Minimizing Estate Taxes
Almost any transfer of assets, whether by gift during your lifetime or bequest upon your death, can have both state and federal tax consequences. At death, all of the assets you own are transferred to your beneficiaries for tax purposes. If you have a will or trust, the transfer will occur under the provisions you set. If you don’t have a will or trust, the state will get involved in transferring the assets, which can be costly. Through careful planning, you can ensure that you qualify for significant tax-relief provisions.
Depending on the state in which you live, there are generally state taxes on the transferring of assets. These taxes can take a variety of forms. Because each state’s tax rules and rates differ, it’s important to check with a qualified professional on the rules in your state. Also, remember that estates that don’t owe any federal taxes could, and often do, owe state taxes.
The most significant of the various transfer taxes is the unified federal estate and gift tax. This tax increases with the total value of the assets transferred. Under a 2002 law, the estate tax exemption will continue to increase until 2009. With some exceptions, the federal estate tax rate in 2003 is 49 percent.
During 2003, the gross value of an estate that did not exceed $1 million was excluded from federal income tax filing requirements. Although $1 million is a significant amount of money, if you own a home, business, retirement account and/or a life insurance policy, it is possible to own assets of $1 million or more. For 2004 and 2005, that amount increased to $1.5 million. For 2006, 2007, 2008, it increases to $2 million. In 2009, the estate-tax exemption will increase to $3.5 million and remain there, pending any legislative changes.
Deferring payment of the tax is one major goal of estate planning. Unfortunately, the primary means of deferring estate taxes is to transfer an estate to a married spouse, since spouses are completely exempt from the federal estate tax. Because same-sex couples are unable to marry, this means of reducing estate taxes is unavailable to unmarried partners. Also, changing an asset’s title during your life could result in a gift subject to tax. For example, when one person purchases a home and later puts it in his or her partner’s name, the couple could incur significant penalties. Married spouses, on the other hand, can transfer property without penalty.
This makes it more important to consider other estate planning techniques, such as the $12,000 annual gift exemption, charitable gifts and/or irrevocably transferring ownership of assets during your life (often through a trust) so they are not included in your taxable estate. The advantages and disadvantages of such techniques vary with each individual situation, and this is not an area for do-it-yourselfers. Other concerns to think about relate to the inability for unmarried partners to file joint income taxes and to jointly claim dependent children.
If you have tax concerns, consult a competent professional in your area. The money you spend in professional fees will likely be saved many times over through lower taxes.