Many believe paying death tax, as some people call it, or estate tax, does not apply to them. Some mistakenly think that when they pass away, their heirs will not be affected by an estate tax because of the high exemption allowed by the federal tax laws.
Estate tax is a thing of the past, right? In fact, federal legislation passed in 2001 authorized the elimination of the federal estate tax and gift tax by 2009. Alabama´s filing requirement is based on the federal estate tax credit allowed under the federal estate tax law. As a result, estates where the decedent´s date of death is after 2004 are not required to file with Alabama. But, laws change. In 2010, we had no estate tax. In 2011, it went back to a $1 million exemption. Congress changed it so that for 2011 and 2012, the exemption would be $5 million. It was scheduled to go back to $1 million in 2013, and in fact, it did go back. Congress changed it to stay at $5 million for now.
The reaction is often one of disbelief when someone learns a tax will be imposed on their heirs after the deaths of the parents because of their particular circumstances. In some situations, the heirs will be hit with a capital gain tax on the sale of the home owned by the parents. The capital gain tax is not an estate tax. It applies to anyone who makes a profit that is taxable according to the tax laws.
Capital Gain Tax
A capital gain tax might apply when, for example, parents pass away and leave the family home to their children. The children get the step up in tax basis, that is, the value of the home when the parents died. The heir might have to pay a capital gain tax equal to the difference between the fair market value (FMV) of the home at the time the last parent dies and its FMV when the home is sold. It matters little if the last surviving parent gives the home to the heirs through a will or trust. When the heirs sell it for FMV, they might achieve a capital gain that is taxable.
Gift Tax Planning
A gift tax is applied to an individual giving anything of value to another person. For something to be considered a gift, the receiving party cannot pay the giver full value for the gift, but may pay an amount less than its full value. The giver is required to pay the gift tax. The receiver may pay the gift tax, or a percentage of it, on the giver's behalf. Some gifts are excluded from gift tax, such as a gift to a spouse, a political organization, gifts valued at less than the annual gift tax exclusion, and gifts for medical and educational expenses.
You can protect IRA (individual retirement account) funds by creating a trust to be the beneficiary of the IRA instead of a person. A trust is a good way to control how the inherited funds are distributed to beneficiaries, which is useful if the people to inherit the funds are underage, foolish with their money, in debt, divorced or disabled. This permits the IRA to compound income tax free for many years, which also allow the funds to grow in value.
Reach Out to Us
With just a little estate tax planning, you could lawfully avoid some or all of the taxes mentioned here. Call us today at 205-663-0281 for a free consultation if you want to know more about the estate tax, the death tax and the capital gain tax. John Holliman and Melanie Bradford will help you with estate tax planning while taking care of your loved ones. We treat you like family.
Let us help you create an estate tax and gift tax plan for your life, as well as your death, that includes the steps necessary to minimize your tax burden. Contact us today - we offer a free consultation. Or call us at 205-663-0281.
John Holliman, Attorney and Melanie Bradford Holliman, Attorney