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Tax Planning FAQs

Q. WHAT KIND OF TAXES WILL I HAVE TO PAY WHEN I DIE?

A. Depending on the State, a decedent is responsible for the payment of both State and Federal gift and estate taxes. Estate and gift taxes are in addition to the taxes paid on income. No Federal estate or gift tax is due unless or until the total of lifetime gifts combined with the assets remaining in the individual’s estate exceeds certain levels. An estate in excess of $1 million is taxable in New York. An estate in excess of $675,000 is subject to tax in New Jersey.  On the federal level, in 2010, the estate tax has been repealed; however, it is set to revert to $1 million on January 1, 2011.

Q. WHAT ASSETS ARE INCLUDED AS PART OF MY TAXABLE ESTATE?

A. All assets that you own at the date of your death are part of your taxable estate. This means that your home, even if jointly owned, IRAs, 401Ks, insurance policies and jointly owned bank accounts and brokerage accounts are all part of your taxable estate.  Assets held in an irrevocable trust are not included in the estate unless assets were transferred within 3 years of death.

Q. ARE THERE ANY TRANSFERS (GIFT OR INHERITANCE) THAT ARE TAX FREE?

A. Yes, there are certain exclusions from gift tax. Each individual has the right to gift $13,000 ($26,000 for spouses) in any calendar year to any number of persons. For example, if you have two children who are married and each one of those children has a spouse and three children, you could gift $13,000 to each of the ten family members per year. In this way, you could gift $130,000 per year with no gift tax consequences and reduce your taxable estate. Often family members who have total assets that exceed the Federal exemption amount make these tax free gifts for the purpose of reducing the amount of assets in their estates, thereby reducing their eventual estate tax liability.  Other gifts excluded from gift tax are unlimited payments on behalf of another person made directly to a provider of educational services for tuition or to a provider of medical services. An individual can reduce his total assets and eventual tax liability by paying a grandchild’s college tuition, or nursery school bills directly to the educational institution. Hospital or doctor bills paid by the individual directly to a hospital or doctor on behalf of another person also carry no gift tax consequences.  The most significant exception to gift and estate tax is the marital deduction. The marital deduction allows each spouse the right to give an unlimited amount of assets during life or after death to the other spouse who is a U.S. citizen without any estate or gift tax consequences

Q. IF I’M MARRIED, WHAT TAX PLANNING CAN I DO TO SAVE ON TAXES?

A. For married couples, an exemption trust can be very helpful. Even though married couples have a right to an unlimited marital deduction, a couple’s assets are not necessarily protected from hefty estate taxes when the second spouse dies. Married couples with total assets over the applicable exemption level should consider the use of an exemption trust to avoid Federal estate taxes.  The trust can be structured so that the surviving spouse receives income from the trust and can access trust principal at the discretion of the trustees. The provisions of the trust can vary, within limits.  Before implementation of such a plan, or other available tax saving devices, you should have a thorough discussion of the available strategies with a knowledgeable attorney.

Q. I AM SINGLE. ISN’T THERE ANYTHING I CAN DO TO SAVE ON TAXES?

A. There are numerous opportunities to save on gift and estate taxes if you are a single individual. A consultation with a knowledgeable attorney will allow you to explore your own unique options. And don’t forget the non-taxable gifts as discussed above.