Miner & Lemon Blog

Tax Savings Series Part 6 - Gift and Estate Taxed or Bilked, Bamboozled, and Bushwhacked

Gift and Estate Taxed or Bilked, Bamboozled, and Bushwhacked

            Benjamin Franklin once observed that “Nothing in life is certain except death and taxes.”  But what about death taxes?  Farmers more than others have reason to fear the estate tax for the reason that their estates frequently consists of large and illiquid assets such as land, machinery, and equipment.  In today’s post I will outline the federal gift and estate tax system, and next time I will discuss a few of the techniques available for reducing or otherwise addressing the gift and estate tax obligation. 
            The gift tax is a tax that is levied upon gifts made during life.  Each year every taxpayer is allowed to gift an amount up to the then-applicable annual exclusion to an unlimited number of individuals.  In 2009, the amount of the annual exclusion is $13,000.  This means that in 2009, a taxpayer may give up to $13,000, in cash or other property, to any number of people that he or she desires, and each married couple may give up to $26,000 to any number of people.
            In addition to the annual exclusion, each taxpayer is allowed a $1 Million lifetime gift tax credit.  This means that in any given year, if gifts exceed the applicable annual exclusion amount, then that excess will function to reduce the available amount of the gift tax credit.  And the gift tax credit is tied to the estate tax credit.  As a result, the estate tax credit is diminished to the extent that the gift tax credit is utilized.  In other words, the gift tax credit could be thought of as lifetime usage of the estate tax credit
            The estate tax credit is currently set at $3.5 Million; however, the estate tax scheme is currently in a state of transition and the eventual outcome is still uncertain.  IRC 2010 provides for an applicable credit amount against estate taxes of $3.5 Million in 2009; however, in 2010 there will be no estate tax, but in 2011, the estate tax will return with an applicable credit of only $1 Million.  Although, the consensus among experts in the field is that Congress will not allow the 2010 phase-out to occur, but will rather set the applicable credit amount to remain at the $3.5 Million figure for the foreseeable future. 
            The federal estate tax is calculated by first determining the size of the gross estate, which requires an understanding of what is includable in the gross estate and what is not.  IRC 2031 states “The value of the gross estate of the decedent shall be determined by including . . . the value at the time of his death of all property, real or personal, tangible or intangible, wherever situated.”  And IRC 2033 goes on to state that “The value of the gross estate shall include the value of all property to the extent of the interest therein of the decedent at the time of his death.”  Which is to say that not only does the gross estate include all assets held by the decedent at death, but it also includes several types of assets not held at death, such as: dower or curtesy interests held by the surviving spouse, certain gifts made three years prior to the decedent’s death, property regarding which the decedent held a life estate, property transferring upon the death of the decedent, property transferred subject to the decedent’s power to revoke, annuities receivable by a beneficiary as a result of the decedent’s death, certain joint interests, property over which the decedent held a general power of appointment, life insurance proceeds from policies regarding which the decedent possessed any of the incidents of ownership.
            After the gross estate has been calculated various deductions must be taken to arrive at the taxable estate.  Deductions are allowed for the following items, among others: funeral expenses, administration expenses, claims against the estate, charitable contributions, and property left to the surviving spouse.  If the taxable estate is less than the estate tax credit as reduced by lifetime gifts, then no federal estate tax is due.  If, however, the taxable estate is greater than the estate tax credit as reduced by lifetime gifts, then federal estate tax will be due.  And, in the event that federal estate tax is due, the size of the obligation can be determined by multiplying the amount by which the taxable estate exceeds the estate tax credit by the applicable rate, which in 2009 is 45%.

            Please join me next time for:  Don’t Pay Any More Than You Have to or How to Stick It to the (Tax) Man.