Federal estate taxes and state death taxes are complex and can significantly decrease what your beneficiaries ultimately receive. It is advisable to consult with a professional financial adviser, such as a CPA/PFS, for information on estate, inheritance, and gift taxes on both the federal and state levels. The following are some basic estate tax planning considerations of importance.
Unlimited Marital Deduction
You may leave an unlimited amount of assets to your spouse (who is a US citizen) without any estate tax liability. However, when your surviving spouse dies, tax may be charged against his or her estate, which would include the assets received from your estate. This may result in a larger estate tax than would be the case if you both make good use of the unified credit, discussed below.
Unified Credit
Individuals are entitled to a lifetime unified estate and gift tax credit that effectively exempts from the tax transfers up to a specified amount. The amount exempted ˜ the applicable credit amount is $1,000,000. Estates valued at less than the applicable credit amount pass tax-free to beneficiaries.
Transfer Tax Rates
An estate tax return must be filed if your taxable estate exceeds the applicable credit amount. Estates over this amount are taxed at rates up to 49% in 2003 (49% in 2004).
Gifts
Gifts are a classic way to reduce an estate and the related taxes. You are allowed to make yearly tax-exempt annual exclusion gifts of up to $11,000 per recipient or up to $22,000 with your spouse's consent. Making gifts in excess of the exclusion amounts will have an impact on the lifetime unified credit and gift and estate taxes. Reminder: Only gifts of a present interest qualify for the annual exclusion. A gift of a present interest is one that the donee has immediate access to.
