MONEY MANAGEMENT

UNDERSTANDING ESTATE TAXES AND HOW THEY CAN AFFECT YOU

(August 1, 2006) -- If you want to leave more of your assets to your beneficiaries rather than Uncle Sam, it's wise to start thinking about estate planning and estate taxes as soon as possible. Don't make the mistake of assuming that estate planning is a task only for the wealthy. CPAs point out that with more individuals setting aside retirement and other savings earlier in life, they are likely to have larger estates that may potentially be subject to estate taxes. And this can be costly. For 2006, the maximum federal estate tax rate is 46 percent. To help you assess your potential estate tax liability, the Virginia Society of CPAs provides the following information.

Calculate your estate's net value

Your estate will be required to pay federal estate taxes if your taxable estate exceeds the exemption amount set by Congress. Your taxable estate will be determined by adding up the fair market value of all the property you own at death, including cash, investments, your home and other real estate, business interests, retirement plan assets, as well as death benefits from your life insurance that are paid to your estate because your beneficiary designations are out-of-date.

From its total assets, your estate gets to deduct money owed; for example, your mortgage balance, funeral and burial expenses, money paid to the executor and other professionals for settling the estate, and charitable deductions that are part of your estate settlement. In addition, your estate also gets a "marital deduction" for property passing to your surviving spouse.

Applicable credit amount reduces estate tax bill

The Federal Unified Credit offers some relief. With this credit, a certain amount of your estate passes to your heirs free of federal estate tax.

For 2006, the federal estate tax exemption amount is $2 million per individual. That means only those who die leaving a net taxable estate of more than $2 million are subject to federal estate tax. This exemption amount increases to $3.5 million in 2009. In 2010, the estate tax is scheduled to be fully repealed, but only for one year. Under the sunset provision of the Economic Growth and Tax Relief Reconciliation Act of 2001, in 2011, the federal estate tax exemption amount reverts back to $1 million, unless Congress enacts further legislation prior to that time.

The unlimited marital deduction

A married taxpayer is allowed to pass an unlimited amount to his or her spouse free of estate tax. (This rule does not apply if the spouse is not a U.S. citizen.) The unlimited marital deduction can be a good way to reduce your current estate tax liability, although it may mean a larger estate tax bill in the future because it will increase the estate of the surviving spouse.

If you leave everything to your spouse using the unlimited marital deduction, no federal estate tax will be levied at your death. However, when your spouse dies, the assets of the entire marriage are included in his/her taxable estate, but only one exemption amount is available for your spouse to use to offset estate taxes. Even though you never used it, your exemption amount cannot be applied to your spouse's taxable estate.

Consult with a CPA

Like income taxes, estate taxes are a graduated tax. As your estate's value increases, so does the tax for that portion of your estate. To help you better understand the estate tax rules and develop a tax-smart way to distribute your estate, contact a CPA.

The Virginia Society of CPAs is the leading professional association dedicated to enhancing the success of all CPAs and their profession by communicating information and vision, promoting professionalism, and advocating members’ interests. Founded in 1909, the Society has nearly 8,000 members who work in public accounting, industry, government and education. This Money Management column and other financial news articles can be found in the Press Room on the VSCPA Web site at www.vscpa.com.