A University of Alabama Law School Clinical Program funded in part by West Alabama Regional Commission

G. And a word about Estate and Gift Taxes

Estate Tax. Only a tiny percentage of estates is subject to taxation at death. Every individual has the equivalent of a $1,500,000 lifetime exemption in 2004 and 2005; this will go up to $2,000,000 in 2006, to $3,500,000 in 2009; and in 2010, barring further changes, the estate tax will be eliminated. The top tax rate will be applicable only to gifts. But, unless Congress acts before 2011, at that time the estate tax will be reinstated, with an exemption equivalent of $1,000,000.

Aspects of the complex Tax Relief Reconciliation Act of 2001 that can affect seniors and their families go far beyond the scope of this article. There are complicated income and generation-skipping taxes included in the federal act that changed the estate tax. The need for good planning was not eliminated by this extremely complex legislation. Those with large estates will likely find that the fee paid to a knowledgeable tax law advisor will be far less than would be incurred without good planning. Planning could also conserve property that is important to your family. Changes were made in the carry-over/stepped-up basis rules, state death tax credits, and other aspects of estate management.

In addition, there is no way to guess what will be the long-term effects on fiscal policy of the wars and reconstruction efforts in Afghanistan and Iraq, efforts to deal with terrorism, huge tax cuts, new Medicare benefits, a sustained economic downturn, and other events of the last few years.

From time to time there is some Congressional talk about repealing the Estate Tax permanently. Such an action seems unlikely in the face of huge deficits, but it is possible. It may be that the tax will not be eliminated completely, but the exemption equivalent will be raised to a more realistic level; $3,000,000 is one amount that has been mentioned. In the meantime, tax planning involves a plan for the current structure, with enough flexibility to make adjustments as the law changes. As a practical matter, at least for the time being the larger exemptions means that few Alabama estates are subject to federal and Alabama taxes, in effect there is currently no tax on Alabama estates within the federal exemption amount.

Gift Tax. Currently, the exemptions mentioned above apply to an individual’s total estate at death. If you give away property with a high value during your lifetime, without careful planning, the amount of the value may be charged against your lifetime exemption at the time of death. Each individual is permitted to give away up to $11,000 in cash or equivalent property each year to as many people as (s)he wishes. A couple could give $22,000 to several people, file gift tax returns on the gifts, and the gifts would be removed from the estate while not reducing the estate tax exemption. There are other strategies that a qualified estate planner can help you use to maximize your exemptions.

Note: The $11,000 annual gift tax exclusion is unrelated to Medicaid qualification. It is only related to estate and gift tax planning. If you give $11,000 to someone and then immediately apply for Medicaid assistance, the $11,000 gift will be treated as a transfer for less than fair market value and there will be a penalty imposed.

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