Sy Schnur CPA, PFS, IAR

The Economic Growth and Tax Relief Reconciliation Act of 2001 includes the repeal of federal estate taxes for people dying after December 31, 2009. Between January 1, 2002 and December 31, 2009, the current federal estate tax will gradually decrease as shown in the following table.

Year	Highest Estate and Gift Tax Rate	Amount Exempt from Estate Tax
2002	50%	$1 million
2003	49%	$1 million
2004	48%	$1.5 million
2005	47%	$1.5 million
2006	46%	$2 million
2007	45%	$2 million
2008	45%	$2 million
2009	45%	$3.5 million
2010	Top Individual Rate (for gift tax only)	Unlimited - Taxes Repealed

It's very important to be aware that this repeal is temporary; the entire law "sunsets" (expires) after December 31, 2010. This means that the provisions of this 2001 Tax Act will no longer be effective on January 1, 2011 and the tax structure as it existed in 2001 will take effect again (in 2011, Federal estate tax will be assessed on property in excess of $1 million with a maximum tax rate of 55%.)

Gift Tax

Congress did NOT repeal the federal gift tax, although it raised the lifetime gift tax exemption (the amount that may be passed without gift tax) to $1 million, effective in 2002. This means that a person could make a total of $1 million of gifts over his/her lifetime before owing any federal gift tax. Gifts of more than $1 million WILL be taxed, regardless of the exemption for transfers at death. Beginning in 2010, the gift tax rate will equal the highest individual income tax rate (currently scheduled to be 35% in 2010).

Basis of Inherited Property

"Step-up in basis" will continue until December 31, 2009. The "basis" of a piece of property is generally the purchase price of that property and is used to calculate taxable gain when property is sold. The greater the increase in value of property, the greater the taxable gain when sold. A "step-up in basis" means that the basis of inherited property increases to the value of the property on the date of death.

For the year 2010, "step-up" will be replaced by "carry-over basis" rules. Carry-over basis generally means the basis of inherited property remains the same as it was for the deceased owner; which potentially increases the amount of gain (and tax) when the property is sold. When property is inherited, the heir can choose to take a "step-up" in basis for only $1.3 million of the property. For any amount inherited over $1.3 million, the heir's basis will be the smaller of the deceased owner's basis or the date-of-death-market value. The basis of property passing to a surviving spouse can be increased by an additional $3 million.

Basis of property given to the decedent by someone other than his/her spouse within 3 years of death cannot be increased.

Remember, in 2011, step-up in basis generally resumes as it existed prior to this Act, because all provisions of this tax act expire after December 31, 2010.

State Death Tax

Currently, there is a credit against federal estate taxes for death taxes paid to a state. This State death tax credit will be reduced from current levels as follows:

2002 - reduced by 25%
2003 - reduced by 50%
2004 - reduced by 75%
2005 - Completely Repealed

Federal Inheritance Tax is one of those things you really don't feel like dealing with, but in some ways it is part of the cycle of life. Possessions have been passed down from generation to generation throughout history and they provide us with both sentimental and monetary value. Thankfully, we don't have to deal with inheritance issues all the time, but we want to provide that information for those that need it.

Inheritance Tax Law

Depending on where you live the tax code may make reference to inheritance tax, estate tax, and even "death duty." Here in the United States, there is a difference between estate taxes and inheritance taxes. Estate taxes are levied on representatives of the deceased person, while inheritance taxes are levied on the beneficiaries of an estate. Elsewhere in the world, the terms estate tax and inheritance tax are used interchangeably.

Some individuals mistakenly believe that there is a separate inheritance tax rate in the US. IRS tax law, or tax code, does not provide for a special inheritance tax rate, instead there are exemptions and credits that apply to property that is inherited or gifts that are received.

Under the current law, the IRS has a prescribed method for determining if any inheritance tax is due on property or monies received. We are going to briefly describe this method in the section below. Keep in mind that the settling of an estate is a complex matter. An attorney or tax accountant should be consulted in situations where matters of the law are concerned such as the contesting of a Will, known as the probate process.

