Gift and Federal Estate Taxes: FAQ

The following are the most frequently asked questions on federal estate and gift taxes

Is my estate going to have to pay federal taxes when I die?

That depends on your estate’s worth. But you most likely may not need to pay estate taxes. The federal government collects estate taxes for estates that are worth more than a certain amount. The amount set is what is applicable on the year of your death. There are very few estates that actually needed to pay estate tax, about only 1% of estates in the whole United States.

If your spouse is a US citizen, then anything left to them from your estate after your death is free from federal estate tax. If you leave money to a tax-exempt charity, that money is also not taxable.

Estate tax is imposed only on estates that exceed the following amount at the corresponding year of death.

2006, 2007, 2008 — #2 million

2009 — $3.5 million

2010 — repealed

2011 — $1 million, but Congress may extend the 2010 repeal of property tax

Are there steps I can take to avoid federal estate taxes?

There may be ways to avoid or at least reduce federal estate taxes. Here are some options:

Giving Tax-Free Gifts — You are allowed to give up to a certain amount for every calendar year for each recipient, and this amount is free of gift tax. You can give cash gifts or properties with the same or less value as that cap amount. Paying for another person’s tuition or medical bills could also help reduce your taxes. By gifting your property, you may reduce its value over time and possibly even take it down to a value equal to or less than the limit.

Setup an AB Trust — If you setup an AB trust with your spouse, it allows you to leave your property to the other and your children, and this will enable either of you  to spend the income from the trust, and at times as well as the principal, in the event that one of you dies. It may help cut your taxable estate in half.

Setup a “QTIP” Trust — Setting up a QTIP trust will allow the postponement of the collection of estate taxes until after your surviving spouse dies. Maybe by that time estate taxes may be lower or your estate has become exempt from taxes.

Give to Charitable Trusts — Giving a tax-exempt charity a substantial gift

Setup a Life Insurance Trust — This trust will allow you to take out of your taxable estate the value of the life insurance proceeds.

Is it possible to just give away all of my property before I die in order to avoid estate taxes?

If you give more than the limit set as tax-free gift per person per year, that gift will be taxed. However, if you can give to more than one person or charity every year, within the limits of non-taxable gifts, assuming that you live long enough to dispose of all your properties this way, then you may end up giving everything away tax-free before you die.

But if you give to your spouse, assuming that your spouse is a US citizen, then you can give as much as you want each year, with no tax. Also, if you give to a tax-free charity, you can give a substantial amount and still be free from paying taxes. It’s the same for paying for someone’s education or medical bills.

Are there any states that have their own estate taxes?

Yes. There are states that impose taxes on estates that may have a lower value than the federal estate tax limit.

State Estate Taxes — There used to be a time when states did not ordinarily impose their own estate taxes and just took part of the taxes imposed by the federal government. Now that states can no longer get a share of the federal estate taxes, some states have started imposing their own estate taxes. Some states may impose taxes on estates with a value that is lower than the amount exempted set by the federal government.

State Inheritance Taxes — There are some states that collect inheritance tax in place of an estate tax. This tax is imposed on the properties that the decedent left to others. The rates vary depending on each beneficiary’s relation with the deceased.

States that currently impose inheritance taxes:

New Jersey,
Pennsylvania, and

Are there ways of avoiding paying state imposed estate or inheritance taxes?

The only way to fully avoid these taxes is if you live in a state that does not impose them. However, you may not get away from paying estate or inheritance taxes, whichever is applicable in your state. You can, however, try if you can spend time in two different states and establish residency in one of those that do not impose these taxes.

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