1. How much is free of Estate and Gift tax? For 2011 and 2012 the exemption from Federal exemption for estate, gift and generation skipping transfers is $5 million dollars. Beginning in 2012 the exemption is adjusted for inflation. The exemption also applies to deaths in 2010 if elected. If Congress does not act then the law reverts to the Pre-Bush tax cuts, a $1 million estate and gift exclusion and a 55% tax rate.
2. I heard that I can use my predeceased spouses exemption- Yes, under the new law if your spouse dies after 2010 and has not used her $5 million exception; the surviving spouse can use the exemption. This may eliminate the need for a trust for both the husband and wife. This also makes second marriage tax planning more complicated if there is substantial wealth involved.
3. What is the rate of the Federal Estate and Gift tax? – 35%.
4. How much money can I give away free of tax? - For 2011 and 2012 the lifetime exemption is $5 million which means that you can give away that amount in your lifetime. There is no gift tax or income tax due on a gift. There is some concern that if you give a large gift and the law reverts to the old Pre-Bush exemption you could end up paying tax on the gift when you pass away. However the use of the larger $5 million exemption makes sense if you can afford it because all of the growth of the asset will be out of your estate.
5. What about the $10,000 gift amounts? – In addition to the lifetime exemption for gifts of $5 million dollars, every year you can give away $13,000 (it used to be $10,000 but has increased due to inflation) free of any gift tax to as many people as you want. For example if you have three kids, you can give them each $13,000 free of gift tax each year and still retain that $5 million dollar exemption. If you are married you can give $26,000 to each child plus you have a $10 million dollar lifetime exemption. The only people who should worry about the gift tax are people with very large estates.
Example- Mr. and Mrs. Jones have a home and assets worth $1 million dollars. Their son needs $50,000 to make a down payment on a house. Mr. and Mrs. Jones could give their son $50,000 with no tax consequences and never have to worry about taxes. A gift tax return should be filed.
6. Do the new estate laws impact my income tax? The new law puts back the income tax basis laws that existed prior to 2010. If someone dies in 2011 or later all capital gains are wiped out.
Example- You bought stock for $1000 and it has grown to $101,000. If you sell the stock or give it to your children and they sell the stock the Ohio income tax and the Federal capital gains tax could be as high as $20,000. Under the new tax law ( and under the law that existed prior to 2010, ) if you die holding the stock the capital gains is eliminated so if the stock is sold after your death there is no income tax due.
7. Do I need to revise my estate planning documents? – This depends on what your documents do. If you had a trust and you thought you had a federal estate tax problem when the trust was drafted, it may have language in it that will not be appropriate for you.
Example: Mary and Tom Jones husband and wife set up trusts in 1999 when they thought there were going to be subject to Federal estate tax. Now there estate is $2 million dollars split evenly between them. Tom Jones dies and all of his money goes into a Family credit shelter trust. Mary passes away 10 years later and the Tom Jones trust increased to $2 million dollars and so did Mary’s personal assets. The assets in Tom’s trust did not receive the step up in income tax basis on Mary’s subsequent death and on liquidation of the investments on Tom and Mary’s death Tom’s trust owes a combined Ohio income and Federal capital gains tax of $200,000 on the growth.( This assumes no sale of assets during the trust term.) If instead they had modified there documents so that all of the assets were taxed in Mary’s estate they would have eliminated the Federal and Ohio income tax( They would have to pay additional Ohio estate but much less than the extra income tax in this example.)
Example- Harry and Sarah Smith have an estate of around $2 million dollars and want to prepare estate planning documents. Assuming that they do not care about Ohio estate tax liability and assuming they want a trust They should consider a joint trust so that they have all of the benefits of a trust and the step up in income tax basis.
8. What about Ohio estate taxes? - Ohio has had an estate tax in its present form since 1968 but had some sort of inheritance tax as far back as 1893. Right now if you are an Ohio resident you will pay an estate tax if your estate is worth more than $338, 333 dollars. The maximum tax rate is 7% on estates over $500,000. The tax is typically due on the second death of a married couple and with the right planning a good portion of the tax can be avoided. However without the correct planning a couple with an estate of $1 million dollars could owe $$58,000 in Ohio estate tax. Legislation has been proposed to repeal the Ohio estate tax effective January 1, 2013.
9. What about Ohio Gift Taxes? Ohio does not have a gift tax. You can give any amounts away during life and there is no Ohio tax. However Ohio does have three year gift in contemplation of death rule. Gifts above $10,000 are presumed to be in contemplation of death if made within three years of death and included in your Ohio estate tax. You can dispute this assumption.
Copyright © Budish, Solomon, Steiner & Peck, Ltd. This article may be reproduced with proper attribution to the law firm of Budish, Solomon, Steiner & Peck, Ltd.
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