Planning Your Estate

A primary purpose of estate planning is to distribute your assets according to your wishes after your death. Successful estate planning transfers your assets to your beneficiaries quickly and with minimal tax consequences. The process of estate planning includes inventorying your assets and making a will or establishing a trust, with an emphasis on minimizing taxes. This pamphlet provides only a general overview of estate planning. You should consult an attorney, CPA or tax advisor for additional guidance.

Do I Need to Worry?

You may think estate planning is only for the wealthy. Actually, if you have assets worth $675,000 to $1,000,000 or more, estate planning may benefit your heirs. That's because generally taxable estates worth in excess of $675,000* may be subject to federal taxes, which can be as high as 55% of the taxable estate.

Adding up your own assets can be an eye-opening experience. By the time you account for your home, investments, retirement savings and life insurance policies, you may find your estate in the taxable category.
Even if your estate is not likely to be subject to federal estate taxes, estate planning may be necessary to be sure your intentions for disposition of your assets are carried out.

Taking Stock

The first step in estate planning is to inventory everything you have and assign a value to each asset. Here's a list to get you started. You may need to delete some categories or add others.

• Residence
• Other real estate
• Savings (bank accounts, CDs, money markets)
• Investments (stocks, bonds, mutual funds)
• 401(k), IRA, pension and other retirement accounts
• Life insurance policies and annuities
• Ownership interest in a business
• Motor vehicles (cars, boats, planes)
• Jewelry
• Collectibles
• Other personal property

Once you know the value of your estate, you're ready to do some planning. Keep in mind that estate planning is not a one-time job. There are a number of changes that may call for a review of your plan. Take a fresh look at your estate plan if:

• The value of your assets changes significantly.
• You marry, divorce or remarry.
• You have a child.
• You move to a different state.
• The executor of your will or the administrator of your trust dies or becomes incapacitated, or your relationship with that person changes significantly.
• One of your heirs dies or has a permanent change in health.
• The laws affecting your estate change.

How Estates Are Taxed

Federal gift and estate tax laws permits each taxpayer to transfer a certain amount of assets free from tax during his or her lifetime or at death. (In addtion, as discussed in the next section, certain gifts valued at $10,000 or less can be made that are not counted against this amount.) The amount of money that can be shielded from federal estate or gift taxes is determined by the federal unified tax credit. The credit can be used during your lifetime when you make certain gifts, and the balance, if any, can be used by your estate after your death.

What's New - Estate and Gift Tax
Form 706 Changes

The applicable exclusion amount is $1,500,000 (2004-2005), $2,000,000 (2006-2008), $3,500,000 (2009), $5,000,000 (2010-2011), $5,120,000 (2012) and $5,250,000 (2013).

For Estate Tax returns after 12/31/1976, Line 4 of Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, (PDF) lists the cumulative amount of adjusted taxable gifts within the meaning of IRC section 2503. The computation of gift tax payable (Line 7 of Form 706) uses the IRC section 2001(c) rate schedule in effect as of the date of the decedent's death, rather than the actual amount of gift taxes paid with respect to the gifts.

With the top bracket tax rates decreasing from 55 percent (in 2001) down to 35 percent (in 2010) and a periodic drop in rates in-between, the IRS has encountered situations where gift taxes paid were greater than the tax calculated using the rate in effect at the date of death.

It appears that some Form 706 software used by practitioners require a manual input of the gift tax payable line. Some preparers are reporting gift taxes actually paid rather than calculating the gift tax payable under date of death rates. These errors result in underpayment of estate tax due. Cases with this issue will involve estates where large gifts were made during life and at a time when tax rates were higher than at date of death. (Posted 6-5-06)

Beginning January 1, 2011, estates of decedents survived by a spouse may elect to pass any of the decedent’s unused exemption to the surviving spouse.  This election is made on a timely filed estate tax return for the decedent with a surviving spouse.  Note that simplified valuation provisions apply for those estates without a filing requirement absent the portability election.  See the Instructions to Form 706 for additional information.  

Exclusions

• The annual exclusion for gifts is $11,000 (2004-2005), $12,000 (2006-2008), $13,000 ( 2009-2012) and $14,000 (2013).
• The applicable exclusion amount is increased to $5,000,000 for estates of decedents dying on or after December 31, 2009.
• The applicable exclusion amount for gifts is $1,000,000 (2010), $5,000,000 (2011), $5,120,000 (2012) and $5,250,000 (2013).

Estate Tax

The applicable exclusion amount is $1,500,000 (2004-2005), $2,000,000 (2006-2008), $3,500,000 (2009), $5,000,000 (2010-2011), $5,120,000 (2012) and $5,250,000 (2013).

For Estate Tax returns after 12/31/1976, Line 4 of Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, (PDF) lists the cumulative amount of adjusted taxable gifts within the meaning of IRC section 2503. The computation of gift tax payable (Line 7 of Form 706) uses the IRC section 2001(c) rate schedule in effect as of the date of the decedent's death, rather than the actual amount of gift taxes paid with respect to the gifts.

With the top bracket tax rates decreasing from 55 percent (in 2001) down to 35 percent (in 2010) and a periodic drop in rates in-between, the IRS has encountered situations where gift taxes paid were greater than the tax calculated using the rate in effect at the date of death.

It appears that some Form 706 software used by practitioners require a manual input of the gift tax payable line. Some preparers are reporting gift taxes actually paid rather than calculating the gift tax payable under date of death rates. These errors result in underpayment of estate tax due. Cases with this issue will involve estates where large gifts were made during life and at a time when tax rates were higher than at date of death. (Posted 6-5-06)

Beginning January 1, 2011, estates of decedents survived by a spouse may elect to pass any of the decedent’s unused exemption to the surviving spouse.  This election is made on a timely filed estate tax return for the decedent with a surviving spouse.  Note that simplified valuation provisions apply for those estates without a filing requirement absent the portability election.  See the Instructions to Form 706 for additional information.  

Exclusions

• The annual exclusion for gifts is $11,000 (2004-2005), $12,000 (2006-2008), $13,000 ( 2009-2012) and $14,000 (2013).
• The applicable exclusion amount is increased to $5,000,000 for estates of decedents dying on or after December 31, 2009.
• The applicable exclusion amount for gifts is $1,000,000 (2010), $5,000,000 (2011), $5,120,000 (2012) and $5,250,000 (2013).

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 (Refer to Form 706 (PDF)). 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 (and in special circumstances, reductions to value) 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.

Most relatively simple estates (cash, publicly traded securities, small amounts of other easily valued assets, and no special deductions or elections, or jointly held property) do not require the filing of an estate tax return. A filing is required for estates with combined gross assets and prior taxable gifts exceeding $1,500,000 in 2004 - 2005; $2,000,000 in 2006 - 2008; $3,500,000 for decedents dying in 2009; and $5,000,000 or more for decedent's dying in 2010 and 2011 (note: there are special rules for decedents dying in 2010); $5,120,000 in 2012 and $5,250,000 in 2013.
For additional information, refer to Instructions for Form 706.

Gift Tax

The gift tax is a tax on the transfer of property by one individual to another while receiving nothing, or less than full value, in return. The tax applies whether the donor intends the transfer to be a gift or not.

The gift tax applies to the transfer by gift of any property. You make a gift if you give property (including money), or the use of or income from property, without expecting to receive something of at least equal value in return. If you sell something at less than its full value or if you make an interest-free or reduced-interest loan, you may be making a gift.