Gifts and Estate Tax 2011

2011 by the numbers:

$13,000 gift per recipient in 2011
This year you can give up to $13,000 per recipient without filing any special tax forms with the IRS.

$5,000,000 in a lifetime
You can also give away up to $5,000,000 in gifts during your lifetime without any tax owed on such gifts. Though a gift tax form must be filed with the IRS.

$5,000,000 when you die
A person dying in 2011 can pass up to $5,000,000 to his or her family and friends free of federal estate tax.

$1,000,000 when you die
But if the decedent is a resident of Maryland, anything passed on to family or friends over $1,000,000 is subject to Maryland estate tax.

Unlimited gifts and estates to spouses
There is no gift tax or estate tax for spouses giving to each other (so long as the recipient is a U.S. citizen.)

Portability
New to our Federal Estate Tax code - unused estate and gift exemptions can be used by the surviving spouse upon his or death, with the proper filing of forms.

*** Please note this blog post is meant as a guide not the last stop for legal advice for your particular situation. ***

Is your lawyer in your wallet?

You know who your lawyer is, does anyone else? After someone passes away it can be very challenging for the family and friends to find what needs to be found. If they can find your lawyer, they can start to finding everything they need to find to get your assets to those you love.

Here are 4 simple suggestions on what you can do to make it easier for yourself while you are alive and less stressful for your family once you are gone.

1. Put your lawyer's name in your address book under A for attorney or under L for Lawyer.

2. Tape your attorney's business card to your refrigerator.

3. Tell your spouse, a close friend, and your kids your lawyer's name.

4. Put your lawyer's business card in your wallet.

The proper title of an inherited IRA for the stretch

If you've inherited an IRA from someone other than your spouse, here are two choices regarding what you may choose to do with the money.

Choice 1: Cash it out and spend the money. If this is a regular IRA as opposed to a Roth IRA, you will pay income tax on money you withdraw from the IRA. A good guideline is to expect to pay income tax on one of every three dollars you receive from the IRA.

Choice 2: Retitle the IRA and stretch the withdrawals. If you choose to do this, you will be required to make a withdrawal of a "required minimum distribution" amount. Income tax will be owed on the withdrawals. The money that remains in the IRA will continue to grow income tax deferred. This may have the effect of substantially increasing your initial inheritance. The minimum amount you must withdraw each year is determined by the IRS and is computed using an actuarial table based upon your age. In addition to taking the minimimum required distribution, you may also withdraw additional funds as you desire.

If you decide to stretch your inherited IRA, you must properly re-title it. Otherwise the IRS may not permit you to stretch the withdrawals and instead require a speedier withdrawal rate. The title should be as clear as possible so that there is no doubt who the IRA belonged to, why you have it, and who you are.

An example of proper retitling:

Mary Bloom IRA/Deceased 10/12/2009/FBO Virginia Bloom Dahlia

Once the inherited IRA is retitled, check your statements carefully for accuracy in titling. You should check the statement you receive as well as have the institution advise you what wording they are using on the documents they send to the IRS. Finally, check your end of year tax statements to ensure that the proper title is being used on official documents sent to the IRS.

Federal Estate Tax Exemption increased to $3.5 in 2009; Maryland Remains at $1.0 million

The Maryland estate tax exemption amount remains at $1,000,000 in 2009. What this means in plain English is that you can give up to a total of $1,000,000 after you die to those you love (besides your spouse or your favorite charities) without incurring Maryland estate taxes. If you give more than $1,000,000, some of your gift will be spent on paying Maryland estate taxes at a rate of approximately 16%.

For example if you have an estate worth $2,000,000 to give to your three kids, the first $1,000,000 goes to them estate tax free. The next $1,000,000 incurs an estate tax of approximately $100,000 reducing the total gift from $2,000,000 to $1,900,000.

The Federal estate tax exemption has increased to $3,500,000 in 2009. Again in plain English, you can give up to $3.5 million after you die to those you love (besides your spouse and favorite charities) without your estate owing federal estate taxes. Anything over that is taxed at at 45%. For example, a total gift to your children of $4,000,000 would be exposed to both Maryland estate taxes of approximately 16% of any amount over $1,000,000 and federal estate taxes on the amount greater than $3,500,000.

