Gift Taxes and Estate Taxes

Some interesting facts that you should know about Gift Taxes and Estate Taxes because you are all building up vast estates.

There are confusing and constantly changing regulations and limits. For example, the exclusion for Estate Taxes will be $2 million for 2007 and 2008 and goes to $3 million for 2009. Estate Tax rates have been lowered to 45% for 2007-2009. The Estate Tax has been repealed for 2010 (no tax that year). The Estate Tax changes will sunset after 2010. Therefore, if Congress doesn't pass any new laws by 2011, the limits will revert back to 2000 and the exclusion will be $1million and the tax rate 55%. For good tax planning you best die in 2010.

There is one other item you should ask your tax advisor. In 2010 there is another twist that will affect community property states (read California).

There is no estate tax in 2010 but step-up-in-basis will be capped. Let's say you are single and you have a piece of land you bought years ago for $1 million and it is worth $4 million today (lucky buy). Currently, if it passes to your heirs they would get a full step-up-in-basis so if they sold it tomorrow there would be no capital gains tax. This year there would be estate taxes upon your death on $2 million ($4 million minus the current $2 million exclusion). In 2010 the maximum step-up-in-basis value will be $3.4 million to a spouse and $1.2 million to any other heir. There would be no estate tax but if your heirs sold it the day after inheriting, there would be capital gains tax on $1.8 million. ($1 million basis plus $1.2 million step upsubtracted from $4 million sales price or $1.8 million.)

This is really confusing so talk to your tax advisor if you have any questions. What should you do? Give your estate away $12,000 a year to each heir and die broke. (Die Broke is a great book byStephen Pollan.)