Elder Law Library for the PublicTax Matters in Elder Law Important Note: Tax is an extremely complex area of law. The information provided here of necessity cannot describe every detail and exception. The Disclaimer that applies to this entire web site applies with particular emphasis here. The discussion below on gift, estate, and generation-skipping transfer taxes is broad in scope, because those taxes as a whole affect estate planning and elder law. The income-tax itself, however, is much broader in scope, and only certain issues frequently arise in elder law, some of which are discussed below. Gift and Estate Taxes Q: What is the difference between the gift tax and the estate tax? Both are taxes on transfers that you make where you don't receive something back of equivalent value. If you give something away during life, that is a gift. If you die and leave something to someone, that is a bequest. The gift is subject to the gift tax. The bequest is subject to the estate tax. The current estate tax was enacted in 1916 and is the fourth estate tax in U.S. history. Its primary purpose was to prevent the accumulation of too much power in a few private hands. The gift tax was enacted in 1932 to prevent easy deathbed circumvention of the estate tax. Q: How do gift and estate taxes work? The gift and estate tax is in essence one single tax. You can give away the following without paying any gift or estate tax:
Beyond this amount, you will have to pay gift or estate taxes of
between 41% and 50% of the excess. No. Your probate estate is only a part of your taxable estate. Assets in your taxable estate are valued at their fair market value as of the date of your death, not what you paid for the assets, not "fire sale" prices, and not the town's property tax assessed value. Your taxable estate includes, among other things:
Have the discipline to list all of your assets and add up their values. It is human nature to dramatically underestimate the sum of a list of numbers. Q: How about if I just sell my house to my son for $1? This is a taxable gift, regardless of its form being a "sale." The consequences of trying to outsmart the system like this are rarely pleasant, and can include the following:
Q: Does Massachusetts have its own gift and estate tax? Massachusetts has no gift tax. Massachusetts used to be a "sponge-tax" or "pickup-tax" state for estate taxes. That means that Massachusetts only took an amount that the federal government would share dollar for dollar with states from the federal estate tax. Thus, the sponge-tax did not increase your estate tax; it just diverted some of it from the federal government to the state. However, the federal 2001 tax act changed the federal law to drastically reduce the amount of federal estate tax that the federal government would share with the states. Like many states have done in response to this, Massachusetts just changed its estate tax law effective for persons dying after 2002. Unfortunately, the law was drafted in such a way that there is no consensus at this writing as to what it means. The Mass Chapter of NAELA expects that the law will be clarified, by regulation or statute, before 2003. Depending on the result, married couples with estates in excess of $675,000 may need to revise their estate plans. Q: I heard that the estate tax was repealed. Are you saying it's not? That is correct. Under the tax act of 2001, the federal estate tax exemption is scheduled to increase, and the top tax rate to decrease, as shown in the table below. Full repeal does not occur until the year 2010, and the repeal lasts for only one year. After that, in 2011, the full estate tax comes roaring back, with only a $1,000,000 exemption, and a 55% top rate that is higher than we have today.
Q: Why is the repeal for only one year, and why in 2010? The repeal is phased in from now until 2010 in order to delay projected budget deficits, and therefore make repeal more politically palatable. The repeal is temporary because of a Senate rule. Because repeal will reduce government revenues, Senate rules require that a permanent repeal obtain 60 votes to pass. Advocates for permanent repeal were unable to obtain the 60 votes, but were able to muster a majority. In order for a majority less than 60 to pass the bill, the repeal had to "sunset" after 10 years. Q: What about the gift tax? Is it repealed? No. The gift tax exemption stays level at $1,000,000, even as the estate tax exemption rises to $3,500,000, and even during 2010 when the estate tax is repealed. The rationale seems to be twofold. First, to prevent large-scale shifting of income-producing assets, or of built-in capital gains, to lower-bracket taxpayers. Second, in case the estate tax comes back with a $1,000,000 exemption in 2011, to prevent widespread circumvention of that "reborn" estate tax by gifting during the years 2004 to 2010. Q: I don't have a taxable estate and never will. Why should I care about the estate tax? Two reasons. First, your heirs may have taxable estates themselves. If so, their inheritance from you might best be left to them in a way so as not to add to their taxable estates. Second, and more important, how you own your assets, and whether or not they are includible in your taxable estate, can have dramatic income-tax consequences, even if you do not have a taxable estate. See the section on Income Taxes below. Generation-Skipping Transfer Tax Q: What is the Generation-Skipping Transfer Tax? Congress wants to collect an estate tax at the death of each generation. If instead of leaving assets to your children, you give assets (by gift or bequest) to your grandchildren or a younger generation, the federal government would "miss out" on the estate tax when your children die. So instead, when you make gifts or bequests to grandchildren or younger generations, the federal government takes a Generation-Skipping Transfer Tax ("GSTT") of 50%. This is after the gift or estate tax. The GSTT also applies if you make gifts or bequests to non-family members who are more than 37-_ years younger than you are. Like the gift and estate tax, there is an exemption for the GSTT. The exemption amount is $1,100,000. Beginning in 2004, the GSTT exemption will always equal the estate tax exemption, shown in the table above. To illustrate, if you are in the highest estate tax bracket of 50%, have used all of your GSTT exemption, and want to leave a bequest to a grandchild of $100, it will cost you $400 to do that. Of the $400, 50% ($200) is taken in estate taxes, then another 50% of the remaining $200 ($100) is taken in GSTT. |
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