ESTATE PLANNING

ESTATE PLANNING FOR EVERYONE

Estate and Gift Taxes

No Tax Owed

Most gifts are not subject to the gift tax and most estates are not subject to the estate tax. (Only about 2% of all estates are subject to the estate tax). For example, there is usually no tax if you make a gift to your spouse or a qualified charity or if your estate goes to your spouse or qualified charity at your death. If you make a gift to someone else, the gift tax does not apply until the value of the gifts you give that person is more than the annual exclusion for the year. 

Even if tax applies to your gifts or your estate, it may be eliminated by the Unified Credit, refer to Publication 950, Introduction to Estate and Gift Taxes.

No Return Needed

Generally, you do not need to file a gift tax return unless you give someone, other than your spouse, money or property worth more than the annual exclusion ($11,000 in 2005) for that year. Although a return may be required, no actual gift tax will become payable until the cumulative lifetime taxable gifts exceed the applicable exclusion amount. The donor is primarily responsible for the payment of the Gift Tax.  An estate tax return generally will not be needed unless the estate is worth more than the applicable exclusion amount (see below) for the year of death. This amount is shown in the section under Unified Credit. 

To reemphasize:  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) with a total value under $1,000,000 and a date of death in 2005 and later years do not require the filing of an estate tax return.

No Tax on the Person Receiving your Gift or Estate

The person who receives your gift or your estate generally will not have to pay any gift tax or estate tax because of it. In addition, that person will not have to pay income tax on the value of the gift or inheritance received. NOTE: There are some technical applications for "Income in Respect of Decedent" under §691 that will have to be considered for income earned but not otherwise taxed prior to the date of death.

No Income Tax Deduction

Making a gift or leaving your estate to your heirs does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than gifts that are deductible charitable contributions). If you are not sure whether the gift tax or the estate tax applies to your situation, refer to Publication 950, Introduction to Estate and Gift Taxes.

Unified Credit

A credit is an amount that eliminates or reduces tax. The unified credit applies to both the gift tax and the estate tax. You must subtract the unified credit from any gift tax that you owe. Any unified credit you use against your gift tax in one year reduces the amount of credit that you can use against your gift tax in a later year. The total amount used against your gift tax reduces the credit available to use against your estate tax.

For Gift Tax Purposes in years 2004 and 2005 the Unified Credit is $345,800, the Applicable Exclusion Amount is $1,000,000. For Estate Tax Purposes in years 2004 and 2005 the Unified Credit is $555,800 and the Applicable Exclusion Amount is $1,500,000.

For Gift Tax Purposes in years 2006, 2007 and 2008 the Unified Credit is $345,800, the Applicable Exclusion Amount is $1,000,000. For Estate Tax Purposes in years 2006, 2007 and 2008 the Unified Credit is $780,800 and the Applicable Exclusion Amount is $2,000,000.

For Gift Tax Purposes in year 2009 the Unified Credit is $345,800, the Applicable Exclusion Amount is $1,000,000. For Estate Tax Purposes in year 2009 the Unified Credit is $1,455,800 and the Applicable Exclusion Amount is $3,500,000.

Estate Tax

Estate tax may apply to your taxable estate at your death. Your taxable estate is your gross estate less allowable deductions.

Gross Estate

Your gross estate includes the value of all property in which you had an interest at the time of death. Your gross estate also will include the following.

• Life insurance proceeds payable to your estate or, if you owned the policy, to your heirs.
• The value of certain annuities payable to your estate or your heirs.
• The value of certain property you transferred within 3 years before your death.
• Trusts or other interests established by you or others in which you have certain powers.

Taxable Estate

The allowable deductions used in determining your taxable estate include:

1) Funeral expenses paid out of your estate,
2) Debts you owed at the time of death, and
3) The marital deduction (generally, the value of the property that passes from your estate to your surviving spouse).

For additional information, refer to Instruction to Form 706.

Gift Tax

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.

The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts.

• Gifts that are not more than the annual exclusion for the calendar year.
• Tuition or medical expenses you pay for someone (the educational and medical exclusions).
• Gifts to your spouse.
• Gifts to a political organization for its use.
• Gifts to qualified charities (a deductions is available for these amounts).

Annual Exclusion

A separate annual exclusion applies to each person to whom you make a gift. For 2005, the annual exclusion is $11,000. Therefore, you generally can give up to $11,000 each to any number of people in 2005 and none of the gifts will be taxable.

If you are married, both you and your spouse can separately give up to $11,000 to the same person ($22,000 total) in 2005 without making a taxable gift. If one of you gives more than $11,000 to a person in 2005, refer to gift splitting in Publication 950, Introduction to Estate and Gift Taxes.

If you determine that estate planning is important to you and your family, start by contacting a qualified attorney or CPA. The Estate Planning Experts at Maxwell Shmerler & Co., CPAs would be glad to help get you started.

