The federal government and many states have established taxes which apply to the gifting of property during lifetime and at death. Utah currently has no estate tax, therefore the discussion here will focus on the federal estate and gift tax. This tax can be avoided by most people with early planning.
The simplest way to look at the estate tax is through an analogy. It is as if each of us is pushing a grocery cart through a grocery store. As we go we put things in our cart; that is, we accumulate assets. During our lifetime we are allowed to transfer up to $13,000 per year per person (called the annual exclusion – currently indexed for inflation) to another’s grocery cart. When we go to check out of this life (we die), all of the assets in our cart are subject to estate tax when they pass over the checkout stand. However, each person has been given a coupon currently worth $5,000,000, so the first $5,000,000 passes through the checkout stand without any tax (so long as it was not used during life through gifting). Every dollar after that is subject to a tax of 35%.
These rates are the same for gift taxes, thus a “unified tax” system. The “coupon” is referred to as the applicable exclusion amount. I will just refer to this as the exclusion amount or the coupon amount. This coupon amount may be used during life or at death. If we exceed the annual exclusion amount in any in year we are subject to a gift tax or using up some of our coupon amount. If the coupon is not used at death it is lost entirely.
You may ask, what is included in my estate for tax purposes? The answer is, your entire net worth, including the face value of any life insurance in which you have any incidents of ownership at your death. Put another way, add up the value of all of your assets, subtract your liabilities, and include your life insurance at face value.
As you can see, the estate tax is a significant expense for those effected by it. Congress may change this system in the coming years to avoid the reduction of the estate tax applicable exclusion to $1,000,000 2013. those with estates in excess of this limit may wish to consider the creation of an A-B Trust plan.
Please contact Jeff B. Skoubye for a free initial consultation to discuss your situation.
