Realty Times: How To Protect Your Estate From Uncle Sam

August 29, 2000

by Peter G. Miller

How To Protect Your Estate From Uncle Sam

The recent effort to end the estate tax has now failed, an event that raises an interesting question: Since we still have an estate tax how much must you pay?

To a surprising extent, the answer is that except for the rich and famous virtually no one pays estate taxes -- not a dime.

The idea of ending estate taxes is not the political pet of one party or the other -- 65 Democrats in the House and nine in the Senate joined with Republicans to pass the estate tax ban that has now been vetoed by President Clinton. Had the measure passed, armies of accountants, lawyers, and estate planners would need to find new employment, a crisis which has been averted.

IRS figures show that in 1996 a total of 2,314,254 people passed away. Of this number, 41,331 had taxable estates -- 1.79 percent of those who died. Seen another way, 98.21 percent of all estates paid no taxes, something which should elate those who wished to end inheritance levies.

It's hardly a surprise that few estates pay anything to Uncle Sam. We each have a unified tax credit, a fancy accounting concept which means that there's no levy on the first $675,000 in taxable estate assets. Since most people don't have $675,000 in taxable assets, federal estate taxes are a non-issue.

Ah, but you say inflation is always with so in the future $675,000 may not represent as much wealth as it does today. That's correct, and thus the Taxpayer Relief Act of 1997 gradually increases the credit so that by 2006 individuals with a taxable estate of $1 million will own nothing to Uncle Sam, while couples will be able to shelter $2 million. According to the IRS, under the 1997 rules the filing requirements for individuals look like this:

Year of Death Filing Requirement

1998 $ 625,000

1999 650,000

2000 and 2001 675,000

2002 and 2003 700,000

2004 850,000

2005 950,000

After 2005 1,000,000

Meanwhile, to assure even less tax liability, there are a number of ways to reduce taxable estates.

There's an unlimited marital deduction. You can leave $1 billion (or more) to your spouse and never pay a dime in estate taxes. When your spouse dies, Uncle Sam may then want a check.

You can give money to the charities and institutions of your choice. To their credit, a number of those with huge holdings expect to leave much to charity and only relatively small sums to their children. Bill Gates, for example, has said he will leave $10 million to each of his children. Warren Buffett told shareholders at the 1990 annual meeting his company, Berkshire Hathaway, that "neither my estate plan nor that of my wife is designed to preserve the family fortune; instead, both are aimed at preserving the character of Berkshire and returning the fortune to society."

Even today you can shelter more than $1 million in household wealth. The IRS gives this example: "Donna died in 1998. Her gross estate was worth $1,325,000. She left a total of $625,000 to her children and the remainder, $700,000, to her husband, Bill. The amount that passed to her husband qualified for the marital deduction and, therefore, was not included in the taxable estate. The taxable estate was $625,000. Neither Bill nor Donna had ever made a taxable gift." In this case, while there was no tax there was a requirement to complete an estate return because the gross estate was above the filing requirement.

"If you make a gift to someone else, the gift tax does not apply to the first $10,000 you give that person each year," says the IRS. If you have two children, that's $20,000 annually. If you're married and have two children, you and your spouse can distribute $40,000 a year tax-free -- money that reduces the value of your estate.

There are special rules for family-run businesses, including farms. Taxes can be paid out over 14 years and a married couple can shelter up to $2.6 million.

The time to think about estate planning, gifts and such is now. The essential issue is not so much that you want to avoid estate taxes -- though you do -- but rather that you want to control the dispersion of your assets and not leave such choices to unknown courts or battling heirs.
It's important to speak with an attorney regarding wills and living wills and also with a tax professional even if your assets today seem to be entirely non-taxable under current regulations. The reason to plan now is that rules can change and over time the value of your assets may grow to a point where tax liabilities suddenly emerge. Also, even if you have no federal tax obligation, there may be state taxes to consider.
For general information, review IRS Publication 950 and Forms 706 and 709. Also, the Extension Service with the Mississippi State University has an excellent estate planning discussion. For details, press here.)

Save Money Financing & Refinancing
The latest edition of The Common-Sense Mortgage -- routinely among the top-ten best selling real estate books nationwide -- is available in bookstores online and off. In print for nearly 15 years and widely recognized as the standard consumer guide to real estate financing, it's described by syndicated columnist Robert Bruss as "an encyclopedic, detailed summary of just about everything real-estate investors, agents, lenders and borrowers want and need to know about mortgages."
"On my scale of one to 10," says Bruss, "this superb book rates a 10."
"This continues to be the most, lucid, comprehensive treatment of the subject on the market," says The Real Estate Professional. "If you want solid, reliable information about residential real estate financing, written in a thoughtful, convincing style, this is your source."
For additional information, press here.

Question Of The Week
Q Our father has a VA mortgage that we want to assume. Is this possible?
A If the loan was created prior to March 1, 1988 then it's freely assumable. If the loan was originated after March 1, 1988, then it can only be assumed by a qualified borrower, whether a veteran or not. For details, please contact the lender or your local VA office.
Also, please speak with a local attorney regarding necessary title work and a tax professional to review any tax issues.

Weekly Resource

It used to be that the Interstate Commerce Commission regulated much that moved. But not the ICC is gone and it can be difficult to find out what responsibility, if any, is owed by transportation companies of various types. However, the Federal Motor Carrier Safety Administration has picked up some ICC responsibilies and offers a useful moving guide for consumers.

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