Estate Planning The State of Estate Tax in 2010

The marital deduction is an important estate planning tool. It provides that any assets passing to a surviving spouse pass tax free at the time the first spouse dies (assuming the surviving spouse is a U.S. citizen). However, the marital deduction ends after the first death. Unless the surviving spouse remarries, the real impact of the federal estate tax is felt at the sec¬ond death. In fact, the bill may even be higher if the estate continues to grow.

Another attractive technique, discounts on intra-family transfers of investment partnership interests, is also under Congressional scrutiny. The IRS has become increasingly hostile to such transfers and made some progress recently attacking these estate transfer vehicles under a step-transaction doctrine, whereby the government argues that funding a family partnership and the subsequent gifting of a limited interest to the next generation is a single transaction in substance, albeit not in form. As a result, valuation discounts are not allowed for lack of marketability or minority interest, without which the technique loses most, if not all. of its tax advantages.

First, let's briefly review cost-basis. When you receive an asset as a gift and sell it, you are responsible for paying capital gains tax. Capital gains tax is calculated using cost-basis. Cost-basis refers to how much money was invested in an asset. When an asset is sold, the cost-basis is subtracted from the amount received to determine the gain or loss. Your amount of gain or loss then determines how much you will pay in capital gains tax. In other words, you pay tax on the profit.

The passing of a loved one can be a devastating and difficult time for families, and dealing with the decedent's estate can be a complicated process for those unfamiliar with tax laws. Those in the legal and tax industries alike recommend that individuals consult with professionals prior to submitting any documents or forms to ensure that they are in compliance with current laws, but understanding the basics may provide some clarification and make the process more simple.

However, an estate tax lawyer will tell you that number may return to $1 million in 2010 after the current Tax Reconciliation Act of 2001 expires. An estate tax lawyer should be asked to look over any estate that may be worth $1 million in case it does qualify for the estate tax.

You may have the best of intentions in leaving your child your home or business, but if he or she has to sell some of his or her own property to pay the estate tax and to keep the home or business in the family, you could cause them even more stress. An estate tax lawyer can help you avoid that kind of situation.

A lien may be placed on the house through the purchase of a tax certificate, and the owner can only remove the lien by paying the required taxes due. After a period of two years, the holder of the tax certificate may request a tax deed application. This application allows the certificate holder to sell your property at a public auction. The only way to prevent losing your property is to pay all delinquent taxes and applicable fees that have accumulated.

Let's review an example to better understand what these changes mean. If you live in California, Florida, or Texas there is currently no state death tax (but the federal estate tax still applies). On the other hand, people who live in Pennsylvania have a state inheritance and estate tax. If a person uses a will that includes a family trust (often referred to as a "bypass" or "credit" trust), it would create a state estate tax at the death of the first spouse. Pennsylvania is just an example. Different states use different exemption amounts and tax rates vary, but the concept is the same in some states there may be a need for cash at the first death, that did not exist prior to 2005. Life insurance often plays a critical role in providing tax liquidity. In some states, as long as the named beneficiary is not the insured's estate, life insurance death benefits are exempt from state estate taxes. Check to see if your state offers this tax break or contact us for assistance.

Estate taxes arise when a person dies and the property or belongings pass on to another person or entity. Due to the laws governing estate taxes changing so often, the total amount of taxes can vary tremendously depending on the time of death. As an example, during some years the requirement is that the estate be valued at a minimum of 1.5 million dollars in order to be exempt from estate taxes. At other times, the number can be a maximum of 3 million dollars. However there are many other guidelines that determine estate taxes, so make sure that you do your research and hire an attorney.