If you are fortunate enough to be considering making lots of large gifts, you should learn a little about the federal estate and gift tax. If you give more than $10,000 to one recipient in one calendar year, you'll have to file a federal gift tax return. You won't actually have to pay any tax, however, unless you give away a total of at least $650,000 during your life or leave more than that much at your death.
If you structure your gifts properly and watch the calendar, you can probably give away as much money as you want without worrying about tax. All of these gifts are exempt from federal gift tax:
- Gifts of up to $10,000 per any recipient per year.
- Direct payment of someone's tuition or medical bills.
- Gifts of any amount to your spouse (as long as he or she is a U.S. citizen).
- Donations of any amount to tax-exempt charities.
Simplified Procedures for Small Estates
Almost every state now offers shortcuts through probate -- or a way around it completely -- for " small estates." Each state defines that term differently. Because of the way the laws are written, however, many large estates, worth hundreds of thousands of dollars, are eligible for special transfer procedures that speed property to inheritors.
There are two basic kinds of probate shortcuts for small estates:
Claiming property with affidavits -- no court required. If the total value of all the assets you leave behind is less than a certain amount, the people who inherit your personal property -- that's anything except real estate -- may be able to skip probate entirely. The exact amount depends on state law, and varies hugely. California's limit, $100,000, is the highest. If the estate qualifies, an inheritor can prepare a short document stating that he or she is entitled to a certain item of property under a will or state law. This paper, signed under oath, is called an affidavit. When the person or institution holding the property -- for example, a bank where the deceased person had an account -- receives the affidavit and a copy of the death certificate, it releases the money or other property. Simplified court procedures -- another option for small estates (again, as defined by state law) is a quicker, simpler version of probate. The probate court is still involved, but it exerts far less control over the settling of the estate. In many states, these procedures are straightforward enough to handle without a lawyer, so they save money as well as time.
| Method |
Advantages |
Disadvantages |
Payable-on-death accounts
|
Easy to create, using a form provided by the bank or agency. |
Limited to bank accounts and some government securities. |
| Naming beneficiary of pension plan or retirement account |
Easy to do. Beneficiary inherits all funds in the account at your death. |
None, unless particular program imposes limits. |
| Transfer-on-death registration for securities |
Easy to do. All you do is name, on the registration form, someone to inherit the securities at your death. |
Not available in all states. |
| Transfer-on-death designation for motor vehicles |
Easy to do. All you do is name, on your registration form, someone to inherit your vehicle. |
Currently available only in California and Missouri, but other states are considering similar programs. |
| Joint tenancy with right of survivorship |
Easy to create. |
If you don't already own property in joint tenancy, you may not want to add another owner, who could sell his share. (For larger estates, there are negative gift tax consequences, too.) Can be a problem if a co-owner becomes incapacitated. No probate avoidance if all joint owners die at once. |
| Tenancy by the entirety |
Easy to create. |
Available only in some states; limited to married couples. Can be a problem if one spouse becomes incapacitated. |
| Community property with right of survivorship |
All the benefits of community property ownership, plus probate avoidance when one spouse dies. |
Available only to married couples in four states: Arizona, Nevada, Texas and Wisconsin. |
| Revocable living trust |
Flexible, private. Easy to create. You keep control over property during your life. |
Some paperwork involved. May need attorney if your estate is complicated. |
| Gifts of property made while you're alive |
Reduces amount of property in your estate, which avoids both probate and estate taxes. |
You lose control over property given away while you're alive. Large gifts use up part of your federal gift/estate tax exemption. Insurance policies must be given away at least three years before death, or proceeds are included in your taxable estate. |
| State laws that allow simplified probate proceedings |
Exempts certain property from formal probate. |
Applies only to small estates; you may still need an attorney to explain the technicalities of your state's laws. |
Copyright 1999 Nolo.com Inc.
