Taxes You Must Consider Before Passing On Your Properties To Your Heirs

Broadly speaking, there are two types of taxes that you need to consider before passing on your properties to heirs. These are Gift Tax and Estate tax.

If you intend to transfer property to your heirs during your lifetime, you must take the relevant provisions of Gift Tax into consideration because you will have to use the mode of gifting away your property. If you wish that your property should pass on to your heirs only after your death, you must take estate tax into account.

Under US laws, an individual can gift property worth one million dollars in his/her lifetime without attracting any gift tax. However, there is a limit on the amount to be gifted at one time to one person. This limit is currently $12000 in one calendar year. This means that any gift(s) to a single person that exceeds $12000 in any calendar year will be taxed for the amount that exceeds $12000. But the donor can make unlimited number of gifts in one calendar year if each gift is within $12000 and is given to a different donee. There would be no gift tax liability on such gifts if their cumulative total were within the lifetime limit of one million dollars.

Estate tax is leviable on the value of the estate of a deceased person. If you make a will explaining how you wish your estate to be distributed among you heirs, you will have to name a personal representative or executor, who will have a fiduciary status and supervise the administration/distribution of your estate according to wishes expressed by you in your will. He will be responsible to pay all debts including the estate tax on your estate. He will act under the supervision of a probate court. If you die intestate i.e. without making a will, the court will step in to take charge and suo moto appoint an administrator to represent the estate.

The rate at which estate tax is levied is currently a flat 45%. Looking in to the historical background you will find that pursuant to relevant legislative enactment in the year 2001, there has been a gradual lowering of the highest rates of estate tax which were between 37 to 55 percent earlier. There is an exemption limit of $2 million dollars on estate value for imposition of tax, which will be raised to $3.5 million in 2009. This means if your estate is valued at $4 million, your heirs will have to pay estate tax @ 45% on $2 million remaining after the exemption is applied. You can avoid much of this estate tax by forming a trust. The proceeds of your life insurance policy are also subject to very heavy taxes. You can avoid the taxes by forming a life insurance trust. You estate tax attorney will be able to help you take necessary steps and let you pass on much more to your heirs.

You must also know that many states impose inheritance tax and state estate taxes. If your legal residence is in a state, which imposes state estate tax, then your heirs will be saddled with those taxes in addition to the federal estate tax.

From the year 2010 if you form an irrevocable trust (to avoid estate taxes) all trust assets would be treated as taxable gifts unless the trust is constituted as being wholly owned by you i.e. the grantor, or your spouse. From this year there will also be a change related to stepped up income tax cost basis at death where an executor can make adjustments and increase the cost basis within certain limits.

If you intend to pass on property/cash to your grandchildren through a generation skipping trust, you have to pay a generation skipping transfer tax. Currently the rate of tax is a flat 45% with an exemption limit of $2 million, which is set to rise to $3.5 million in 2009. This tax also will be abolished from the 1st of January 2010.