Inheritance Tax Basis

The first step used to determine any inheritance tax that might be due is to calculate the fair market value of the entire estate. This would include cash, bank accounts, stocks and bonds, real state, insurance, and similar items of value. The total fair market value of all these items is termed the Gross Estate.

Adjustments to Gross Estate

The next step would be to calculate any adjustments to the gross estate. Typical adjustments include paying-off the remaining balance on a mortgage or the fees associated with settling the estate. This last item might include items such as estate administration fees or payments made to an attorney. Finally, there is also a Marital Deduction that can be taken for property that is left to a surviving spouse.

Net Value of Property

Once all the deductions have been taken from the gross estate, the remaining balance is considered the net value of the property - or the inheritance tax basis. To calculate whether nor not any inheritance tax is due; the net value of the property must be subtracted from the inheritance tax credits appearing in the tables below. If the net estate is larger than the tax exclusion, then the federal income taxes due can be found on the standard tax brackets or tax rate tables published by the IRS.

Taxing of Life Insurance Proceeds

Life insurance proceeds paid to you are used in the calculation of the gross estate. The value of any insurance received is subject to the unified credits and inheritance tax exemptions explained later. This last statement is true if you elect to receive the proceeds in the form of a single lump sum.

If you elect to receive life insurance proceeds in installments, then you need to separate the value of the insurance inherited from the total of all payments to determine your federal tax liability. For example, you may be able to elect to receive a lump sum of $100,000 or $10,000 per month for 12 months. The difference between the lump sum payment and the money received is due to interest you are earning on the policy by taking installments.

In this example, you are receiving a total of 12 x $10,000 or $120,000, which is $20,000 higher than the lump sum of $100,000. This means that you would need to pay income tax on the $20,000 received in the form of interest income.

Unified Credits, Gift Tax and Estate Tax

The Unified Credit is used to eliminate or reduce your tax liability. The credit applies to both gifts you may have received and estates that have been inherited. The credit is termed a lifetime credit because as it is consumed by each gift or estate inherited the credit is reduced. The lifetime credit applies to all inheritance or gifts received since 1977.

Under the current law, the gift tax exclusion or credit is separated from the estate tax or credit. For example, the table below indicates the following:

Lifetime Gift Tax Exclusion and Estate / Inheritance Tax Table

These inheritance tax tables are used to determine the federally-taxable portion of your inheritance. As previously mentioned, they apply to the net estate you've inherited - not the gross estate or fair market value. Estate taxes are due nine months following the passing of the original property owner. The estate will be settled when a closing letter from the IRS is received confirming the acceptance of the tax forms submitted.

Again, if the estate is large enough to qualify for inheritance tax, the advice of an attorney or accountant specializing in estate taxes should be consulted. Additional information on this topic can be also found on the IRS website.

ESTATE PLANNING OVERVIEW

If you think estate planning is only for the very rich, you're wrong. Certainly larger estates are subject to large taxes, but taxes are only one reason for estate planning. Here are seven more, some of which may be more important to you:

1. Plan who receives what size share of your assets.

2. Decide how and when your beneficiaries will receive their inheritance or income.

3. Decide who will manage your estate (executor, trustee, etc.) and be responsible for distribution of the assets.

4. Reduce estate administrative expenses and delays.

5. Select a guardian for your children.

6. Provide financial management for funds that may pass to grandchildren.

7. Provide for the orderly continuance or sale of a family business or investment real estate property.

If you don't have a plan, state laws will determine who inherits your assets and when they receive them. The court will appoint a guardian for your children and the administrator for your estate. Your estate could wind up paying a substantial amount of unnecessary taxes and administrative costs,

WHAT ABOUT TAXES?

Settlement expenses and probate costs are an important aspect of estate planning. So are federal and state taxes. While taxes aren't the only estate planning consideration, because they can be so expensive, they are an important one. If your taxable estate exceeds $625,000, your estate is subject to marginal tax federal rates starting at 37% and going as high as 55%. A $2 million taxable estate would be subject to estate taxes of close to $600,000. After 1998, the minimum subject to federal estate taxes is scheduled for small annual adjustments.

The size of your estate is increased by the death benefit of all life insurance you own as well as any court settlements payable as part of a "wrongful death" action.

