What does it mean to "own more than $5 million?" What possessions count as "your estate?" All investments, cash, vehicles, real estate, furniture, clothing, artwork and other collections, retirement assets and business interests are included in this calculation. In some cases, life insurance counts, too.
What is the tax rate? Every US taxpayer is entitled to bequeath up to $5 million to their heirs with zero tax. Once you leave over $5 million in assets, there is a flat 35% rate. Note that certain costs, such as funeral expenses, are allowable deductions against the total estate.
Another change in the new Estate Tax rules is that if the first-to-die spouse leaves less than $5 million, the surviving spouse can bequeath their own $5 million plus whatever amount the deceased spouse did not leave. For example, if a spouse has only $2 million in assets, she bequeaths $2 million upon her death. That leaves $3 million of her total $5 million allowance unused. If her surviving spouse has $10 million in assets, he can use his own $5 million plus the $3 million remaining from his wife – leaving only $2 million of his estate as being subject to the tax.
An important point to remember is that you don't have to wait until death to leave possessions to your loved ones. You can give up to $13,000 of cash or other property to any individual each year – this applies to multiple individuals as well. Beyond that, you can make lifetime gifts of up to the same $5 million level without paying any tax – the Estate and Gift Taxes have the same tax-free limits and rates. By gifting now, you avoid any increase in value of that property between now and your death from your estate.
Does this mean you can forget about estate planning? No, you should continue to work with competent legal resources to make sure your assets pass as you intend without any complications. Furthermore, this summary applies to federal tax only – your state may assess an estate or inheritance tax as well. Also, these rules may (and they probably will) change before their December 31, 2012 expiration and your attorney can help you be prepared no matter what happens in the future.
If you have any questions or would like more information, please contact:
Diane Burke, CPA, MBA, AEP
Cover & Rossiter
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