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SeniorSite.com - Seniors Retirement Living Well In Retirement retirement planning estate planning
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Retirement Planning:

Estate Planning & Taxes

When you die, you want to be sure that your estate goes to your desired beneficiaries. Estate planning is the process of naming those beneficiaries and managing the tax consequences of passing your wealth to those institutions or individuals. If your estate exceeds a certain value, you owe estate taxes.

To administer your estate, you may wish to establish a will or trust (A trust is an agreement where you as grantor or executor designate a trustee and beneficiary.). Otherwise, you will die intestate, which requires that your estate go through probate. Probate is a relatively expensive and time-consuming process that requires a state court to distribute your estate.

You owe estate taxes on the value of your estate that exceeds the applicable exclusion limit. The Economic Growth and Tax Relief Reconciliation Act of 2001 gradually lowers the maximum estate tax rate, from 55% to 45%, repealing the tax for one year in 2010. The exclusion limit and maximum tax rate revert back to 2001 levels in 2011.

If the value of your estate exceeds the applicable exclusion limit in the year of your death, you must file IRS Form 706. (Generation-skipping tax is the tax owed on property left to grandchildren or great-grandchildren.)

For 2004, the applicable exclusion limit is $1.5 million and maximum tax rate is 48%. The following table shows applicable exclusion limits and maximum tax rates through 2011. Future tax-law changes may affect these figures:

Year Applicable
Exclusion
Limit
Maximum
tax rate
2003 $1 million 49%
2004 $1.5 million 48%
2005 $1.5 million 47%
2006 $2 million 46%
2007 $2 million 45%
2008 $2 million 45%
2009 $3.5 million 45%
2010 Repeal of estate tax 35% (gift tax only)
2011 $1 million 55%


The 2001 tax law may make estate planning even more complex than it already can be. For one thing, the law in its current version is set to expire at the end of 2010. Other aspects of estate planning include:
Unexpected events. In the event you are impaired from a disease or accident, you may wish to arrange for key financial decisions to be made on your behalf. You can establish a living will, power of attorney agreement or revocable living trust.

Marital deduction. The marital deduction allows you to transfer to your spouse the entire value of your estate free of estate taxes. The marital deduction is a tax-deferral rather than tax-avoidance strategy. When the surviving spouse dies, his or her estate (the combined value of both estates) may be liable for estate taxes.

Gifting. Beginning in 2003, you can give up to $11,000 to each individual or charitable organization in a year without paying gift taxes. (The recipient does not pay taxes on the yearly limit of $11,000.) There is no yearly limit for qualified educational expenses. Gifting lowers the value of your estate and distributes your wealth while you are living. Gifts made to charitable organizations may be tax-deductible, but gifts to your heirs are not tax-deductible.

Unified tax credit. The unified credit is a cumulative tax credit. If you give more than $11,000 to an individual or charitable in a year, taxes owed on amounts that exceed the $11,000 per-person limit are subtracted from your unified credit. To record gifts in excess of the yearly limit, complete IRS Form 709, which is the sister of Form 706. (Form 706 is for estate tax and Form 709 is for gift tax.)

The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax adviser

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