Gift Tax Alive In 2010

The estate tax may have been repealed in 2010, but the gift tax is still in full effect. The gift tax works in conjunction with the estate tax to limit wealth transfer between non-spouses. To understand how that affects you, let’s review how the gift tax works.

With certain exceptions, everyone has an annual exclusion in how much they can gift. In 2009 & 2010 the exclusion is $13,000 per person/per year. That means that any gift under this amount does not need to be reported. However, if the gift is property, instead of cash, and could possibly be valued close to the exclusion amount, filing a gift tax return is good practice to ensure the valuation of the property can not be challenged at a later date.

So what happens if you give a gift in excess of your annual exclusion? Exceeding your annual exclusion does not necessarily mean that you will have to pay gift taxes. [By the way, gift taxes are paid by the donor, not the recipient.] If you exceed your annual exclusion, you will need to file a gift tax return, but as long as you haven’t exceeded your lifetime gift allowance ($1 million) and you are willing to use part of your unified credit (death tax exclusion), there will be no taxes due.

So what constitutes a gift? Most gifts are fairly obvious, but there are some that are less obvious, and this is where most people get into trouble. Seemingly simple actions like adding a child to a house deed or investment account can result in a taxable gift. Also transferring an asset for less than fair market value or forgiving a loan can be a taxable gift. Basically, any time there is going to be a transfer in an ownership interest with someone other than a U.S. Citizen spouse, you should double check it with your attorney or accountant.

Is this all there is to the gift tax? Not by a long shot. But this should be enough information to know when you should consult with your legal and tax advisors.

How to Double Your Estate Tax Exemption in 2011

In 2011, the Estate Tax is due to return with a 1 million dollar exemption (unified credit) and top tax rate of 55%. Without planning, this exemption is the same for both individuals and married couples. The following illustration explains how.

Married couples have an unlimited marital deduction to pass assets between each other¹. Although useful during their lifetime, if their joint estate exceeds the unified credit, this could result in unnecessary estate taxes being paid upon the second spouse's death. The following illustration explains how:

• Couple A and B have a joint estate of 2 million dollars
• Spouse A dies and spouse B inherits Spouse A's half of the estate or 1 million dollars
• Spouse B dies and only the first 1 million dollars is protected² by spouse B's exclusion leaving 1 million dollars subject to the estate tax
• Assuming the maximum tax rate of 55%, the amount due in taxes is $550,000

Under this scenario, the first spouse's estate tax exemption of 1 million dollars was wasted. So how can this be avoided?

The Marital Trust, sometimes called an A/B Trust, is used for a married couple that has a potentially taxable estate. The trust is designed to ensure the unified credit of the first spouse to die is not wasted. It effectively doubles the unified credit of married couples. Using the previous situation, the following illustration explains how the Marital Trust works:

• Couple A and B enter into a Marital Trust
• Spouse A dies and Spouse B's half of the joint assets are retained by Spouse B and Spouse A's half is placed into a Marital Trust or Credit Shelter Trust
• Spouse B retains access to the Marital Trust subject to certain broad limitations imposed by I.R.S. Rules
• Because of these limitations, Spouse B is not deemed to own Spouse A's share thus using Spouse A's credit and ensuring it is not included in Spouse B's estate
• When Spouse B dies their 1 million dollars pass under their exemption while Spouse A's share has passed outside of Spouse B's estate
• All 2 million dollars pass to the beneficiaries of A & B free from tax thus saving up to $550,000²

This strategy only works up to double the amount of the unified credit. For additional amounts, or if you do not wish to use this strategy, you will need additional tax saving strategies.

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1Receiving spouse must be a U.S. Citizen
2Assuming a Unified Credit of 1 million dollars

Does Life Insurance Really Pass Tax Free?

As with most legal questions, the answer is maybe. Life insurance does pass income tax free, but it is still subject to estate tax. “But the estate tax has been repealed,” you say. That’s true, but only for 2010. The tax relief act that repealed the estate tax sunsets at the end of 2010, and the estate tax comes back at its pre-relief act rates. This means that without legislative action, beginning in 2011, only one million will pass tax free. Every dollar after that will be subject to the estate tax up to 55%. Keep in mind, the one million dollar exemption applies to all assets, not just insurance. Throw in your house, retirement funds, businesses, vehicles, investment accounts and life insurance; and it adds up quickly.

“Is there anything that can be done about it”? Of course, otherwise why bother talking about it. With proper planning, you can be sure that every dollar of your life insurance passes tax free to your loved ones. This can free up your exemption to ensure other assets pass tax free as well. The estate tax has been described as the only voluntary tax in America. You choose to pay it by not planning ahead.

Estate Planning For Your Pet

In 2002 Florida enacted a provision that trusts could be created for the care of a pet. It has since been amended with the adoption of the Unified Trust Code, but remains in force. Prior to the enactment of this statute, pets could only be left to someone like any other property, but no assets could be set aside for their care. The best you could do is leave the pet to someone together with some money to take care of it, but there was no way to ensure this is what actually happened.

Even with this statute, a trust is needed. A trust allows for a continuing gift for the life of the pet to ensure there are funds available to take care of the pet.

Company Renewal Deadline

May 1st is the deadline to file annual reports with the Florida Department of State for Florida Companies. Late filings incur a late fee of $400, and continued failure to file can result in administrative dissolution of your company. If you have any questions regarding renewing your company, please contact us.
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Traditional vs. Roth IRA: Should I Convert?

To be honest, we don't know. We're not financial planners. What we do know is that this is a very good year to take a look at conversion.

Beginning in 2010, income restrictions for those considering converting to a Roth IRA have been removed. This means that many people that were not eligible to convert, now have this option. If you were not eligible in the past due to your income, your advisor may not have proposed conversion for this reason.

Also for 2010, the deferred tax of the Traditional IRA that must be paid upon conversion to a Roth IRA can be spread over a two year period. Once again, this reduces the expense of conversion based on the time value of money and must also be factored in to your decision.

If you have an IRA and a financial advisor, we recommend you speak with them about the relative benefit of converting some or all of your IRA to a Roth IRA. If you have an IRA and don't have a financial advisor, contact us and we can help you find the right advisor to assist with this decision. Most will perform this analysis for free.

What Happens to Out of State Property When Someone Dies?

For most property, the state in which you reside has jurisdiction over that property, and it will be administered according to the laws of that state. However, real property falls under the laws of the state in which it is located. This means that real property must be administered in the state in which it resides in an ancillary administration. So, if an individual owns any real property outside of their state of residence, there will need to be a probate administration in the state of residence and all states where real property was owned. Probate administration can be expensive and time consuming. Multiple probates are worse. This situation can be avoided by changing how the property is owned.

If you own out of state real property, you should contact your attorney to discuss ways of avoiding multiple administrations.