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Estate/Gift Tax Planning

Isn’t Estate Tax a Thing of the Past?

Many believe death or estate tax does not apply to them. Some mistakenly think that when they pass away, their heirs will not be affected by an estate tax because of the high exemption currently allowed by the federal tax laws.

The history below proves you have to keep an eye on estate taxes, your estate’s value, and adjust your estate plan when needed.

2001 – Federal legislation authorized the elimination of the federal estate tax and gift tax by 2009. Alabama´s filing requirement is based on the federal estate tax credit allowed under the federal estate tax law. As a result, estates where the decedent´s date of death is after 2004 are not required to file with Alabama.

2010 – No estate tax.

2011 – Estate tax returned with a $1 million exemption.

2011-2012 – Congress changed the exemption to $5 million for 2011 and 2012 and go back to $1 million in 2013.

2013 – The exemption went back to $1 million.

Today – Congress changed the exemption back to $5 million . . . . for now.

In spite of the $5 million exemption, heirs are often shocked by a capital gain tax when they sell on an inherited family home.   The capital gain tax is not an estate tax;  it applies to anyone who makes a profit that is taxable according to the tax laws.

Capital Gain Tax

A capital gain tax might apply when, for example, parents pass away and leave the family home to their children. The children get the stepped-up tax basis – the value of the home when the parents died. But the heirs might have to pay a capital gain tax equal to the difference between the fair market value (FMV) of the home at the time the last parent dies and its FMV when the home is sold. Whether a will or a trust is used,the heirs may incur a taxable capital gain when the home is sold for FMV.

Gift Tax Planning

A gift tax is applied to an individual giving anything of value to another person. For something to be considered a gift, the receiving party cannot pay the giver full value for the gift, but may pay an amount less than its full value. The giver is required to pay the gift tax. The receiver may pay the gift tax, or a percentage of it, on the giver’s behalf. Some gifts are excluded from gift tax, such as a gift to a spouse, a political organization, gifts valued at less than the annual gift tax exclusion, and gifts for medical and educational expenses.

Stretch IRAs

You can protect individual retirement account (IRA) funds by creating a trust to be the beneficiary of the IRA instead of a person. A trust is a good way to control how the inherited funds are distributed to beneficiaries especially if the beneficiaries are underage, foolish with their money, in debt, divorced, or disabled. With the right planning, an inherited IRA can compound income tax free for many years.

Reach Out to Us For Estate and Gift Tax Planning

Call us today at 205-663-0281 for a free consultation if you want to know more about the estate or death tax and the capital gain tax. John Holliman or Melanie B, Holliman (formerly Melanie B. Bradford) will help you with estate tax planning while taking care of your loved ones. And we and our staff will treat you like family.