Federal taxes  In substantial estates, one begins the planning process with the desire to keep state and federal death taxes to a minimum. Uncle Sam wants your money! He imposes a gift and estate tax on transfers to non-spouses.
 Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (TRA 2001), significant tax reform has been achieved. Effective 2002 the amount excluded from taxation for Estate and Generation Skipping Taxes (GST) increased from $675,000 to $1,000,000. (Note that large gifts from grandparent to grandchild, can trigger an additional tax, the GST tax.) Additionally, a phased-in rate reduction is begun. In the year 2010 the tax is scheduled to be repealed entirely, only to have it return to the 2003 level the following year! Clearly, although tax relief has been afforded, commentators uniformly believe changes to the provisions will inevitably be forthcoming, making the need for careful planning greater than ever. Gift Tax to Remain at High Level Over the above periods the Gift Tax is reduced, but not eliminated. When the Estate Tax is repealed in 2010, the top Gift Tax rate will be the same as the top income tax rate -35%. This will discourage wealthy donors in high income tax brackets from making lifetime transfers to those in lower brackets. Loss of Step-up in Basis at Death Before TRA 2001, a beneficiary received a fresh tax basis in inherited property. This meant that even though a decedent had paid $100 a share for common stock, if the value of the stock at the decedent's death were $500, a beneficiary could immediately sell the stock without having to pay a capital gains tax. On repeal of the Estate and GST in 2010, the step-up disappears. However, the executor of each decedent's estate will be able to allocate $1,300,000 of basis to assets of the estate. Additionally, a surviving spouse will be able to utilize an additional $3,000,000 of basis. This means a spouse could avoid taxes on up to $4,300,000 of capital gains on inherited property. Knowing the acquisition costs of investment assets will be important. Taxpayers should, thus, prepare for the future change in the law by keeping careful records of all investment property! Business records should now be kept indefinitely.  Exclusion of $250,000 for Residence
Each taxpayer currently has the right to take up to $250,000 in capital gains on the sale of a principal residence tax free. Effective in 2010 this exclusion will be able to be utilized by estates and heirs, provided the decedent resided in the home for two of the last five years. State inheritance taxes  Ohio imposes a smaller inheritance tax that begins at 2% and runs to 7% on amounts over $500,000. A recent increase in the tax credit means an estate under $338,000 is tax free. Assets left to a spouse are exempt. There is a credit for this tax which can be used against the federal inheritance tax. Note that there is no gift tax in Ohio, which means that a gift (where the giver survives three years) escapes the tax that would have been imposed on the same transfer at death.
Phase-out of the State death tax credit Prior to 2002 a credit against the federal tax was enjoyed for state death taxes that were paid. However, by January 1, 2005 the state death tax credit will be eliminated, and replaced by a deduction. In 2002 it was reduced by 25% of former statutory amounts, in 2003 by 50% and in 2004 by 75%. Many states will suffer a loss of revenues as a result, suggesting they will increase revenues by boosting income taxes or revamping their death tax schemes. Chance of estate audit  Because so much money is at stake, in Ohio one has over a 50% chance of having one's estate tax return audited, if federal taxes are due. Thus, extreme care need be taken in carrying out the estate plan.
Availability of unified federal tax credit ("credit equivalent" deduction) The estate of each individual has the right to a unified gift/estate tax credit, which in 2004 has the practical effect of enabling one to pass to heirs about $1.5 million without any federal tax. It is vital to use this "credit equivalent" in each spouse's estate.  Marital deduction allowed for assets passing to a spouse An individual receives a deduction from the taxable estate for amounts passing to a spouse called the "marital deduction." This means a husband and wife can transfer tax free an unlimited amount of assets between them, either during their lives, or at the time of death. Effective plan can pass $3,000,000 tax free The credit equivalent deduction enables a married couple to pass $3,000,000 {$1.5 milllion + $1.5 million} to their children, tax free. This objective can be achieved while allowing the surviving spouse to be supported by all the couple's savings for his or her lifetime. Careful planning is required, however. Example 1 -- "I Love You" Estate Plan Example 2 -- Effective Use of the "Credit Equivalent" -- Without Trusts Back
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