The basics of estate planning

In 2013, a deceased's estate is not subject to estate tax at the federal level until its value is in excess of $5.25 million, as indexed for inflation. This means the great majority of U.S. taxpayers do not have to worry about the federal estate tax diminishing what they plan to leave to their loved ones.

Before you summarily dismiss the federal estate tax, however, be aware there are some types of property you may not consider to be part of your estate but the government does. A prime example is life insurance that you or your employer own on your life. Yes, that seems unfair because you will not live to receive the insurance proceeds ... but the Internal Revenue Service's emphasis is on the "value passing to others as a result of your death" concept.

Other sometimes-overlooked assets that can significantly increase an estate are pension and retirement plan funds and the value of sizable gifts you made over time.

Current law

The value of property the government allows to pass free of estate tax is currently called the basic exclusion amount. The Economic Growth and Tax Relief Reconciliation Act of 2001, fondly called EGTRRA, provided for the basic exclusion amount, then called the applicable exclusion amount, to increase after 2001. Under the most recent tax act relevant to transfer taxation -- the American Taxpayer Relief Act of 2012, or ATRA 2012 -- the basic exclusion amount for gifts, estates and generation-skipping transfers, or GSTs, is $5.25 million in 2013, and the highest tax rate for amounts more than $5.25 million is 40 percent.

One recent and interesting provision made permanent by ATRA 2012 is called the deceased spouse’s unused exclusion amount, or DSUEA, or sometimes DSUE. This provision allows a surviving spouse to use what remains of his or her deceased spouse’s unused exclusion amount in addition to the surviving spouse’s own amount. For example, in 2013, if the first spouse to die only used $3 million of his or her basic exclusion amount of $5.25 million, the surviving spouse could carry over the deceased spouse’s remaining $2.25 million and have a total available exclusion amount of $7.5 million ($2.25 million plus $5.25 million).

Gift tax on generosity

Gifts are gratuitous transfers you make during your lifetime.

The annual gift tax exclusion is a silver lining that the gift tax rules allow. In 2013 you can annually make as many gifts of $14,000 to as many recipients as you can afford without those gifts even being a blip on the gift tax screen. These lifetime gratuitous transfers are completely gift tax-free. The amount is periodically adjusted for inflation.

In addition, if in 2013 you "gift-split" with your spouse, $28,000 can pass to each child, grandchild or any other person you choose. The recipients don't have to be related to you. Some people have referred to an annual exclusion gifting program as "the poor man's estate plan" because it effectively reduces the value of your estate without any interference from Uncle Sam.

State death tax may apply

Not surprisingly, many states want a piece of the estate revenue action, too. So, though you may not be concerned about federal estate tax, your estate may have to chip in to state coffers. Some states allow exemptions for closely related beneficiaries; others tax dollar No. 1.

Some states do not have a death tax, and most, if not all, do not tax the value of assets left to a surviving spouse.

Estate planning is your personal opportunity to make decisions concerning your assets, finances and health care. Although some individuals narrowly view estate planning as a way to assign their assets to heirs, others see it as a way to perpetuate their legacies.

With an estate plan in place, you can sing (like Frank Sinatra), "I Did It My Way."


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