Congress has afforded all of us an unprecedented—and probably never to be seen again—opportunity to make significant gifts to our children (and grandchildren), thereby reducing the estate taxes which could hit our families when we die. For the remainder of 2012, each of us is permitted to make gifts totaling up to $5.0 million to our offspring without any federal gift taxes.  That amount will fall to $1.0 million for each of us on January 1, 2013.  On paper, it appears that making significant gifts this year makes sense, if we are concerned that our estates will exceed $1.0 million in 2013 and thereafter.  However, does such a strategy make sense for you and your family?

First, it is important to remember that you must keep enough assets in your name so that you can provide for yourself as you age.  In doing that, remember that a change in your health could dramatically increase your cost of living.  Relying on children to take care of you if you run out of money carries with it great risk.  Some children can barely afford their own living expenses; others simply don’t care about their parents.

Secondly, any gift can also affect your ability to have your nursing home costs paid by the state in which you live if you run out of money.  Ohio has a 5-year “look-back”rule, which provides that you are not eligible for Medicaid (the State funds which pay the nursing home costs for those who run out of money) if you make a gift within five years of applying for Medicaid.  The period of your ineligibility depends upon the size of the gift.  So, while making gifts to reduce your estate may seem like the right thing to do, it could have bad consequences for you if you end up in a nursing home.

The conclusion:  it is really important to get competent advice from an Estate Planning and Elderlaw attorney before beginning any type of gifting strategy.

Jack N. Alpern, Esq.

The Alpern Law Firm

The Alpern Law Firm is a member of the American Academy of Estate Planning Attorneys.

Estate taxes have been in the news over the past year, and the 2011 Federal estate tax exemption is now $5 million.  This is only temporary, as this law expires in two years, leaving the future of the Federal estate tax, once again, unknown.  But who is responsible for paying estate taxes?  Do your heirs or beneficiaries, those who receive an inheritance, have to pay it?

No, the estate itself pays estate taxes.  When a person dies, the executor of the estate is named when the estate is probated, the legal process that administers an estate.  The executor is in charge of gathering up the estate’s assets and distributing them in accordance to the decedent’s Will. Depending on how much a person owns at his or her death, there is a possibility that an estate tax might be due.

Prior to distributing the assets of an estate the executor must pay all estate taxes owed. This becomes important if you have an estate of mostly real estate or other difficult-to-sell assets and little cash. The executor must file both a federal and state estate tax return within a specified time, normally nine months from the date of death.

Unless an extension is requested, in most cases, the full tax payment will be due within that time frame. In the event that one dies with a large amount of real estate or other difficult-to-sell assets and little cash, the executor may be forced to liquidate some of the real estate assets to get the cash needed to pay the taxes.  This may impact the amount that your beneficiaries receive, so in essence, they do ultimately pay.

The estate tax, along with any of the other debts of the estate, must be paid before heirs receive their inheritances.  An estate planning attorney can work with you to ensure that your estate has not only addressed any estate tax burden, but to ensure that you have estate planning tools in place to provide enough cash to get the bills, including the tax bill, paid.

The Alpern Law Firm is a member of the American Academy of Estate Planning Attorneys.

You would like to leave something special to a friend or relative, but you’re worried that your bequest will be a curse, rather than a blessing.  Will they have to pay taxes, or will it impact their tax bracket?  We discuss three myths involving leaving an inheritance to a loved one.

Myth:  Your beneficiaries will be stuck with paying estate taxes on anything you leave them.

Fact:    Your estate is subject to federal estate taxes if it exceeds the current Federal estate tax threshold, which is slated to be just $1,000,000 in 2011, and Ohio estate taxes if it exceeds $338,333.  The estate pays the estate taxes before property is distributed. 

Myth:  Your heirs will need to pay income tax on their inheritance.

Fact:  Normally the inheritance itself is not taxed, but any income it produces will be.  An exception to this generality is a retirement plan like a IRA or 401(k), as withdrawals from the plan are taxed to the heir just as they would have been taxed to the original owner (in many cases, that means  taxable as ordinary income).

