There are two things we all know for certain: 1) We are going to pay taxes; and 2) We are going to die. Some people are in denial about both, but regardless, both are still going to happen. Refer to the I.R.S. Code for taxes and Hebrews 9:27 for a guaranty on death.
Adding insult to injury, when you die, you are going to be taxed if your estate exceeds a certain value. Currently, that figure is $2 million in total wealth.
Since 1916, the U.S. Congress has imposed an estate tax on those who manage through inheritance, hard work or just sheer luck to accumulate assets and wealth. The generation of taxes in relation to the total national budget is small when compared to the amount collected by income and corporate taxes. However, through poor planning by uninformed people, the government collects billions of dollars in estate taxes. But you don't have to be included in that number.
The purpose of this column is to inform you that whether or not you know it, you are possibly looking at a large estate tax bill if you own a farm or other small business. The current tax law mandates that anyone with a “gross estate” in excess of the $2 million amount will have to file I.R.S. form 706 and have to pay a tax on any amount in excess of that sum.
Most people would come to the conclusion that their farm is not worth more than this amount. However, the tax code requires inclusion of EVERYTHING you own, including the value of the life insurance on your life to be included in your gross estate. To further scare you, this year the estate tax on amounts more than $2 million starts at 45 percent.
Every month, we are going to be providing some helpful tips to inform you about the federal estate tax and its nasty double first cousin, the gift tax. But along with the bad news, hopefully you can walk away with some beneficial ideas both to legally and morally avoid the devastating implications of the estate tax and further solidify your entire financial scenario.
We are going to begin with an overview of the tax system that so greatly affects American farmers and their entire financial structure. After you learn about the horrifying possibilities of the estate tax, we will begin to proactively develop some ideas and designs to streamline your estate plan and make your death a little more palatable situation for your heirs.
Recently, I have had to sit at a dining room table with five grown children of a small Florida Panhandle family farm and tell them the I.R.S. is entitled to well more than $500,000 in taxes they had no idea they owed, simply because their mother and father failed to plan adequately. We could have sheltered the entire amount with only a little bit of planning.
Congress has made a mess of the estate planning future in that it has increased the total amount you can leave tax free, the “unified credit,” each year until 2011. Currently, we have no unified credit for that year and beyond.
This makes planning very difficult.
In 2007 and 2008, it remains at $2 million. In 2009, it rises to $3.5 million. That is the maximum amount any one person can give away either during life or at death tax free.
In 2010, the Congress has totally abolished any and all estate taxes. If you are very wealthy (and deathly ill), try to go in that year and let your kids keep it all.
Let me parenthetically insert here that Congress does give us all an amount we can give away annually in the amount of $12,000 that does not contribute towards the maximum of the unified credit. Currently, that amount is $12,000 per donee. You can give that amount to any one you desire to give it to. A husband and wife can give away $24,000 annually tax free per donee.
Likewise, spouses can give away an unlimited amount tax free to each other and only to each other. This is the “marital deduction.” Remember this term as we will be discussing it further in future articles.
EDITOR'S NOTE — Mark Tippins is a licensed attorney practicing in Auburn, Ala. For questions or comments, he can be contacted at [email protected] or (334) 821-3670.