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estate and gift tax primer

December 12, 2010 Leave a comment

I. Estate Taxes:
The Estate Tax is a tax on the transfer of property at death. It consists of everything owned at death. The fair market value of these items is used, which can be much different from what their values were when acquired. The total value of this is termed the “Gross Estate.” The Gross Estate may consist of cash and securities, real estate, insurance, trusts, annuities, business interests and other assets.
To determine the “Taxable Estate,” certain deductions or reductions to value are permitted. These deductions can be mortgages and other debts, estate administration expenses, property passing to surviving spouses and qualified charities. Also, in some cases the value of operating business interests or farms can be reduced.
Then, the value of lifetime taxable gifts (since 1997) is added to the above number to determine the tax. The tax is then reduced by the available unified credit. In 2010, there is no taxable estate amount, but next year there will be a taxable estate amount. However, this taxable estate typically affects only a minority of Americans because of their larger estates. In years with a taxable estate threshold, most relatively simple estates (which include cash, publicly traded securities, small amounts of other easily valued assets, and which have no special deductions, elections, or jointly held property) do not require the filing of an estate tax return.

II. Gift Taxes:

Donors are generally responsible for paying the gift tax, unless the donee agrees to pay it. Any transfer to an individual where full consideration (monetary payment) is not received in return. Most gifts are taxable, except:
1. Gifts that are not more than the annual exclusion for the calendar year (see below).
2. Tuition or medical expenses you pay for someone.
3. Gifts to your spouse.
4. Gifts to a political organization.
Also, gifts to qualifying charities are deductible from the value of the gift made (see estate tax section above). You cannot otherwise deduct gifts on your tax return. However, you can exclude an amount of gifts to individual donees up to the annual exclusion amount. In 2010, this amount is $13,000 or $26,000 for couples (this amount can only increase by $1,000 increments each year if it does increase).

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