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In the course of discussing and updating your estate plan, the estate planning attorney will discuss with you the different types of taxes that can affect the value of your estate. These are: gift, estate, inheritance, generation skipping transfer and finally income taxes.

Taxes That Affect Your Estate

Gift Taxes

The estate planning attorney, like Fleming & Monroe, will help you understand all about this gift levy as this is usually the most ignored one that can have an adverse bearing on the value of your estate planning, as you know it. You will find that under the current federal code, there is an exemption of up to $14,000 per year in gifts made by a person to anyone or to any number of persons.

This is known as the annual exclusion from gift levy rule. In the event that you instructed your estate planning attorney to make one personal gift over $14,000 in any given year, you would have breached the threshold and are now required to pay this. The good news you will find is, instead of paying it at once, the lawyer will tell you that the federal code also gives you a personal legal lifetime exemption of $5,340,000, which may be used to mitigate the item.

For instance, let us assume that this year you decide to gift your son a down payment for his home amounting to $114,000. The first $14,000 is already considered exempted but the 100k is not. Once the gift is made, instead of having a $5,340,000 gift tax coupon you will have $5,240,000 remaining according to the law.

Your estate planning attorney will tell you that legal taxable gifts made during the course of the year needs to reported on IRS Form 709, United States Gift (and Generation-Skipping Transfer) Tax return. Under the law, this needs to be filed on April 15 of the year following the year the gift was given.

Estate Taxes (Federal Estate and State Estate)

According to the estate planning attorney, decedents that die during 2014, the federal estate levy applies to estates that are worth more than $5,340,000 and is referred to as the federal estate tax exemption. Present legal guidelines says that the exemption will continue to be indexed for inflation for future years. As of January 1, 2014, the District of Columbia and the following places also impose a separate legal estate levy:

Connecticut, Delaware, Hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Rhode Island, Tennessee, Vermont, and Washington. However, Tennessee's estate tax you will find was scheduled to be phased out by January 1, 2016

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State Inheritance

Your estate planning attorney will also inform you that as of January 1 2014, there are six states that collect a separate inheritance tax, which is essentially a state duty levied on certain legal beneficiaries that receive a dead person’s property in: Iowa, Maryland, Kentucky, Nebraska, New Jersey and Pennsylvania. With the help of the estate planning attorney, assets passing to the dead person’s legal living spouse and to charity are exempt from the inheritance tariff while assets passing to the deceased person’s descendants are exempt in: Iowa, Kentucky, Maryland and New Jersey. Do note that presently New Jersey and Maryland are the only two states that have both the state inheritance levy and the state estate taxes under their law.

We all know that laws do change from time to time, that is why it is best to contact a reputable estate planning attorney in your area for help in determining if your assets are subject to a state estate tax or a state inheritance tax once you pass on. It is also equally important to know that if you own personal effects or real estate that are outside your home state and the other state has an estate tax or an inheritance tax, then those needs to be paid also after your death. All of these should be discussed in detail during the estate planning process.

Generation Skipping Transfer

The estate planning attorney will discuss with you this type of duty which states that decedents dying after 2014, the generation skipping transfer tax applies to transfers of greater than $5,340,000 that “skip” one or more generations. The “skip” in this case refers to either a transfer made to a relative who is two or more generations below yours. (Grandparent to Grandchild) or to a non-relative who is more than 37 ½ years younger than you. Present law states that GST exemption will be indexed for inflation in future years.

Income Taxes

The estate planning attorney will also tell you that under the law, deaths occurring in 2010, the heirs of the decedents had the option of subjecting the estate to federal estate taxes or applying the modified carryover basis regime. The estate planning lawyer will explain that carryover basis means is that as opposed to the beneficiaries of an estate or trust receiving an asset with a full step up basis to the date death fair market value, the beneficiaries received the lesser of the fair market value of the property or the decedent’s original basis that could be modified following specific basis adjustment rules. And depending on the modified carryover basis of an asset, the beneficiaries may also owe capital gains taxes when the inherited asset is later sold. Contact an estate planning attorney today to get help on understanding how the law on duties and levies can affect the state of your affairs once you are gone.

Brian Roy

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