There are legal well-accepted ways to reduce estate taxes. If you are in the fortunate position of having an estate as described above, I urge you to consult with an estate lawyer to properly plan your posthumous gifts.

Gift exclusion is $13,000 in 2009

Each year you can make tax free gifts to whomever you choose so long as you limit your gifts to the annual gift exclusion amount. This year's gift exclusion amount is $13,000. If you give more than this amount to any one person, then you must pay federal tax on your gift. If you are so inclined, you can give $13,000 per person to just about anybody you choose. If you decide to give more than $13,000 to one person, consult your attorney or accountant to ensure that you file the correct forms with the IRS.



For most of us the question isn't how much to give but why give anything? The tax reason people make substantial gifts while they are alive is to reduce the value of their estate after they have died. Estates greater than $1,000,000 are subject to a 16% Maryland estate tax and estates greater than $3,500,000 are subject to both a 16% Maryland estate tax and an even more substantial 45% Federal estate tax. If you have gifted money while you are alive, your estate can be reduced tax free and the gift can reduce or even eliminate the exposure to estate taxes after your death.

The Basics: 4 ways to leave what you have to those you love.

When I meet with clients, I always spend some of our first meeting discussing the basics. That way everyone in the room has the same understanding of what we will be discussing and what the words mean. There are four basic ways to leave what you have to those you love. The four ways are: by operation of law, by contract, and by will, and by trust.

Digressing for one moment, the following definitions are general. With every defiinition there is likely a variation on the definition or a nuance that seemingly conflicts. The concepts described below are the starting point of any discussion you may have with your own estate attorney.

By operation of law refers to jointly owned property that automatically goes to the other person named on the account or title. For example, a husband and wife who own a home by tenancy by the entirety or joint tenants are both on the title to the home. When one of them dies, the surviving spouse automatically owns the entire property. The surviving spouse need not take any legal action such as filing a new title or opening probate. The surviving spouse is automatically the full, legal owner of the home. Another example of this type of property is a bank account jointly owned by a husband and wife. When one dies, the other becomes the only owner and can choose to remove the deceased spouse's name by simply showing a death certificate to the bank.

By contract refers to financial accounts and insurance policies where there is a named beneficiary. If you have an IRA or TSP account, when you die the money in it will pass to the beneficiary you listed when you opened the account (see "Check Your Beneficiary Designations" posted October 2, 2008). Another example of this is a life insurance policy, where the owner names who will get the money when the insured dies. If nobody is named then the IRA account, TSP account, or Insurance policy - and so on - goes to the estate of the deceased.

By will encompases property not covered by contract or operation of law. A will is a piece of paper with words on it identifying who you are and what you want done with your personal belongings, bank accounts, property, and everything else you own after you die. A will is also used to designate who you want to take care of your children. It is also used to create trusts that go into existence after you die. Each state has specific requirements establishing what must be included in the will and what must be done to make it valid. Examples of property that pass by will are homes, bank accounts, and cars with only one owner.

A trust is a legal entity that owns property and distributes it according to the wishes of the person that created it. A trust technically falls under the "operation by law" category - but it is an important legal concept and should be specifically explained. Think of a trust as a glass of water. The trust is the drinking glass. The property is the water. The grantor fills the glass with water - to whatever level is desired. The trustee holds the glass and pours out the water pursuant to the grantor's written instructions. The beneficiary gets to drink the poured out water.

Disclaimer - Read this First!

This blog reflects my personal views upon issues that affect my friends, family, and clients. The comments I make should not be the sole source of information you use to evaluate your own particular circumnstances. Nor should you, the reader, rely upon the contents of this website as your sole source of legal advice. You should only use this blog as one of many resources that you use with the most important resource being your own attorney. Finally and most importantly, your reading this blog does not create an attorney-client relationship between me the author and you the reader.

Thank you for reading and commenting!