	•	Make sure that assets are transferred to your intended beneficiaries;

	•	Reduce estate administration costs, such as attorneys' fees, executors' fees, and court costs;

	•	Reduce or eliminate federal gift, estate, and generation-skipping taxes;

	•	Protect beneficiaries from mismanagement and from the claims of creditors and ex-spouses;

	•	Discourage certain types of conduct; and/or

	•	Give incentives to beneficiaries to be productive members of society.

	•	Generally: A will is a document in which the maker, ("Testator" or "Testatrix") can direct the administration and distribution of his or her estate. When you prepare your will, you must specify the fiduciaries and the beneficiaries, which are discussed below. Your estate planning attorney will provide the relevant technical language relating to the administration of the estate and the powers of the fiduciaries.

	•	Advantages: A will has several advantages when compared to living trusts or asset ownership which is transferred by right of survivorship or under a contractual beneficiary designation.

	•	Minimum Requirements:  The minimum requirements for a will are easy to meet in every state.   In Nevada, for example, a formal will can be attested by two witnesses, neither of whom should be named in the will as a fiduciary (executor, guardian, or conservator) or as a beneficiary.  In Nevada, a handwritten ("holographic") will which has been dated, written, and signed entirely in the maker's handwriting is legally valid in Nevada.  Other states have similar requirements, but some states require that wills have three witnesses, and some states do not recognize handwritten wills that are not witnessed.

	•	Probate Property:  A will effects all assets that belong to you at the time of your death. No special form of ownership is required (although the will has no effect on assets which pass by operation of law or contract, as discussed in the introduction).

	•	Fiduciaries and Beneficiaries:  In most states you are free to name your own fiduciaries and beneficiaries.  "Fiduciaries" include the personal representative (executor or executrix), a conservator (or guardian of the estate), and a guardian of your person.  "Beneficiaries" are those persons whom to designate to receive your assets (or at least some benefit from your assets.)  You should also designate alternate fiduciaries and alternate beneficiaries, which is difficult to do effectively under contract beneficiary designations and impossible to do under any form of joint ownership with a right of survivorship.

	•	Simplicity; Expense:  A will is simpler than a revocable living trust, and is usually significantly less expensive to have professionally prepared. Because many attorneys expect to make money probating your will, their fee or hourly rate for will preparation may be less than their rate or fees for other legal work.

	•	Disadvantages:  A will does not alleviate the need for a guardian and will require probate upon your death. If you become unable to take care of yourself or your assets, your will can name the guardian, but it does not alleviate the court-supervised guardianship proceeding. Upon your death, probate proceedings are required to transfer those of your assets which do not pass directly by law or contract. Court costs, executors' commissions, and attorneys' fees can be expensive, and even an uncontested probate often takes six to twelve months to complete (even longer for estates subject to the federal estate tax).

	•	If your will delays the distribution to one or more beneficiaries until they reach a specified age or some other event, your will includes a "testamentary trust." A will with a testamentary trust is not a "simple will", and the preparation costs can be similar to those for revocable living trusts.

	•	After the will is probated and the administration of the probate estate is complete, the testamentary trust receives the assets allocated to it.  Testamentary trusts are subject to continuing court supervision beyond the probate proceeding. In Nevada, the Trustee has to file an accounting with the court annually, and a court hearing is required at least every three years (and sometimes every year). This results in continuing attorneys' fees and costs until the beneficiaries' shares are finally distributed.

	•	Generally: A revocable inter vivos ("living") trust is essentially a contract in which the creator of the trust (the "settlor", "grantor", or "trustor") transfers his or her assets to a "trustee" who agrees to own, administer, and distribute those assets (the "trust estate") to designated "beneficiaries" according to the provisions of the written trust document ("Declaration of Trust" or "Trust Agreement"). Initially, the settlor, the trustee, and the beneficiary are usually the same person, and successor trustees and successor beneficiaries are designated in the trust document.

	•	Benefits: The primary benefits of a revocable trust are as follows:

	•	Avoid Guardianship Proceedings: A trust can provide that the designated successor trustee will manage the assets and provide for the care of the settlor when the settlor becomes incapacitated or incompetent. A trustee can be directed to retain funds for beneficiaries who are young or immature, incompetent, unwise, or easily influenced by greedy people. This eliminates guardianship proceedings, including the annual court accountings required by law. If done properly, a beneficiary cannot compel an early distribution of--and his creditors cannot place a lien on--trust assets.

	•	Avoid Probate: Assets held in the name of a trustee are not subject to probate upon the death of either the settlor or the trustee (even if you are both the settlor and the trustee of your own trust). The expense and delays associated with probate proceedings are avoided as to trust assets.

	•	Other Benefits:  A revocable trust can be used to consolidate all of the settlor's assets, including benefits from life insurance policies, retirement benefit plans, and other contracts. It can include provisions which optimize the marital deduction, charitable gifts, and generation-skipping transfers in order to reduce or eliminate a settlor's federal gift and estate taxes. A trust can be used as a form of a marital property agreement if established after a marriage, or it can help segregate separate property if established before a marriage.

For Estate and Trust Planning and Preparation, Contact The Tax Experts at tax@msco-cpa.com

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