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The most frequently asked tax questions related to Estate Tax
For Tax Payers
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That is the limit that you can leave your heirs free of federal estate taxes. It is also known as the exemption equivalent amount.
The unified tax credit is cumulative. It includes the taxes due on taxable gifts that you have made over the course of your life (taxes on these gifts are usually not due until you die). Non-taxable gifts of up to $14,000 per person, per year are not counted against the federal unified tax credit.
There are several strategies you can pursue to reduce or eliminate the tax bite. Speak to your local CPA or attorney about these strategies.
They may mention to you to consider making gifts. You can give up to $14,000 a year to as many people as you like, tax free. Together with your spouse, you can give up to $28,000 to each person. Also consider giving your life insurance policy to your wife, your child or put it in an irrevocable trust provided the assignment takes place more than 3 years before death. To keep the policy out of your estate, you cannot continue to pay the premiums.
The new owner has to pay them. Another strategy is to get married. No estate tax is levied on property given to a spouse. Of course, whatever is left (over $5,250,000) will be taxed in your spouse's estate when he or she dies.
Included in your estate is your home and any rental property you may own, securities and other investments, retirement funds (401k, IRA's)you have saved and all your personal possessions.
Pending federal and state income tax refunds are also included. Many such items will automatically pass to your spouse and not be included in your estate if the property is jointly owned.
In addition, the size of your estate will be reduced by the money you owe, such as a mortgage on your home, burial expenses, the cost of settling the estate and other items.
Assets left to charity will also reduce the size of your estate.
The exception involves a decedent who owned a business that accounted for more than 35% of the total estate. In that instance, a formula established by the IRS may allow estate taxes to be paid over several years. Speak to your local CPA about filing Form 706.
For 2012 the $5 Million exemption may be increased for inflation.
New for 2011 and 2012 is a concept named portability which allows a surviving spouse's estate to use any portion of the exemption amount not used by the other spouse’s estate.