In reality,
estate
taxes
affect only 2% of estates because assets up to an exempt
amount aren’t
taxed. Your estate will have to pay estate taxes only
if its value rises above the exemption in the year of
your death. That amount is $2 million in 2006, scheduled
to rise to $3.5 million in 2009.
Estate
tax rates
Year
Exemption
Tax
rate
2006
$2 million
46%
2007
$2
million
45%
2008
$2
million
45%
2009
$3.5
million
45%
Under current law, estate taxes will be repealed
entirely for tax year 2010. But unless Congress acts to extend the
repeal or modifies it in some way, in 2011 the estate tax will be
reinstated and the exemption will return to $1 million. If there’s a
chance your estate could add up to more than the exemption, careful
estate planning now could help bring its taxable value down.
Reducing estate taxes
One way to reduce estate taxes is by placing your assets in an
irrevocable
trust.
Another way is to shrink the size of your estate by giving assets away.
During your lifetime, you can make gifts valued at up to $1 million
without owing
gift
tax.
Plus you can make as many annual
tax-exempt gifts of $12,000 per recipient as you are comfortable
making.
Giving after death can
reduce taxes too, if you bequeath part of your estate to a qualified
charity. Your estate will be able to deduct the value of those
contributions from its taxable value.
Only federal estate taxes are headed toward repeal. You should
check whether your state has its own estate and inheritance
taxes, since they might be substantial.
A basis for concern
Another tax change may affect more people than changes to the estate tax: The
step up in basis
for inherited property is scheduled to end in 2010, which could result in your heirs owning
capital gains
taxes on your bequests.
