Estate Tax and Your Property

Estate tax is one of the foremost issues in today’s uncertain economy, and many people are waiting to see how Congress will revise the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001. This law increased the estate tax exemption to $3,500,000 as of 2009. Additionally, the whopping 55% rate was gradually reduced to 45% between 2001 and 2009.

In light of the economic downturn, Congress temporarily repealed the estate tax in 2010. However, the law is set to expire in January 2011, which would restore the 55% tax rate and a maximum exemption of $1,000,000. It’s important to stay informed about estate tax changes and the options available to help you minimize the impact of taxes on your property.

Your estate is based on the Fair Market Value of everything that you own (or have an interest in) at the time of your death. The total of these items is called your ‘Gross Estate.’ From your Gross Estate, certain deductions may be made (for mortgages, debts, funeral expenses, estate administration, property transferred to a surviving spouse, or qualified charities) to arrive at your ‘Taxable Estate.’

The items that comprise your estate (also called ‘includible property’) may include cash, securities, trusts, real property, and other assets. For most people, real property makes up a significant portion of their estate. From 2006 to 2010, the median price of homes (both new and resale) declined about 20%. This will certainly affect your taxable estate since your includible property is taxed based on its Fair Market Value.

The transfer of property between spouses is generally not subject to estate tax, though certain conditions nullify this exemption. For example, if you give your spouse the right to use/possess a property during their lifetime, with the stipulation that the property goes to your children upon your spouse’s death, that property does not qualify for the marital deduction.

Gift taxes are levied on the portions of your estate that you pass along to another individual during your lifetime. The ‘gift value’ is considered the Fair Market Value, regardless of the compensation received in return. For example, if a father sells his home to his son for $100.00 but the property is valued at $100,000.00, the gift tax will be levied on the fair market value of the home, minus the compensation received, which is $99,900.

Note that small gifts are exempt from tax ? as of 2009, ‘small gifts’ are defined as items/property with a maximum fair market value of $13,000.00. A husband and wife can increase their exemption by ‘gift splitting,’ which raises their annual exemption to $26,000.00. Additionally, each spouse may contribute one-half of the gift, regardless of who actually owned the gifted property.

The ‘Lifetime Gift Exemption’ is the maximum amount of property a person can give away during their lifetime without being subjected to federal gift taxes. As of 2010, the Lifetime Gift Exemption is $1,000,000.

It is wise to consult an Estate Tax attorney when arranging your estate and planning for taxes. Depending on the fair market value of your property and where your domicile is located (for state estate tax purposes), estate taxes could reduce your estate by as much as 70%. Therefore, it is crucial to learn as much about estate tax as you can.

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