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Estate and Gift Tax FAQ

 

Can't I just give all my property away before I die and avoid estate tax?

No. The government long anticipated this one. If you give away more than $10,000 per year to any one person or non-charitable institution, you are assessed federal " gift tax," which applies at the same rate as the estate tax.

Making gifts of less than $10,000, however, can yield substantial estate tax savings. If you give away $10,000 for four years, you've removed $40,000 from your taxable estate. And each member of a couple has a separate $10,000 exclusion. So a couple can give $20,000 a year to a child free of gift tax. If you have a few children, or other people you want to make gifts to (such as your sons- or daughters-in-law), you can use this method to significantly reduce the size of your taxable estate over a few years. (The $10,000 amount is now indexed for inflation, and will increase in $1,000 increments in years to come.)

Consider a couple with combined assets worth $1 million and three children. Each year they give each child $20,000 tax free, for a total of $60,000 per year. In seven years, the couple has given away $420,000 and has reduced their estate to $580,000, below the federal estate tax threshold.

Of course, there are risks with this kind of gift-giving program. The most obvious is that you are legally transferring your wealth. Gift giving to reduce eventual estate taxes must be carefully evaluated to see if you can comfortably afford to give away your property during your lifetime.

Some other kinds of gifts are exempt from the gift/estate tax as well. You can give an unlimited amount of property to your spouse, unless your spouse is not a U.S. citizen, in which case you can give away up to $101,000 per year free of gift tax. Any property given to a tax-exempt charity avoids federal gift taxes. And money spent directly for someone's medical bills or school tuition is exempt as well.

Do some states impose death taxes?

A handful of states impose death taxes. These taxes are of two types: inheritance taxes and estate taxes.

Inheritance taxes are paid by your inheritors, not your estate. Typically, how much they pay depends on their relationship to you. For example, Nebraska imposes a 15% tax if you leave $25,000 to a friend, but only 1% if you leave the money to your child. These rates vary from state to state.

State estate taxes are similar to the estate tax imposed by the federal government. Your estate must pay this tax no matter who your beneficiaries are. The good news is that every state except Mississippi, New York, North Carolina, Ohio, and Oklahoma has abolished these taxes, at least in effect. (New York is phasing out its tax.) In the rest, the state takes part of the money that you owe to the feds; it's a matter for accountants and tax preparers, but doesn't increase the tax bill.

Can I avoid paying state death taxes?

If your state imposes death taxes, there probably isn't much you can do. But if you live in two states - winter here, summer there - your inheritors may save on death taxes if you can make your legal residence in the state with lower, or no, death taxes.

Copyright © 1999 Nolo.com Inc.

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