Myth:  If I leave property as an inheritance, and the person sells it, they will pay a huge capital gain tax since I purchased the property 40 years ago for very little money.

Fact:  The capital gain or loss on the sale of an inheritance is determined by the “stepped-up basis.” This means that your beneficiary’s investment in inherited property is considered to be the value as of the date of death. When they sell property that is inherited, the capital gain or loss is determined by the difference between the amount they sold it for and the value of the property on the date of death. Remember that not all inherited property may be subject to the stepped-up rule, since it depends upon the type of property and the size of your estate at death.

An estate planning attorney can advise you of the best way to handle leaving a bequest to a loved one, and they can help you ensure that the inheritance truly is a blessing, not a curse.

The Alpern Law Firm is a member of the American Academy of Estate Planning Attorneys.

There’s been much media attention on estate taxes in 2010 due to the lack of a federal estate tax during the year.  What happened to the estate tax?  In 2001, Congress voted to raise the estate tax exemption while cutting the actual rate of the tax. This act resulted in a repeal of the tax in 2010.

This was unexpected, as the law was intended to be only a temporary measure, and it was assumed that Congress would pass a new law to enact appropriate estate tax levels before the 2010 expiration, but it did not.  Instead, the estate tax was actually eliminated as of January 1, 2010.  But, unless Congress acts very quickly, the elimination of the estate tax is scheduled to expire at the end of 2010.

This means that the provisions of this 2001 Tax Act that reduced the tax and raised the exemption limit will no longer be effective on January 1, 2011, so the tax structure as of 2001 will take effect again.  In other words, the federal estate tax is scheduled to return with a vengeance on January 1, 2011, with a tax of up to 55% on estates valued at more than $1 million.

So what does the estate tax situation mean to estate planning?  While the future of estate taxes remains uncertain, there are still estate planning strategies available in the interim.   An estate planning attorney can help you review and update your estate plans to ensure they are viable under the current tax laws, as well advise you of future strategies for upcoming changes. 

With the federal estate tax exemption slated to be just $1 million in 2011, many families stand to benefit from estate planning, which can minimize or eliminate those taxes, now more than ever.

The Alpern Law Firm is a member of the American Academy of Estate Planning Attorneys.

Normally, a person receiving an inheritance, the beneficiary, does not have to pay federal estate tax on their bequest, although the estate itself may be subject to estate taxes.  But what happens if the beneficiary then chooses to sell the property?

 Determining the cost basis of the inheritance will determine if the sale of inherited property is taxable.  A basis is the term that tax law uses to refer to the amount of investment in property.  The basis of property you purchase is usually its cost or purchase price, along with certain other expenses allowable in acquiring the property.  For inherited property, the fair market value of the property at the date of the individual’s death is generally used as the basis (although for farms and businesses this may not be the case).

For 2011 and thereafter (unless Congress changes the law), the manner in which the cost basis of inherited assets is allocated among the inheritors is very different than in previous years.  Getting advice on this important issue is paramount.

When property is received as an inheritance, the beneficiary’s basis is often termed “stepped-up” or “stepped-down,” meaning the beneficiary’s basis of the inherited property is the value on the date of the donor’s death rather than the deceased’s original basis in the property.  This is important considering a deceased’s basis may be a purchase price from several decades before their passing. 

The calculation of a beneficiary’s cost basis is calculated on the property’s value at the time of the donor’s passing, and a beneficiary will pay capital gains taxes only on any gains or losses realized on the asset after the donor’s death.

Estate planning and inheritance planning take into account the IRS guidelines that govern both gifts and inheritances.  Working with an estate planning lawyer knowledgeable in estate and inheritance taxes can not only save your estate money, but reduce the financial impact on your beneficiaries, ensuring that your inheritance is a blessing, not a burden.

The Alpern Law Firm is a member of the American Academy of Estate Planning Attorneys.