12/10/2012 3:45 PM ET|
Would dying now save on taxes?
With changes to the estate tax looming in fiscal cliff negotiations, we had to ask: Would your heirs be better off if you died before 2013?
For tax purposes, dying this year might constitute a huge savings strategy.
We all know about the income tax. That's Uncle Sam's share of your annual wealth accumulation. It's the annual April 15 government grab of a piece of your salary, rents, interest, dividends, etc. The more you make, the bigger the slice the feds want.
But, it's not the only tax the Internal Revenue Service may hit you with.
The income tax is a tax on the accumulation of wealth. There's a second tax on the transfer of that wealth. If the person doing the tranferring is alive, we call it the gift tax. At death, it's called the estate tax. Both are taxes on the transfer of wealth.
Those taxes can be heavy. The top rate this year is 35%, and it's scheduled to go to as high as 55% in 2013.
The basic rules for transfer taxes are simple. There is no transfer tax on anything gifted or left to a spouse. Transfers to anybody else are fair game. Here's where the planning gets fun.
You can gift as much as $13,000 per person ($14,000 for 2013) without any transfer-tax liability. You don't even have to file a gift-tax return (IRS Form 709). The exclusion is based on a calendar year. So you can gift $13,000 on Dec. 31 this year and an additional $14,000 the next day -- Jan 1, 2013 -- to the same person and not even have to file a return. The best part is that you can do that with unlimited beneficiaries, as long as your cash holds out. But if you gift more than $13,000 to any one individual, you have to file that gift-tax return.
Just because you have to file a return, that doesn't necessarily mean you owe any transfer tax. There's a lifetime exclusion in addition to your annual exclusion. For 2012, your lifetime exclusion is $5.12 million. That means that a husband and wife can transfer as much as $10.24 million without having to pay a penny in transfer taxes. And that doesn't include the annual exclusion amounts.
You use your lifetime exclusion to shelter any gift taxes in excess of the annual exclusion. Anything left over can be used to shelter any potential estate taxes. Under current law, if an estate-tax return (IRS Form 706) is filed for the first spouse to die, any unused lifetime exclusion becomes available to and usable by the surviving spouse.
So if the husband dies in 2012 (without any prior taxable gifts) and leaves 100% of his wealth to his spouse, none of his $5.12 million exclusion is used up and all of it becomes available to the widow, in addition to her own exclusion at the time of her death. There's a catch here, though. In order to get the unused lifetime exclusion, the estate-tax return must be filed -- even if no tax is due.
Limits set to drop dramatically
The lifetime exclusions should shelter most of us from any transfer taxes. Unless Congress acts before year's end, though, the lifetime exclusion will fall to only $1 million on Jan. 1, 2013. There would still be no tax on transfers between spouses, but a whole lot more would get sucked out in taxes before the kids or any other heirs get any money.
If you add the value of your house (hopefully paid off prior to your death), investments, retirement plans and other assets, it's not that hard to get to $1 million. And that's where not knowing the rules can get you in trouble.
Congress has to act. I don't want to get on a rant here, but last session, our Congress showed all the character of an egg yolk frying on the asphalt behind my grandfather's barn on a hot summer day.
What you can do
Assuming Congress doesn't act, what should you do? Begin by removing any life insurance from your estate. If you own the policy, it's in your estate and potentially taxable. Create an irrevocable life insurance trust, designating it as the owner and beneficiary of the policy. You "real" beneficiaries (spouse and kids) would then be the beneficiaries of the trust.
You can use both the annual exclusion and the current lifetime exclusion of $5.12 million to shelter any gifts made before year's end. These current sheltered gifts would reduce your future estate value. Before you make that move, though, you should consider not only whether you're ready to give up control of the assets, but also whether your beneficiary is psychologically ready and able to take over ownership and control. One of you may not be ready for that step.
You should also examine the potential benefits of a family limited partnership to reduce the taxable value of the assets transferred via the partnership's use of discounts based on marketability and lack of control. This strategy also offers potential income tax advantages and asset protection, and it removes all potential appreciation in the transferred assets from estate-tax liability.
There are many additional techniques for reducing your potential estate. It's in your best interest to sit down with a CPA, tax attorney, financial planner etc., to examine your options and do some planning. Remember, people don't plan to fail, they fail to plan.
VIDEO ON MSN MONEY
I bet 99% of people who hate Obama didn`t put money in the stock market when he
took office.If they did their money would be up 60%.When I ask employees to work
over they don`t like it, but on payday they like me.Last night after the Christmas
party I passed out $1000 Christmas bonuses.Now they all love me.The Dow is up
5,000 points with Obama.You got to love him.
Barry can change the rules and take as much away from those who are successful as possible. Those who have lived their lives by spending everything they could get their hands on will benefit by the Government hand outs.
Work your whole life, save, invest and where do you end up. You die, the Govenment steals what you earned and who ever you might have left any of it to suffers.
Please remember that the vast majority of Barry's followers are not earner, savers or investors. Most would just as soon put their money up their noses, in their arms or guzzle it down their throats.
So if you are a parasite like his mob why would they care.
Punish the successful and award the mob.
Thank you Barry, Thank you.
What were people doing the last 4 years? Trying to survive. Republicans took away our jobs, homes, assets, lives, liberties and suppressed our pursuit of happiness. Obama was re-elected because we want our FREEDOM restored.
If you can't grasp the issues, just look at Michigan- a Republican Congress slapped together a bad Act in days and the Republican Governor is willing to sign it. The Act undermines all the protections set in place by workers before us and condemns the future to substandard wages and environment that are insufficient to buy the products made. Any nation can suppress, only America rises above the rest by treating people fairly and respectfully. We don't need a New World Order, Democracy is our way.
The majority believe we are not where we want or need to be and are willing to pay taxes based on an awareness that the revenues need to be deployed better. We don't necessarily need less government, we need better functionality in it. Real recovery will come ONLY when we tear down Republican walls and restore balance. Everyone knew that the bottleneck where baby boomers started to retire would and could be precarious. Most people approached it assuming we would take the high road. Obviously we are stuck on the low road, so let's bury the greedy, stubborn, nefarious and corrupt and get moving upward toward the better road.
As for labels- socialist muslim and all the immature trashing of his name- they don't help. If you are beyond your working years, take it and revel in the long run of prosperity you enjoyed. To stand in the way now is utterly anti-American. Be a help not a hindrance.
"For tax purposes, dying this year might constitute a huge savings strategy."
I LIKE THAT IDEA!!! Based on the soggy butt poor-me comments we see daily from Me Generation Republicans, they can have a group breath-holding until they all expire. Start with the Tea Party division... they're older crankier and weirder. Burn in Hell economy-stalling GOP, you are the worst.
GREAT COMMENT SOMEONE! IF YOU DON'T JUMP OFF THE CLIFF OBAMA'S DEATH PANEL WILL KILL YOU ANYWAY!
WHAT THE HELL WERE PEOPLE DOING THE LAST 4 YEARS WHERE THEY DIDN'T SEE ALL THIS COMING? AND BLAME THE
DOPES WHO DIDN'T VOTE CAUSE THEY REFUSE TO VOTE FOR ROMNEY! IF THEY HAD THE US WOULD BE BACK ALREADY!
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