QUESTION
My estate is currently under the Federal Estate Tax exclusion but I also want to avoid having my estate pay State Inheritance tax, like that in Pennsylvania. How can Estate Planning help me?
Answer
Transfers to a surviving spouse or a charity are tax free. Certain type of joint ownerships between non-spouses would allow the surviving owner to receive the deceased owners share without an inheritance tax. The concept behind this ownership (Joint Tenants with Rights of Survivorship) is that both individuals owned the whole so upon death there was no “inheritance” by the other owner. This generally occurs when parents name an adult child as co-owner (Joint Tenant with Rights of Survivorship). Though this would allow one to avoid inheritance tax, there are other things to consider before naming another person as a co-owner. Remember, that person’s creditors would have another asset to attach if outstanding debts occur.
Gifting provides another mechanism to avoid or reduce the inheritance tax. The basic rule is that in the year 2009 anyone can give up to $13,000 in money or other property to any number of parties without gift tax. This $13,000 per year, per recipient rule is known as the annual gift tax exclusion and one’s estate is reduced by that amount.
Perhaps the most significant tax disadvantage of gifting is the loss of the so-called "stepped-up" basis. This can be best explained by an example. Let's say you purchased unimproved land for $10,000 but the land is now worth $100,000. If you sell the land, you would realize a $90,000 (100,000 minus 10,000) gain. If you were to make a lifetime gift of this property, the recipient would stand in your shoes and would also realize a $90,000 gain if they were to sell the property. If, however, you were to die owning the property and leave it to your beneficiaries in your Will, those beneficiaries would receive it as if they paid $100,000 for it. As such, they could in turn sell it for $100,000 and realize no taxable gain. Because of the “stepped-up basis” that a decedent's beneficiaries receive, it’s suggested that a donor refrain from gifting appreciated property. You have to do the numbers to see what might work best for your heirs.
Send your questions in by providing a comment or visiting my website at http://www.ythlaw.com/
My estate is currently under the Federal Estate Tax exclusion but I also want to avoid having my estate pay State Inheritance tax, like that in Pennsylvania. How can Estate Planning help me?
Answer
Transfers to a surviving spouse or a charity are tax free. Certain type of joint ownerships between non-spouses would allow the surviving owner to receive the deceased owners share without an inheritance tax. The concept behind this ownership (Joint Tenants with Rights of Survivorship) is that both individuals owned the whole so upon death there was no “inheritance” by the other owner. This generally occurs when parents name an adult child as co-owner (Joint Tenant with Rights of Survivorship). Though this would allow one to avoid inheritance tax, there are other things to consider before naming another person as a co-owner. Remember, that person’s creditors would have another asset to attach if outstanding debts occur.
Gifting provides another mechanism to avoid or reduce the inheritance tax. The basic rule is that in the year 2009 anyone can give up to $13,000 in money or other property to any number of parties without gift tax. This $13,000 per year, per recipient rule is known as the annual gift tax exclusion and one’s estate is reduced by that amount.
Perhaps the most significant tax disadvantage of gifting is the loss of the so-called "stepped-up" basis. This can be best explained by an example. Let's say you purchased unimproved land for $10,000 but the land is now worth $100,000. If you sell the land, you would realize a $90,000 (100,000 minus 10,000) gain. If you were to make a lifetime gift of this property, the recipient would stand in your shoes and would also realize a $90,000 gain if they were to sell the property. If, however, you were to die owning the property and leave it to your beneficiaries in your Will, those beneficiaries would receive it as if they paid $100,000 for it. As such, they could in turn sell it for $100,000 and realize no taxable gain. Because of the “stepped-up basis” that a decedent's beneficiaries receive, it’s suggested that a donor refrain from gifting appreciated property. You have to do the numbers to see what might work best for your heirs.
Send your questions in by providing a comment or visiting my website at http://www.ythlaw.com/
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Porter Brown & Co Financial Services ltd, Specialist Investment advisers. Porter Brown provide jargon free advice on investing, Equity Release, Inheritance tax and Long Term Care. Free investment guide available from our website.
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