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Gift and Estate Taxes
Gift and Estate Taxes
What
is the federal gift and estate tax? 
Generally, the federal
government imposes a gift tax on any transfer of property
by gift from a person that is a United States citizen
or resident alien during the person's life. The government
also imposes an estate tax for the transfer of your
property at your death.
Both the gift and estate taxes are subject to certain
deductions, credits and exclusions. Gift and estate taxes work in unison to catch
transfers of your property during your life and upon
your death. Taxable gifts made after 1976 are added back
into your estate prior to calculating estate taxes.
Any amounts you previously paid in gift taxes are then
subtracted from the estate taxes due. The estate tax
is in addition to income tax and probate costs.
Generally, your estate
will have to pay a federal estate tax if the net value
of your estate exceeds the unified credit in the year
of your death, subject to any deductions and exclusions.
The following is a schedule of the amount of the unified
credit:
| Year of Death |
Unified Credit Amount |
| 2002 & 2003 |
$1,000,000 |
| 2004 & 2005 |
$1,500,000 |
| 2006, 2007 & 2008 |
$2,000,000 |
| 2009 |
$3,500,000 |
| 2010 |
N/A (Repealed) |
| 2011 and after |
$1,000,000 |
For 2004 and 2005,
the unified credit is $1,500,000. Examples of deductions
applicable to both gift and estate taxes include the
marital deduction, which allows transfers between spouses
with no resulting gift tax, and the charitable deduction.
Examples of exclusions from the gift tax include a $11,000
per donee annual exclusion for present interest gifts
made in 2002 and forward. For gifts in excess of $11,000 during any year, a gift tax return
must be filed.
Prior to making a
gift in excess of the annual exclusion, contact your
accountant, attorney or financial advisor to discuss
any gift or estate tax implications.
Does
North Carolina have a gift and estate tax?
Yes, in addition
to the federal gift and estate tax, North Carolina imposes
a gift tax on the transfer of property by gift and an
estate tax on decedents living or owning property in
North Carolina, subject to certain deductions, credits
and exclusions. The North Carolina tax is similar to the
federal tax, however, there are some differences that
should be discussed with your accountant, attorney or
financial advisor. Most notiably is the North
Carolina gift tax which is based upon what class the
donee falls under with each class taxed at a different
rate.
What
is included in my taxable estate?
At your death, the
value of any property in which you have an interest,
even if title or possession is held by another person,
is included in your estate for estate tax purposes.
This includes any property which you have a general
power of appointment and one-half of property owned
by you and your spouse. Additionally, any life insurance
policies in which you have an "incident of ownership"
are included in your estate for estate tax purposes. Taxable gifts made after 1976 are added back
into your estate prior to calculating estate taxes.
Any amounts you previously paid in gift taxes are then
subtracted from the estate taxes due.
What
are the tax rates for the federal gift and estate tax?
For 2002, the highest
federal gift and estate tax rate is 50%; for 2003, the
highest gift and estate tax rate is 49%; for 2004 the
highest gift and estate tax rate is 48%; and for 2005,
the highest gift and estate tax rate is 47%.
What
is the generation skipping tax?
The General Skipping
Tax is a federal tax imposed on transfers, distributions
and the vesting of present interests to, or for the
benefit of, a person two or more generations below the
transferor, subject to certain dedutions, credits and
exemptions. For 2005, everyone has an exemption from
the general skipping tax in the amount of $1,100,000.
How
can I reduce my gift and estate tax liability?
You can reduce your
gift and estate tax liability through the formation
and implementation of an estate plan. Generally, an
estate plan will include maximizing both spouses' unified
credit, which for 2005 is $1,500,000 per person, and
implementing plans to reduce the value of your estate.
This can be accomplished through lifetime gifting, the
formation of and transferring property to trusts, and
the use of techniques to freeze the value of appreciating
assets which may include the formation of a family limited
partnership or limited liability company.
A common mistake
is to leave everything to the surviving spouse upon
the first spouses death. Although there is no estate
tax upon the first spouses' death due to the marital
deduction, the first spouses unified credit amount of
$1,500,000 (if such death occurred in 2005) is waisted.
Life insurance is
a valuable tool that can be use to used to provide for
the payment of estate taxes upon your death.
Life insurance policies owned by either you or
your spouse may be transferred and held in an Irrevocable
Life Insurance Trust ("ILIT") with the proceeds
going directly to your beneficiaries at your death.
If you transfer a life insurance policy to an ILIT by
gift and you survive for three years after such gift,
the insurance proceeds will not be included in your
estate for estate tax purposes.
Finally, both spouses
should maximize the annual exclusion for gifts, which
for 2005 is $11,000 per donee. Such gifts do not have
to be in cash, but could be an $11,000 interest in property.
If you have two childred and three grand children,
you may gift each child and grandchild $11,000 each
year, thus reducing your gross estate by $55,000 or
$110,000 if your spouse joins in the gift.
What
is a typical estate plan for a family with minor children?
For a family with
minor children, a typical estate plan may include the
drafting of reciprocal Wills for both parents which
provide for the appointment of a guardian for your children,
the creation of a trust for the benefit of the children
if something were to happen to both parents, and the
execution of durable and health care powers of attorney
for both spouses. Additionally,
beneficiary designation on your qualified and non-qualfied
retirement accounts should be reviewed and options discussed
including the establishment of IRA's and trusts.
If the family wants
to limit the cost, expense and time involved with probate
while maintaining control over their property, a revocable
trust is a good option.
Tax planning should also be considered to limit potential gift
and estate taxes. Such planning may include lifetime
gifting, maximizing both spouses' unified credit, the
purchase of life insurance, and the formation of one
or more trusts.
For assistance with
formulating and implementing an estate plan, contact
our firm for an appointment or Email
David.
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