How to Minimize your Estate Tax: Exemptions

The saying goes that there are only two sure things in life – death and taxes.

Combine these two ‘sure’ things and you get estate tax! But, the beneficiaries of your estate do have a ‘get out of jail free’ card – better known as estate tax exemptions – and here they are:

Estate Tax Exemptions

A Personal Exemption
A personal exemption of up to $1.5 million is available. However, to be able to tax advantage of this personal exemption the ‘gross’ value of the estate, which includes the value of all property – a term that not only includes real estate, but also stocks, bonds, notes and cash – the deceased person had an interest in cannot exceed the $1.5 million threshold.

The good news is that this threshold is set to increase yearly from now till 2010. The bad news is that this will revert back to $1 million in 2011, unless Congress decides otherwise. Another black cloud hanging over the personal estate tax exemption is the fact that Congress and repeal any current limits and new limits at any time it so decides.

Marital Exemption/Deduction
If the deceased person has a surviving spouse at the time of their death, then their estate can pass to the surviving spouse tax-free, provided that (a) the estate so inherited is not of a nondeductible terminable interest – meaning that, beside the surviving spouse, some third party has an interest in the property in question; and (b) the surviving spouse is a US citizen. If either of these two qualifying factors is present, then the exemption may not be available.

Funeral Expenses
Any and all funeral expenses of the deceased person are tax deductible from the estate.

Administrative Fees
All administrative fees incurred by the estate subsequent the deceased person’s death are also tax deductible.

Charitable Donations
While not all charitable donations are necessarily tax deductible by the estate, a large number of charitable donations are. So, if for no other reason, you now have one very good reason to be generous in death – you’d only have had to pay the money in taxes in any event!

Structured correctly, a deceased person can reduce the estate tax payable by giving away a gift to the beneficiary during their lifetime. The Inland Revenue allow individuals to give away up to $1 million during their lifetime. Moreover, within the threshold amount of $1 million, smaller gifts of $11,000 or less can be given away in any one year to a beneficiary (up to the aggregate threshold amount of $1 million).

So, if you are reaching the end of your life, and don’t think you’ll have too many needs in the time you have remaining, then the time may well have come for you to consider giving your gifts away to beneficiaries so that the aggregate total of your estate does not exceed $1.5 million, or the aggregate amount you give away to anyone but your US citizen wife, does not exceed $1.5 million.

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