The Basics of Estate and Gift Taxes

Although most taxpayers are painfully aware of the income tax laws, many people are not aware that they can be subject to a tax on the money and assets that they give as a gift, or money or assets they leave as bequests when they die. The Internal Revenue Code refers to the taxes imposed on these transfers as the gift tax and the estate tax. Depending on the total amount of gifts you make during your lifetime, combined with the size of your estate when you die, you may be subject to these taxes. In addition, the year in which the gifts are made could effect the taxable status of the gift.

The estate and gift tax may be minimized or avoided in a number of ways. They all start with planning. The most widley used method is to utilize the unified credit for gift and estate taxes. The Unified Credit allows a taxpayer to transfer, effectively tax free, a certain credit-equivalent amount of assets via either gifts during life or bequests at death.

For 2008 any U.S Individual can make a $12,000 gift and for 2009 the amount increases to a $13,000 gift to any U.S. Individual and not have to pay a gift tax. Gifts between a husband and wife are unlimmted while they are married. If a U.S. Individual gifts more than $12,000 in 2008 or $13,000 in 2009 to any U.S. Individual than a Gift Tax Return is required to be filed and there would be no tax up to the first $1,000,000. gifted. After $1,000,000 is gifted the gift tax starts. The gifts also reduces the indivudal's Estates Unified Credit. The $1,000,000 is a lifetime credit not an annual credit.

The Unified Credit for Estates in 2008 is $2,000,000 for 2009 $3,500,000 and for 2010 the Estate Tax Law is repealed. In 2011 the amount resets to $1,000,000. This is the current law and is subject to change.

The Gift and Estate Unified Credit is a individual one. Hence, a married couple can use the credit for both the Husband and Wife. Tax planning is critical for the Gift and Estate Tax.

After reviewing the above, you may reach the conclusion that the gift and estate taxes do not apply to you. However, many taxpayers do not realize the full value of their asset and unknowingly expose themselves to potential gift and estate tax liability. Assets that could be included in your estate are your home, IRA's, 401k's, pension plans, annuities, life insurance proceeds, jewerly, U.S. savings bonds and all investments.

There are many ways to plan for your estate tax beyond the above. The idea is to plan and not let the ones you love have to face a loss of a loved one without a plan. If you have questions about gift and estate planning please contact me.