Death and Taxes

Two things you can’t avoid, or so they say.  We’ll all deal with death someday, and most of us will deal with some kind of tax – if only sales tax. But what’s worse than having them both come together?  First, you lose someone you love; then you have to write a big check to the government because your parent, spouse or other relative actually cared enough to leave you something to help you get by, or to make your life a little easier.

Fortunately, most of us haven’t had to worry about estate or inheritance taxes – for years now, they have only affected those who are pretty well-off.  In 2009, only those with taxable estates over $3.5 million had to pay a tax, and for several years before that, the limit was $2 million. In Hawaii, there has been no estate tax at all since 2005, and even then it didn’t “hurt,” because there was a Federal credit that offset the entire tax paid.  But all that is going to change in 2011. (In fact, some of it has changed already.)

If Congress doesn’t act before the end of the year, beginning on January 1, 2011, a Federal estate tax will be owed by anyone leaving a taxable estate of just $1 million or more. If you own real estate and even a modest retirement account, or some life insurance, your estate will most likely be close to or over $1 million, even if you don’t think of yourself as “rich” at all.  And if your only major asset is real property, or a business, worth over $1 million, then your heirs may have to sell or mortgage that property, or liquidate the business, just to get funds to pay the estate tax.

Also, remember, if you have made any taxable gifts – gifts to anyone other than a spouse or a charity, exceeding the “annual exclusion” amount (which has ranged from $10,000 to $13,000 per person per year) – the value of those gifts will eat into your $1 million exemption. So if you gave your son a parcel of property worth $300,000 while you were alive, you would only be able to pass an additional $700,000 at your death.

There ARE things that you can do to minimize these taxes. If you have a life insurance policy – many people don’t realize that while life insurance proceeds don’t incur income tax, they are often counted when determining estate tax – you can often get those funds out of your estate, for tax purposes, by putting the policy in a trust designed for that purpose. If you have a taxable estate that includes life insurance proceeds of just $200,000, setting up this trust now can save your heirs over $100,000 in taxes when you die!  If  a home or business is your major asset, you may be able to remove a portion of its value from your estate.  And if you have stocks, bonds, mutual funds or other investments, there are ways to minimize or eliminate the tax burden when passing on those assets, too.  But none of these things will happen unless you take action now.

What about the Hawaii tax? Well, it has already come back, for those dying on or after May 1, 2010, with taxable estates over $3.5 million.  If your estate is not that high (remember to count your retirement accounts, life insurance on your life, personal property such as cars, art, musical instruments, collections, etc., and the full value of property and accounts you hold jointly with others), then you don’t have to worry about an additional Hawaii tax just yet.  But you should be aware of it when you are planning, just in case your estate grows over time or the State Legislature gets even more greedy and decides to lower its exemption amount.

Published in: on August 29, 2010 at 12:32 am  Leave a Comment  

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