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Estate Planning: Not Only for the Rich

By Parag Patel, Esq.

Estate planning is not only for the Rockefellers of the world. Increasingly, Indian Americans who think of themselves as comfortably middle class are accumulating enough personal assets to make their heirs liable for estate taxes. In the United States, estate taxes are the highest and most progressive of the government’s tax rates where the highest estate tax rate is 60%.

With such high estate tax rates, estate planning becomes a serious concern, particularly for Indian Americans, one of the wealthiest minority groups in the United States. In this article, I wish to briefly explain the estate tax and identify some classic problems one should avoid while making estate planning decisions.

All U.S. citizens as well as any person owning property located in the U.S. may be required to pay estate taxes on the transfer of property at death. The estate tax is simply an excise tax on the transfer of property at death. The effect of the estate tax is to impose a tax on the decedent’s net wealth (total fair market value of assets less debts and expenses) that passes to his or her heirs.

The federal estate tax is currently imposed only on taxable estates exceeding $600,000. However, most states levy estate taxes on smaller estates, for instance, New York, Ohio and Iowa, start taxing estates at the first dollar.

The difficulty with having an estate large enough to tax is that you have to do estate planning, a process so complicated that you often need a professional attorney and/or financial planner help. However, the following tips identify some classic problems to avoid when making estate planning decisions.

The $10,000 annual gift.
Most people know about this provision, but few people are sure about it. The $10,000 annual gift simply is the amount that you are permitted to make each year to another individual and have no gift tax payable (the gift tax and estate tax have the same schedule). Each year a donor may give $10,000 ($20,000 if a spouse joins in the gift) per donee with no federal gift tax consequences. In addition, a donor can pay certain medical and educational expenses of the donee without gift tax liability
The $10,000 annual gift must be a “present interest” gift meaning the recipient must have some control of the $10,000 for some period of time. It is common to take advantage of the uniform transfer act account in order to make the simplest type of gift because no legal documents are required. Using these gift tax exclusions to the maximum extent annually for every child, grandchild, and other close relative continues to be one of the best estate planning strategies.

Giving away the house.
If you are over 55, you get a one-time exclusion from capital gains taxes on gains up to $125,000 on the sale or exchange of your principal residence.

In other words, if you gift your house to your kids you lose this tax break (your kids will not benefit from this provision) and may pay gift taxes on the value of the home. Instead, keep the house, through your will leave it to your children, and its value will be rolled into your total estate.
Even better, sell your home to your children. This option allows you to get the one-time capital gains exclusion and increases your children’s basis in your home (you could still help them with financing or the down payment). Alternatively, you can sell the house, pocket the gain, and gift the proceeds at $10,000 annually without any tax consequences.

Leaving it all to your spouse.
There is an unlimited deduction for the value of all property included in your gross estate that passes to your spouse (spouse must be a U.S. citizen otherwise a trust may be necessary).
However, when the surviving spouse dies federal estate taxes will imposed on the taxable estate exceeding $600,000. Solutions to this problem requires professional advice.

These strategies are only a few common strategies utilized in effective estate planning. In the future, expect more tax and legal information for self-employed individuals, real estate investors and self-employed individuals.