Planning your estate is about caring for your loved ones, seeing that they are provided for, and making sure your hard earned property is distributed according to your wishes. Your estate consists of all your property including:

An estate plan is your mapping of where you want your property to go after you die.

To many young and middle-aged people die, without warning, often leaving spouse and minor children who need care and direction. Estate planning should be part of your overall financial plan, along with your children's college tuition and your retirement needs. If your circumstances change, it's easy & inexpensive to adjust plans.

If you die without a will or trust, you have in effect left it to your states law to write your will for you. That means the state will make certain assumption about where you would like your money to go to (with which you might not agree). Some of your hard earned money might end up with people who do not need it.

Meanwhile others who might need money more; or who are more deserving, could be shortchanged. Surviving relatives may squabble over who gets particular items of your property, since you did not, make the decisions before death.

We do all of the Estate Planning and prepare will and all necessary trust documents.

THE ABOVE IMFORMATION FOCUSES ON BROAD LEGAL PRINCIPLES, AND THE INFORMATION PROVIDED SHOULD NOT BE ACTED ON WITHOUT PROFESSIONAL ADVICE. MAKE SURE THE PROFESSIONAL YOU USE IS THROROUGHLY FAMILIAR WITH THE LAW IN YOUR STATE.

Under New York law, an individual may appoint someone she trusts E.g. a family member or close friend to decide about treatment if she loses ability to decide for herself. She can do this by using a health-care proxy in which she appoint a health care agent to make sure that health-care providers follow her wishes. Her agent can also decide how her wishes apply as her medical condition changes. Hospitals, nursing homes, doctors and other health-care professionals must follow the agent's decisions as if they were the patient's. The individual can give her health-care agent as little or as much authority as she wants. She can allow the agent to decide about all health-care or only certain treatments. To properly protect patient who does not want to be kept alive by machine you must include both a "Do Not Resuscitate" and a "Do Not Intervene" order in all Powers and Living Wills. You must have multiple copies of this document e.g. Patient going to hospital by ambulance. Without DNI, patient could be put on machines and may not be able to be taken off.

A Living Will is a written statement of an individual's wishes regarding medical treatment. The statement is to be followed if an individual is unable to provide instructions at time medical decisions need to be made. Health-Care proxy is significantly different from Living-Will in that it empowers another person (agent) to make health decisions if patient cannot do so herself/himself. Living-Will on the other hand, has no such provision but enables a person to express his/her own choices regarding medical treatment. It makes sense to utilize both a Living-Will and a Health-Care proxy.

Can the health-care agent be legally or financially liable for health-care decisions made on your behalf?

No. A Health-Care agent will not be liable for treatment decisions made in good faith. The agent cannot be held liable for costs of care just because she/he is an agent.

No. Signing a Living-Will or Health-Care proxy is voluntary. No one can require an individual to complete documents

In 1993, NYS enacted a new guardianship statute know as Article 81 of the Mental Hygiene Law. The new law set aside the former system of conservatorships and committees. Under Article 81 a court may appoint a guardian for a person whenever it finds by "clear and convincing" evidence that alleged incapacitated person, the "AIP" (1) cannot adequately understand and appreciate nature and consequences of his/her particular limitations and (2) is likely to suffer harm because of these limitations and inability to appreciate consequences. A guardian is a person appointed by Court who receives authority from Court to make certain personal care decisions and/or property and financial mgt. decisions for AIP for a period of time found by Court to be necessary to meet a person's needs. Powers of guardian are specifically limited to those necessary to meet needs of the AIP. A guardian may be an individual of 18 years of age or a parent under 18 years of age and certain public agencies and not-for-profit corporations.

Statute provides that guardian's authority should be tailored to satisfy specific personal and/or property management needs of AIP making available least restrictive form of intervention. In contrast to the old guardianship law under Articles 78 and 81 of the Mental Hygiene Law, the new statute permits AIP as much latitude as possible under circumstances for exercise of independence and self-determination. Guardianship proceeding may be commenced by alleged incapacitated person or a person with whom that person resides, relatives, a trustee of a trust established by and/or for benefit of a person and in fact, any individual who is concerned about welfare of person alleged to be incapacitated.

Federal Estate Tax Update 2002-2010