Estate & Gift Taxes:
Perhaps the most unavoidable of all things in life is the payment of taxes. Even upon the death of an individual, taxes must be paid on the property that they owned prior to their death, in certain cases. The taxation of a person’s estate is perhaps one of the earliest forms of taxation to arise. There exist numerous forms of the so-called “death tax” as well, one of which is the estate tax. This type of tax refers to deductions made prior to the distribution of ones assets and is actually levied on the decedent’s entire estate. Beneficiaries are not exempt from taxation either as they also feel the consequences of the death tax, but in the form of an inheritance tax. This type of taxation refers to, as its name suggests, deductions taken from any inherited property a beneficiary may receive.
Many people opt to disperse their wealth before their passing in order to avoid or lessen the degree of these forms of taxation, yet another type of tax comes into effect in this case, this being the gift tax. A federal estate tax and federal gift tax are generally used in order to discourage this type of asset distribution. Gift tax laws were devised specifically to thwart complete tax avoidance. It is important to note that not all gifts and estates are subject to taxation upon the passing of an individual. There are in fact a profusion of laws and regulations governing gift and estate taxes and as such they can be quite complicated.
To illustrate, only a mere two percent of estates are taxable and supposing that your estate is passed to your spouse or a charitable organization at the time of your death, no taxation will occur. Also there is annual exclusion which permits an individual to not file a gift tax return if it is less than a given dollar value. This only applies to gifts given to a person other than your spouse, as regardless of the price, a gift given to your spouse does not have to go on file.
While gift and estate taxes can be bothersome, the rules and regulations governing them aim to protect the majority of people and as a result many people are entirely exempt from paying these taxes. Some of the other stipulations which permit exemption from paying gift taxes include gifts that are:
- Less than the annual exclusion for that particular year
- Medical or educational expenses (i.e. tuition)
- Given to your spouse
- Given to charitable organizations, for which there are other such deductions
Elaboration on the concept of annual exclusion is necessary also as it has a number of conditions that apply to it which are not often fully understood. For each person to whom you give a gift in one such fiscal year, a separate annual exclusion applies. This means that you can give gifts up to the amount stated as the annual exclusion to a number of people and these will not be taxable. If you are married you and your spouse can each give a single person up to the amount declared as the annual exclusion.
If your estate is large enough to be considered taxable upon your passing, having a quality estate plan in place can effectively reduce the amount of your property that will be taxed. Since one of the main goals in estate planning is the reduction of taxes on your estate, it is essentially very important that you have one in place to protect your family and ensure that they receive what they deserve once taxes are eventually deducted from your estate.
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