should be done now.