A few weeks ago I sent out information about the gift tax. In that post I mentioned that we would be talking about the estate tax sometime in the near future. Well, today is that near future.
As some of you may or may not know, the estate tax exemption – which means the amount of non-taxable assets that you can have when you pass away – is currently $5,340,000.00; for a married couple that total is $10,680,000.00. Many of you will never, ever have to deal with this tax, but that does not mean that you do not have to plan your estate to make use of other tax advantages that are available for certain assets. We will concentrate on that aspect of the estate tax law. Most people will fall into that arena.
State Estate Taxes
Of greater concern are state estate taxes. These vary tremendously, and sometimes the exemption amount is lower than the Federal exemption.
The limitations of this blog do not give me enough time to go through every state, but New York, over the next four years, is raising its exemption to match the Federal exemption – and according to the current law, it will stay that way.
Transfer of Assets
As discussed in the gift tax post, when you transfer assets while you are alive, the donee (person receiving the gift) picks up the asset at your basis; in other words, basically at your cost. However, if you die, and the same person who you were going to give the asset to receives the asset through your Will as a beneficiary, they receive the asset at market value. This can be a tax advantage, if planned correctly.
If you own stocks purchased for $100,000, which are currently worth $500,000 and you transfer them while alive, the donees (the people you give them to) receive them with a tax basis of $100,000. If they sold them immediately, they would pay capital gain taxes on $400,000.
However, if you were to transfer these assets at death, the beneficiaries would receive the stocks with the market value of $500,000 as their tax basis and if sold immediately they would pay no capital gains tax. Plus given that you and your spouse’s estate was worth less than $10,680,000, you would not pay any Federal estate taxes.
Basically the rule of thumb is: If you are going to use part of your lifetime exemption while you are alive by giving gifts, try to give gifts that have a market value similar to your tax basis when possible. Retaining assets that have a large discrepancy between market value and tax basis, and passing those to your beneficiaries at death, will cause them to receive the assets at a higher tax basis, which will minimize any capital gains or income taxes when they turn around and sell the assets.
Again, because of the limitations of this post, I cannot go into other reasons for giving away assets such as elder care planning, but a basic rule of thumb is that if we are going to transfer any assets at all, we hold on to assets that have appreciated in value and transfer out, while we are alive, assets that have not yet appreciated in value but we believe they will.
Do you think your estate is too small to warrant an estate plan? If you have assets that have appreciated in value or you expect them to then you should plan accordingly.
Feel free to give us a call at 914 682-7007 or consult with your tax advisor.