Duvall & Associates, Inc.
BUSINESS ADVISOR NEWSLETTER
 

A few tips on the estate tax

- by Alan Duvall 

Published in Dayton Daily News January 15, 2006  

A sense of urgency exists with regard to writing about estate taxation – after all, Congress may repeal the tax at any moment.

But pending repeal, a review of estate tax basics may be useful even if viewed in a historical context. 

Estates are taxed on the value (at date of death) of the decedent’s net assets.  All owned assets (investments, real estate, etc.,) must be appraised and the cumulative values reduced by debts, life insurance proceeds and charitable bequests.   

Assets inherited by the surviving spouse are tax-free and also subtracted from the net taxable estate. 

Estates are only federally taxed to the extent net taxable assets exceed $2 million. 

To maximize tax exclusions, standard will structures allocate $2 million estate assets to a “credit trust” for eventual benefit of non-spousal beneficiaries.  Remaining assets flow tax-free to the spouse.  Such a structure insulates all estate assets from taxation at death of the first spouse. 

The surviving spouse also receives a $2 million tax-free passage of net assets upon his/her own death.  Therefore, with very simple planning, couples can shelter at least $4 million of net assets from federal taxes. 

Closely-held companies and farms must be appraised, the values of which are taxed at death.  However, since Congress has a soft spot for small business owners, beneficiaries are allowed 14 years (at low interest rates) to pay estate taxes in those situations. 

Beneficiaries receive “stepped-up basis” of assets equal to fair market values at time of death.  For example, if decedent paid $100 for stock worth $100,000 at death, inherited stock would have to be sold for an amount exceeding $100,000 to generate income tax gains.   

One notable exception – in addition to estate taxation, inherited pension assets are income taxed to beneficiaries upon distribution from of trust accounts to beneficiaries.  Thus, pension assets are essentially double-taxed when the pensioner dies.  

Lifetime gifts of less than $11,000 per recipient per year are tax-free.  Annual gifts in excess of those limits reduce the $2 million exemption at donor’s death.  All gifts to spouses are tax-free. 

An estate tax repeal accompanied by a “carry-over basis” of inherited assets is under consideration in Congress.  Estate taxes generate comparatively minor revenues to the government and remain only as an emotional political tool to hypothetically deter undue accumulation of wealth.   

Alan Duvall is a certified public accountant in Dayton.  Contact him at Alan@Duvallcpa.com.