Estate Tax

Preparing for estate tax is one of the most important areas of financial planning. Estate tax is a tax on someone’s right to transfer assets at their death. If the value of an estate exceeds an exclusion limit set by law, a tax will be levied on an heir’s inherited portion. The estate consists of everything the decedent owns, and current fair market values are used in determining the taxable amount, not what the cost to acquire it was. Failing to speak with an estate planning advisor to set up the proper estate plan can cost the heir’s dearly.

An exception to the normal estate tax laws are on assets left to a spouse. Spouses can leave an unlimited amount of assets to one another; this is called the “unlimited marital deduction”. It is when the surviving spouse dies that estate tax becomes a concern. Estate tax can be quite high, well over 40%, so careful estate planning with a financial advisor, financial planner, or wealth management firm is advisable.

Certain deductions are allowed in arriving to your taxable estate. Some of these deductions include mortgages and other debts, estate administration expenses, and assets that pass to qualified charities. A financial planner can help determine whether any deductions may apply to your specific situation. After the net amount is computed, the cumulative total of lifetime gifts (gifts made 1977 and after) is added to this figure and the tax is calculated. The tax is then reduced by the available unified credit, or the exclusion amount. Presently, the exclusion amount for 2009 is $3,500,000. This means that only taxable estates and lifetime gifts that exceed $3,500,000 will actually have to pay tax. It is the next two years where estate planning gets really interesting.

In 2010, estate tax is repealed meaning there is no estate tax whatsoever. Someone can have a taxable estate of $100,000,000 and not have to pay estate tax, however gift tax remains with the exclusion being $1,000,000. To make things more confusing, in 2011, the estate tax exclusion amount presently goes back to $1,000,000, levels it hasn’t seen since 2003. However, this figure is expected to get increased, and most experts are predicting an exclusion amount of around $3,000,000 for 2011.

Estate tax is an important issue with an often times complex solution. Clay Northam Wealth Management can help make sense of it all and assure that your assets are passing to your heirs rather than the tax man. Serving all of Southern California, we have 2 convenient offices located in the Los Angeles and Orange County. Please do not hesitate to contact our offices to see how we can be of value to you.