 |
|
Estate taxes
If you decide to leave any stock in your business or other personal property to your loved ones or charities, you may decide to use a will or trust. A trust may help your heirs to avoid the costly and time-consuming process of probate.
It's generally recommended that you use a trust if you have substantial assets. A trust helps you to manage the value of your estate, a practice called estate planning.
The Economic Growth and Tax Relief Reconciliation Act of 2001 eliminates the estate tax in 2010. This tax is paid on the value of your estate that exceeds a certain limit called the applicable exclusion limit.
For 2007, the applicable exclusion limit is $2 million and maximum estate tax rate is 45%. The applicable exclusion limit rises to $3.5 million in 2009. The following table shows applicable exclusion limits and maximum tax rates through 2011. Future tax-law changes may affect these figures:
| Year |
Applicable
Exclusion
Limit |
Maximum
tax rate |
| 2004 |
$1.5 million |
48% |
| 2005 |
$1.5 million |
47% |
| 2006 |
$2 million |
46% |
| 2007 |
$2 million |
45% |
| 2008 |
$2 million |
45% |
| 2009 |
$3.5 million |
45% |
| 2010 |
Repeal of estate tax |
35% (gift tax only) |
| 2011 |
$1 million |
55% |
|
The table shows how the estate tax is phased out by increasing the exclusion limit and reducing the maximum tax rate over the next several years. In 2010, the estate tax is repealed -- for one year. That's because the entire tax law has a "sunset provision," which leads to its expiration in 2011. With such a feature, it's clear that estate planning remains an important part of protecting your wealth. For information on estate planning, see the Web site of the National Association of Financial & Estate Planning (NAFEP).
A casualty of the 2001 tax law (which takes effect in 2010, and is also subject to the sunset provision) is the loss of the stepped-up basis at death. The stepped-up basis works like this: say your father (the decedent of the estate) buys a parcel of real estate for $200,000 in 1985. When he dies, you (the beneficiary) inherit the property at the current fair market value (FMV) of, say, $350,000. In other words, the basis of the property "steps up" to the higher price of $350,000 at the time of the decedent's death. If you sell the property for $500,000, you owe capital gains tax on the $150,000 difference.
The new law eliminates the stepped-up basis rule in 2010, triggering a capital gains tax liability on the capital gain of $300,000. The bottom line is that effective estate planning helps to anticipate such changes in tax treatment of assets your beneficiaries receive.
Using a trust to safeguard your assets -- including personal property in the form of stock in your small business -- ensures that your assets go to the desired beneficiaries. By using effective estate planning, you can avoid the nightmare scenario of your beneficiaries having to sell inherited assets to pay estate taxes. You may wish to obtain a life insurance policy that pays a death benefit that can be applied to any estate taxes.
The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser.
Return to beginning of Educator
|
|
|
