One of the important facets of estate planning is proper tax planning. Knowing what is included in your taxable estate will enable you to properly plan so that your heirs aren't stuck selling their inheritance to pay off taxes.
Once you know what is in your taxable estate, you'll be able to plan for ways to cover your estate tax without touching you're heirs' inheritance.
Your taxable estate will include anything you own in your own name. Retirement and bank accounts, your home, automobiles, artwork, life insurance policies, and business interests are all included. The amount exceeding the federal estate tax exemption is taxed. The exemption amount, in 2011 and 2012, is $5 million. If Congress doesn't act, that amount will be reduced to $1 million at the end of 2012.
That means many will not have to worry about federal estate taxes until after 2012. For estates that exceed the exemption amount, heirs will be taxed at 35 percent of the value of the estate. That amount will also change at the end of 2012, to 55 percent.
In addition to federal estate tax, there are state taxes. Different states apply the tax differently and at different rates. According to the Georgia Department of Revenue, the state of Georgia imposes no gift or inheritance tax, but there is an estate tax on estates of individuals who died prior to January 1, 2005. The tax itself is equal to the amount allowable under federal law as a credit for state death taxes. This means that estate taxes paid to Georgia are used to reduce the estate taxes due to the IRS.
In our next post we'll look at how you can use life insurance policies to properly fund your estate for paying off its taxes.
Source: Fox Business, "How Life Insurance Can Save Heirs a Bundle," Margarette Burnette, Sep 27, 2011.